Middle Class Tightens Wallets To Fight Inflation, Leaving FMCGs Gasping

Runaway inflation has crossed the Reserve Bank of India’s ‘danger line’ and people are putting padlocks on wallets.

There is a downhill shift in urban middle-class spending, triggered by food inflation, which flirted with the 11-per cent mark in October. In the same month, overall inflation was pegged at 6.21 per cent, well ahead of RBI’s upper tolerance levels. The whiplash is being felt by all Indians, and through their consumption patterns by Fast-Moving Consumer Goods (FMCG) brands like Britannia, Nestle, Dabur and others.

In its Analysts’ Presentation, Britannia admitted that the consumption dip was led by metropolitan cities. Compared to smaller towns, metropolitan cities contributed 2.4 times to the slowdown in Q2, an alarming statistic. Nestle, which had forecast a robust fiscal in April, is now seeing middle-class sales shrinking, while Dabur saw Q2 profits drop by 18 per cent, with urban demand tuning off like a blown incandescent bulb.

That begs the question: Are consumers not eating as many munchies because of inflation and slowdown, or is this the beginning of a health fad targeted at consuming lesser fats, sugar and preservatives? Whatever be the case, there is only one trend being witnessed among shareholders of these companies — reshuffling of portfolios.

Stock market numbers tell a tale of bloodied noses. Dabur is down 2 per cent since last year, while Britannia has slipped 3 per cent and Nestle 6 per cent.

Insiders and market-watchers have their own theory — cost-conscious Indian consumers are still eating biscuits and instant noodles, and dipping into ketchup and chutneys, but with no brand loyalty. “People are saving every buck they can. Local brands are cheaper and offer a desi taste alternative as well,” says Shantanu Vyas, who recently quit his job with Dabur India.

Established brands have higher overheads due to input, marketing and people costs, which have to be passed on to the consumer. All this is leading to a huge backlash from consumers, who are getting more penny wise.

This is despite the government’s efforts to perk up consumption through outlays for schemes targeting higher rural spends. In her Budget speech a few months back, Finance Minister Nirmala Sitharaman unveiled an allocation of Rs 2.65 lakh crore for agriculture and Rs 1.52 lakh crore for rural initiatives.

“I am announcing schemes for employment and to skill the youth, and to rejuvenate rural and urban consumption,” Sitharaman said.

FMCG big guns saw this incentivisation as a precursor to runaway demand and sales growth. It led ITC Chairman Sanjiv Puri to declare that the infrastructure push would transform India into a manufacturing hub. “Policies to spur physical and digital infrastructure backed by an aspirational society and young demographics, are growing the market, increasing FMCG’s immense potential,” Puri said.

In its Brand Footprint Report 2024, research firm Kantar projected that rural markets would provide an impetus to FMCG resurgence, especially as they account for 65 per cent of India’s households and make up 52 per cent of volumes (for FMCG firms). The report added that rural volumes would grow from 4.4 per cent in fiscal 2024 to 6.1 per cent in fiscal 2025.

Those projections are falling flat just a few months later, ostensibly at the altar of stagnant or depleted personal income, steep inflation and the resultant price hikes. Notably slimmer than Indians’ wallets now is their appetite for packaged foods like biscuits, namkeens, sweets and savoury items, and juices and beverage concentrates.

The collapse in the backbone of FMCG sales is remarkable. Two quarters ago, FMCG majors Hindustan Unilever, Dabur, ITC, Marico and Tata Consumer noted in their earnings calls that rural demand lagged behind urban demand for the first time in a year-and-a-half. Financial heads at large corporates admitted then that despite best efforts, they hadn’t been able to stop the slide, losing out to “liquidity pressures, rising inflation and patchy monsoons”.

Today, that logic has turned on its head, with rural sales outperforming urban consumption. Note: The rural market is way smaller than the urban one. While remoteness of rural hubs translate into higher transportation costs, the geography is scattered, and poor road and internet access make inventory management and IT-enablement near impossible. Also, preferences and diversity are vast and challenging.

Still, in the larger scheme of things, this is a disturbing trend, particularly because the numbers and stakes are quite daunting.

According to the India Brand Equity Fund (IBEF), the FMCG market is valued at US$ 192 billion (Rs 16,20,559 crore) in 2024. The sinker in the works is that this market, growing steadily, is expected to double in size by 2025.

As mentioned, the stakes are high in the organised Indian FMCG space, the fourth-largest in the economy, and providing direct employment to over 30 lakh people. There are some categories in the FMCG space that are saving India the blushes, such as smartphone shipments.

India is emerging as a key manufacturing hub, and IDC has predicted a 4-per cent growth in worldwide smartphone shipments in 2024. But there’s a monkey wrench here too, that big-brand sales are declining, while cheaper, ‘assembled in India’ brands are coming to the rescue. TV and electronics goods sales are also helping.

The overall picture, however, is grim. It is one that leads to the same old tearjerker tale. Employment needs to grow. That will grow earnings. Disposable incomes and aspirational spends will follow. Demand will perk up. Biscuits and ‘bhujiya’ will make it to more tables. It won’t be just FMCG firms reaping the harvest. India’s automobile, alcobev, tourism, hospitality and ancillary sectors will grow in tandem. It takes one spark.

(The writer is a veteran journalist and communications specialist. Views expressed are personal)