The Fast Moving Consumer Goods sector treading a cautious path for the year ahead

The overall demand for Fast Moving Consumer Goods (FMCG) in India witnessed a muted growth of 1.4% in December 2022, according to data by retail intelligence firm Bizom. Further, the demand in rural areas recovered to an extent on a sequential basis - it declined about 0.2% in December vis-a-vis 17% in November.

The rural markets account for around 40% of the overall demand for FMCG in India. The sequential recovery witnessed in the consumer staples segment in the rural market in the third quarter of the financial year 2023 has been on account of softening raw material prices, moderating inflation, and price cuts by firms.

However, the recovery in the rural markets can be largely attributed to favorable base effects. The rural areas were the most affected due to the second wave of COVID from April to June 2021. The rural demand started declining during the second half of the financial year 2022 i.e. from July 2021 onwards. Thus, the demand recovery coming from rural markets, however modest, is quite fragile at the moment and should be viewed with caution going ahead.

Meanwhile, the demand for discretionary goods, majorly coming from the urban markets, seems to be decelerating after the festival season. This is not a surprising trend given the mass layoffs announced by several companies over the past 6 months. In this status quo, we believe it will start showing substantial in the overall demand dynamics not only for FMCG but also across other sectors of the economy in the year ahead.

FMCG firms do have room for price cuts due to cooling inflation and softening input prices. Due to high commodity inflation in 2022, the incumbents were forced to increase their product prices across various segments and resorted to various innovative practices such as inflation and supply chain cost optimization. They are facing stiff competition from unorganized players which are eating away at their market share. The organized players will likely implement price cuts and increase marketing spending to protect their market share.