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  • Scattered rain may pour cold water on rural demand for consumer goods

    Publish Date: October 17, 2018

    FMCG, or fast-moving consumer goods, companies are a worried lot. A below-par monsoon this year can be attributed to their anxiety.

    A few companies have even expressed this in public. Hindustan Unilever managing director, Sanjiv Mehta, admitted during an earnings meet on October 9 that they will have to “wait and watch” to see how strong the demand will be in light of below rainfall in the country.

    The FMCG companies are skittish because they are concerned that this year’s below-average monsoon may affect rural demand.

    So, let’s go step-by-step to understand the depth of the problem.

    What are FMCG companies?

    Fast-moving consumer goods companies sell products that are used by consumers frequently. These companies sell products such as processed food, toiletries, cosmetics, beverages and so on.

    Some of the prominent FMCG companies in India are ITC, Hindustan Unilever, Dabur, Emami, Britannia and Amul.

    What’s this year’s monsoon data?

    India Meteorological Department said this year’s monsoon was 9% below the long-term average. The figure is considered to be ‘normal’. However, if the rainfall was another percentage down, it would have been deemed as poor monsoon.

    But to make things worse, 21.4% of the country has remained moderately to extremely dry this monsoon, according to the weather department.

    What has poor monsoon got to do with low rural demand?

    Various studies show that more than 50% of India’s farming land does not have irrigation facilities. As a result, most farmers depend on monsoon for their produce.

    Related read: Monsoon and the economy

    But since this year’s monsoon has left large swathes of agricultural land dry, farmers will struggle to earn considerable income as they won’t have enough produce to sell in the market. This would consequently have an impact on their total income. A low income, therefore, would lessen the amount of money they can spend on consumer goods.

    How does all of this affect FMCG companies?

    As explained earlier, poor monsoon generally lowers demand for consumer goods in rural India — as was seen in the drought-stricken years of 2014 and 2015.

    That’s not good news for FMCG companies as rural consumption contributes more than 40% of total consumer goods sale in the country.

    Moreover, last year’s data show that rural demand has outstripped urban consumption by 9.7% to 8.6%, as per research company Nielsen.

    The FMCG companies wanted the rural demand streak to continue this year as well, especially because demonetization in 2016 and drought in 2014 and 2015 had hobbled rural demand for consumer goods.

    Are there any positives to the story?

    FMCG companies will hope the increased minimum support price will help keep farmers’ disposable income intact.

    Minimum support price (MSP) is the price at which the government buys crops from farmers.

    This year, the government increased the procurement prices for 23 crops, including soybean, pulses and millets. Bajra producers have got the best deal: the government will pay them 47% more than the actual production cost. For pulse growers, the MSP has been hiked around 12-13%.

    The consumer goods companies will also expect the government to announce pro-farmer reforms in the next few months, given the general elections are scheduled to be held next year. But government reforms don’t necessarily translate into higher revenues for FMCG companies. Data compiled by research company Jefferies suggest that top FMCG companies like Britannia, Hindustan Unilever and Emami actually witnessed in a decline in volume growth in the last election year, 2014.

    The last word

    FMCG companies haven’t been in the best of shape in the last few years. The drought in 2014 and 2015 and the double whammy of demonetization and GST knocked the wind out of the industry.

    The last financial year hinted that the FMCG sector was on the mend, but this year’s below-average rainfall may pour cold water on their revival hopes.

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