Weak urban demand weighs on FMCG firms in Q2 despite rural market recovery

Urban demand grew by 2.8 per cent, while rural demand increased by 6 per cent, up from 5.2 per cent in the April-June quarter

Even as rural markets continued to recover, urban markets became a challenge for fast-moving consumer goods (FMCG) companies in the July-September quarter (Q2) of 2024-25 (FY25).

 

In their post-results commentary, companies highlighted the stress in urban India. NielsenIQ’s latest data shows that India’s FMCG sector grew 5.7 per cent by value and 4.1 per cent by volume in Q2FY25, driven primarily by rural demand. Rural demand grew at twice the pace of urban demand during this period.

 

Urban demand registered a growth of 2.8 per cent, while rural demand rose by 6 per cent, up from 5.2 per cent in the April-June quarter of FY25.

 

Brokerages pointed out that weak urban demand and higher inventory in general trade weighed on urban revenue in Q2FY25.

 

“We remain watchful of whether this is a temporary trend or a shift that could impact the trajectory over the long term,” Motilal Oswal wrote in its post-earnings sector report.

 

The brokerage also added that price hikes are expected in the second half of FY25 to counter recent raw material inflation.

 

“Gross margins are likely to witness gradual recovery, with a more meaningful improvement expected in the fourth quarter. Urban pickup, pricing activities, channel strategy, and raw material prices are key monitorables,” it added. 

 

Rohit Jawa, managing director and chief executive officer of Hindustan Unilever (HUL), said in the company’s earnings release: “In the September quarter, FMCG demand witnessed moderating growth in urban markets, while rural demand continued its gradual recovery. In this context, we delivered a competitive and profitable performance.”

 

HUL, the maker of Lux soaps, acknowledged that crude palm oil prices have risen and announced calibrated price increases to offset higher commodity costs.

 

“In big cities, growth is trending downward across all channels and segments. Let’s not forget that the urban economy has been the engine of growth for the FMCG industry over the past several quarters. We are operating on a high base, and some normalisation is to be expected,” Jawa added.

 

The quarter also saw commodity prices beginning to climb, prompting companies to implement price increases.

 

Discussing the outlook, Varun Berry, vice-chairman and managing director of Britannia Industries, told analysts during the company’s post-results conference call that they are closely monitoring commodity trends and making daily adjustments.

 

“We are vigilant about competitive pricing actions as well. As market leaders, we must take the lead, but we also aim to remain competitive in the market,” he said.

 

In its report on Marico, Elara Securities said: “For FY25, although the management previously indicated a goal to sustain earnings before interest, tax, depreciation, and amortisation margins at 2023-24 levels, the recent increase in input costs may impact margins by 40-50 basis points year-on-year. Nevertheless, the long-term outlook remains positive, with anticipated margin expansion driven by improvements in the food segments and digital-first brands (as the business continues to scale), a favourable product mix, and a focus on premiumisation.”

 

Motilal Oswal also observed: “The volume trend is expected to see stability with a gradual upward trend. Companies are also implementing price hikes, thereby, the price cut-led pressure on revenue growth is behind.”

 

The brokerage added that the rapid growth of e-commerce and quick commerce channels is putting pressure on general trade growth across the industry. “It will be interesting to see how companies use this trend in their favour,” it said.