The coming rural boom
FMCG companies are making a beeline for rural India as the government’s social spending is expected to offset Budget-related price hikes and slowdown, and boost consumption,
Fast moving consumer goods (FMCG) companies, led by majors such as Asian Paints, ITC and Marico, have set their sights on rural India. They expect growth to come from there, in spite of recent signs of a slowdown. Budget-related price hikes, FMCG majors think, will translate into brisk growth and higher profits as rural consumers indulge in branded goods or uptrade to better products, driven by government’s rural spending through various development programmes.
An industry report by Batlivala & Karani Securities, titled Rural Consumption: The Only Bastion of Strength, says consumer companies will reap the rewards from the structural changes taking place in rural India like rising income level and increasing urbanisation. “Contrary to other recent reports highlighting a slowdown in the rural economy, we maintain a positive stance on the domestic demand story. Companies that benefit from the consumption theme will continue to reap the benefits,” observes the B&K report.
In the past five years, the annual growth rate of the sector has accelerated to 17%, compared to 11% in the last decade. As per a Nielsen report on the FMCG industry, the FMCG market’s size stood at `1.46 lakh crore in March 2011. According to Booz & Company, the industry is expected to report a 12-17% CAGR and become a `4 lakh crore-Rs 6.20 lakh crore industry by 2020.
In the last three years, consumer goods companies’ growth in rural India has been double that seen in cities. This, in spite of rural consumers who, unlike city folks, remain price-sensitive. They were impacted by high inflation, leading to a drop in consumption of daily and discretionary products. And now, excise and service tax rate hikes announced in the Union Budget will push companies like Hindustan Unilever, Nestle India, Dabur India, Marico and Asian Paints to effect price hikes across all product categories.
Thankfully, the government’s focus on increasing the purchasing power of rural consumers through social programmes will boost consumption, the B&K report says. “The current Budget reinforces our belief that rural consumption still remains the best theme to play in India.”
At least, the FMCG players believe so. Which is why most of them are orientating their sales strategies to rural coordinates. Paint-maker Asian Paints is already seeing higher rural growth and is likely to be a key beneficiary of the ‘premiumisation’ of rural India, or the trend of rural consumers buying branded paints to re-paint their homes. Analysts expect the company to grow volumes at CAGR of 11-12% for the next few years.
Like many FMCG majors, Nestle has extended its distribution reach to semi-urban and rural areas of late. It has added 4.64 lakh new points of sale in 2010 and is focusing on penetrating the Tier 2, 3 and 4 towns. Recently, Emami unleashed a campaign painting rural walls and shops with its ads for `1 sachets of Navratna oil.
In 3QFY11, 30% of hair oil major Marico sales came from rural areas, up from 25% in FY10 and 27% in FY11. Given the potential for high government-fuelled growth in rural areas, and confident that worst of inflation may be behind them, FMCG companies are gearing up to up ad and promotional spends in FY13, having cut them for most part of FY12.
A slew of expert reports indicate as much. For instance, Esprito Santo Securities (ESS) observes that “of late, prices of most of the raw materials have corrected from their peak, suggesting that pricing is running ahead (for Colgate, Emami and HUL), or is in line (for Marico and GCPL) with cost inflation”.
As we look toward FY13, the tailwind benefits of recent price increases, rupee appreciation and the softening of some key commodities should create a more benign environment, at least in 1HFY13, the ESS report states. Citing estimates from research firm Nielsen, a report by Angel Broking says more than 80% of FMCG categories are growing faster in rural India as compared to urban India.
A study by The Boston Consulting Group last month said there were four segments of consumers in India: the ‘Affluent’ who have annual household income above $18,500, are well-educated, have mid to large businesses or good jobs and constitute 6% of households in India; the ‘Aspirers’ who have annual household income between $7,400 and $18,500, are educated, with mid-sized businesses or stable jobs and make 14% of Indian households; the ‘Next Billion’ who have household income between $3,300 and $7,400 with basic education and low-paying jobs, and constitute 30% of Indian households; and the ‘Strugglers’ who earn less than $3,300, are illiterate with limited education and very low income, but constitute nearly 50% of Indian households.
FMCG companies are convinced all these four segments have a presence in rural India. And government programmes like National Rural Employment Guarantee Act or NREGA could only boost rural consumption, they believe.
