FMCG sector flags urban consumption slowdown as food inflation bites

Lower salary increases, high interest rates will continue impacting urban demand, says Nomura

A worrying trend is unfolding in the Indian consumer sector, with fast-moving consumer goods (FMCG) companies reporting a slowdown in urban consumption in the September quarter.

 

While temporary factors, such as a heavy monsoon, have worsened the slowdown, especially for out-of-home consumption, companies say high levels of food inflation remain a key concern for urban consumers.

 

In its second-quarter results released on Wednesday, Dabur India, the maker of Hajmola candy and Real fruit juice, said its rural business continued to outpace urban by 130 basis points (bps) for the third straight quarter. While rural markets grew 1.8 per cent, urban lagged at 1.2 per cent. 

   

The primary factor behind this lag was food inflation, Dabur India Chief Executive Officer Mohit Malhotra told investors in a post-earnings call. “Food inflation is definitely something which is worrying me. It was around 9 per cent and is shifting spending from discretionary to more essential items,” he said.

 

According to data from the National Statistical Office (NSO), food inflation showed an upward trend in the second quarter, rising sharply to 9.2 per cent in September from 5.6 per cent in August and 5.4 per cent in July.

 

This increase was led by a rise in the prices of fruits (7.65 per cent) and vegetables (35.99 per cent), while the prices of cereals (6.84 per cent) and protein-rich items like eggs (6.31 per cent) and meat and fish (2.66 per cent) decelerated during the month.

 

Earlier this week, analysts at Nomura India noted that urban demand was likely to remain soft due to lower salary increases, waning pent-up demand, high interest rates, and tight credit conditions.

 

“When deflated by urban consumer price index CPI, real salary and wage expenditure growth of listed non-financial corporates — a proxy for real urban wages — moderated to 0.8 per cent year-on-year in Q2 FY25 (provisional for July-September) from 1.2 per cent in Q1 FY25, down from 2.5 per cent in FY24 (year ended March 2024) and 10.8 per cent in FY23. This likely reflects a mix of weaker nominal salary growth and a leaner workforce,” Nomura said.

 

Suresh Narayanan, chairman and managing director at Nestlé India, also raised concerns over rising food inflation after announcing the company’s September-quarter results. Identifying metros and mega cities as “points of pressure,” Narayanan said while Tier-I towns and rural areas seem relatively stable, “the pressure points are coming from mega cities and metros… It is almost like we are operating in two Indias.”

 

Narayanan identified food inflation as the primary reason behind this shift.

 

“Growth in the food and beverages sector, which used to be in double digits a couple of quarters ago, is now down to 1.5-2 per cent. It is a combination of food inflation… the debate was once again rekindled a few days ago, when there were talks about a sharp uptick in (prices of) fruits and vegetables, and of course in oil prices. This is cause for concern.”