Coffee, Chocolate, Cookies Hit Sweet Spot In Dull FMCG Market

Indians are looking for comfort in coffee to cookies, offering a sweet moment to the nation's $110-billion consumer goods sector in an otherwise lacklustre year.

The consumption of fast-moving consumer goods has stagnated at about 117 kilogram per household over the last three years, according to market research and insights firm Kantar. Out of the 90-odd categories it tracks, about half of them, like the essential cooking oil, rice and salt, have seen a decline in purchases, but even so, instant coffee became a staple as consumers stocked up on their favourite brew.

Similarly, chocolates and cookies emerged as popular choices in the annual shopping basket. To put it simply, consumers are spending more on what they want than what they need.

"2023 seemed to start well, growing at 4% in the first quarter, but a closer inspection showed that it was all on the back of just one category — atta or wheat flour," according to Kantar's February FMCG Pulse Report.

Atta grew 29% between January and March, including the imputed free grain distribution. Given that atta accounts for 16% of all FMCG volume, its growth rate contributed to the overall expansion of the FMCG industry.

Though FMCG seemed to have grown at a handsome 6.1% in 2023, the report said removing atta from the mix brought the growth down to 2.7%.

Incidentally, 2.7% is also the population growth in the year, which means that FMCG volumes have grown purely on the basis of household population growth, according to Kantar.

Among other categories, cooking oil has seen the biggest consumption drop, with 1.4 fewer litres purchased in 2023 over the previous year. The average spend on the category, however, has gone up by Rs 95.

"If shoppers were purchasing the 2022 quantity with 2023 prices, they would have been spending Rs 286 extra, however, the drop in demand for cooking oils has reduced this extra spend to Rs 95," Kantar said.

Washing powders too lost 300 gram per household, followed by basmati rice, which lost 180 gram, and salt, which lost 80 gram. Each of these categories is generally purchased in bulk. But to avoid paying exorbitant prices for larger quantities of products, consumers choose to buy smaller amounts to better manage their budgets amid the alarming rate of inflation.

Increased trips resulted in a notable uptick in pack purchases, with a staggering 81 more, or twice as many vs. 2022 packs bought on average.

The inflation-led shift in shopping behaviour also gave consumers some freedom with the smaller category purchases.

Spends on biscuits and cookies, chocolate and instant coffee saw a surge, indicating a continued increase in daily snacking routines since the Covid-19 pandemic, according to Kantar. Within non-food, categories like insecticides, fabric softeners and washing liquids attracted new buyers.

All these six categories grew much faster than FMCG consumption, which is stagnant, according to Kantar. It also grew faster than the household population growth of 9 million and faster than FMCG spend growth, which is at 8.5%.

Nescafé is the market leader in instant coffee, with its penetration currently estimated at 46 million households in the country.

"Our coffee business has grown strongly, not only in double-digits but have also gained market share quite appreciably," Nestle India's Chairman, Suresh Narayanan, said during a post-earning briefing last month.

With a market share of 54%, the coffee business will be the biggest contributor to the company's growth in 2023, said Narayanan. The company is doubling its coffee production capacity. The only con, however, has been the high commodity prices. "Coffee prices are becoming a little bit illogical... We are waiting to see when the market quietens down."

India's FMCG sector is poised for subdued growth, at least until the September quarter, primarily due to an uncertain outlook for the agricultural sector, according to Kantar. The upcoming general election is also likely to have little impact on consumption, as seen in the past. However, it expects the FMCG growth to get “progressively” better in the later part of the year.

Agricultural growth is projected to be at 1.8% in 2023–24—a seven-year low. Moreover, the dry weather due to El Nino is expected until the first half of the year, hurting consumption.

"2024 is an election year. However, the past election years did not see any surge in FMCG; on the contrary, with all the freebies announced, there was only stagnation or shrinkage," the report said. In 2009, consumption growth was 0.7%, while in 2014 it was static, and in 2019 it was negative.

It is further said that El Nino is expected to wane by the middle of the year, and with the Rabi harvests close by, without any unexpected weather phenomenon, the year might yet turn good, especially in the second half.

Burning summers might help categories like soft drinks, ice-creams, sunscreens, and even laundry products to some extent.

However, the growth in these categories combined will have a negligible impact on overall FMCG.

Earlier in February, another researcher, NielsenIQ, predicted that makers of soaps, shampoos and biscuits to beverages may grow at 4.5–6.5% in value terms this year, sharply lower than 8.4% in 2022 and 9.3% in 2023.

These projections are also corroborated by a recent government survey that indicated a slowdown in consumption growth.

According to the All-India Household Consumption Expenditure Survey, which covers 2.6 lakh households, consumers were spending more on discretionary items like consumer durables than on food. For rural households, the weight of food in the consumption basket fell to 46% from 53% in 2011–12, while for urban households, food constitutes only 39%.

The National Statistical Office also pegs private consumption, which is almost 60% of GDP, to grow just 3% in FY24, the lowest rate since 2012–13. This excludes the negative 5.3% growth in 2020–21. In FY23, private final consumption expenditure growth was 6.8%, according to official data.

The December quarter earnings of Hindustan Unilever Ltd., which is often considered a barometer of consumption in the country, tell a similar tale.