FMCG companies are making a beeline for rural India as the government’s social spending is expected to offset Budget-related price hikes and slowdown, and boost consumption,
Fast moving consumer goods (FMCG) companies, led by majors such as Asian Paints, ITC and Marico, have set their sights on rural India. They expect growth to come from there, in spite of recent signs of a slowdown. Budget-related price hikes, FMCG majors think, will translate into brisk growth and higher profits as rural consumers indulge in branded goods or uptrade to better products, driven by government’s rural spending through various development programmes.
An industry report by Batlivala & Karani Securities, titled Rural Consumption: The Only Bastion of Strength, says consumer companies will reap the rewards from the structural changes taking place in rural India like rising income level and increasing urbanisation. “Contrary to other recent reports highlighting a slowdown in the rural economy, we maintain a positive stance on the domestic demand story. Companies that benefit from the consumption theme will continue to reap the benefits,” observes the B&K report.
In the past five years, the annual growth rate of the sector has accelerated to 17%, compared to 11% in the last decade. As per a Nielsen report on the FMCG industry, the FMCG market’s size stood at `1.46 lakh crore in March 2011. According to Booz & Company, the industry is expected to report a 12-17% CAGR and become a `4 lakh crore-Rs 6.20 lakh crore industry by 2020.
In the last three years, consumer goods companies’ growth in rural India has been double that seen in cities. This, in spite of rural consumers who, unlike city folks, remain price-sensitive. They were impacted by high inflation, leading to a drop in consumption of daily and discretionary products. And now, excise and service tax rate hikes announced in the Union Budget will push companies like Hindustan Unilever, Nestle India, Dabur India, Marico and Asian Paints to effect price hikes across all product categories.
Thankfully, the government’s focus on increasing the purchasing power of rural consumers through social programmes will boost consumption, the B&K report says. “The current Budget reinforces our belief that rural consumption still remains the best theme to play in India.”
At least, the FMCG players believe so. Which is why most of them are orientating their sales strategies to rural coordinates. Paint-maker Asian Paints is already seeing higher rural growth and is likely to be a key beneficiary of the ‘premiumisation’ of rural India, or the trend of rural consumers buying branded paints to re-paint their homes. Analysts expect the company to grow volumes at CAGR of 11-12% for the next few years.
Like many FMCG majors, Nestle has extended its distribution reach to semi-urban and rural areas of late. It has added 4.64 lakh new points of sale in 2010 and is focusing on penetrating the Tier 2, 3 and 4 towns. Recently, Emami unleashed a campaign painting rural walls and shops with its ads for `1 sachets of Navratna oil.
In 3QFY11, 30% of hair oil major Marico sales came from rural areas, up from 25% in FY10 and 27% in FY11. Given the potential for high government-fuelled growth in rural areas, and confident that worst of inflation may be behind them, FMCG companies are gearing up to up ad and promotional spends in FY13, having cut them for most part of FY12.
A slew of expert reports indicate as much. For instance, Esprito Santo Securities (ESS) observes that “of late, prices of most of the raw materials have corrected from their peak, suggesting that pricing is running ahead (for Colgate, Emami and HUL), or is in line (for Marico and GCPL) with cost inflation”.
As we look toward FY13, the tailwind benefits of recent price increases, rupee appreciation and the softening of some key commodities should create a more benign environment, at least in 1HFY13, the ESS report states. Citing estimates from research firm Nielsen, a report by Angel Broking says more than 80% of FMCG categories are growing faster in rural India as compared to urban India.
A study by The Boston Consulting Group last month said there were four segments of consumers in India: the ‘Affluent’ who have annual household income above $18,500, are well-educated, have mid to large businesses or good jobs and constitute 6% of households in India; the ‘Aspirers’ who have annual household income between $7,400 and $18,500, are educated, with mid-sized businesses or stable jobs and make 14% of Indian households; the ‘Next Billion’ who have household income between $3,300 and $7,400 with basic education and low-paying jobs, and constitute 30% of Indian households; and the ‘Strugglers’ who earn less than $3,300, are illiterate with limited education and very low income, but constitute nearly 50% of Indian households.
FMCG companies are convinced all these four segments have a presence in rural India. And government programmes like National Rural Employment Guarantee Act or NREGA could only boost rural consumption, they believe.
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