After A Muted 2023, Consumer Goods Makers Say New Year Offers Hope

Weak consumer sentiment and depressed demand was the running theme for makers of packaged consumer goods in 2023, but the new year holds promise with hopes of a strong volume-led recovery in top-line growth.

"The economy is on a sound footing," Saugata Gupta, chief executive officer of Marico Ltd., told NDTV Profit. "Inflation is largely under control and the overall outlook is on an improvement trajectory." He forecasted that the demand situation would improve in the next financial year.

A combination of factors such as increased aggression of smaller players after decline in raw material prices, elusive recovery in rural demand, limited pricing growth, unseasonal rain and alternative avenues of spending led to softer growth for the consumer goods sector this year.

Although some green shoots in rural demand were visible in the first quarter of the current fiscal, that seemed to have paused as the makers of staples-to-soaps reported a sub-5% volume growth in the second quarter.

The October–December period was expected to bring some respite as consumers are usually more willing to open their purse strings amid Diwali and Christmas festivities. However, channel checks suggest otherwise.

"Volume growth for most consumer goods companies remain challenging and we expect flat to low single-digit growth on a YoY basis in Q3," Abneesh Roy, executive director at Nuvama Institutional Equities, said.

Distributors are not keen on stocking up cold creams or Chyawanprash, thanks to the late arrival of winter. Key beneficiaries like Hindustan Unilever Ltd., Emami Ltd. and Dabur India Ltd. can brace for an impact, according to Roy.

The good news is that green shoots of recovery are visible in rural India even as the demand growth is still trailing urban markets, Dabur CEO Mohit Malhotra said.

Analysts say 2024 will likely be a tale of two halves—pre-election: when government spending will be the growth driver; and post polls: when higher investment will put more money in the hands of consumers, driving demand.

"Real rural wages have started to move towards the positive trajectory and election-related stimulus programmes shall lift sentiment," Roy said.

Axis Securities expects the FMCG sector to rebound stronger as prices of raw materials continue to remain low. Next year can see a solid recovery in volume growth, especially in rural segment, due to an increase in government spending ahead of the general election.

"An increase in overall wages, the RBI intervention of controlling overall consumer inflation and a huge pent-up demand for large part of discretionary category in rural...will also aid the overall volume growth," Preeyam Tolia, equity research analyst at Axis Securities, said.

Companies are taking greater interest in penetrating into the rural areas and boosting the consumer sentiment. Dabur is investing "ahead of the curve" to enhance distribution footprint in the hinterland, taking its total coverage to over 1.07 lakh villages from 1 lakh villages in March, Malhotra said.

"In the rural market, we are also targeting the aspirational buyers with more affordable packs of products," he said. "We are already seeing the gap between rural and urban growth shrinking." The Dabur CEO is hopeful rural markets will post a "strong" recovery next year on the back of continued investments towards expanding rural distribution.

Large and organised players in the sector hope that price drops would make them more competitive. They aim to increase the pace of innovation and premiumisation while benefiting from a stronger urban market.

"Convenience is a strong trend with consumers adopting cooking aids for in-home cooking," said Sunil D’Souza, managing director and chief executive officer, Tata Consumer Products Ltd. "Consumers are also seeking more premium experiences and being open to experimenting with product choices," he said, adding that expanding into adjacencies in the food and beverage space would be the company's top priority in 2024.

Other than modern trade channels, the companies are betting on quick commerce as part of their strategies that resonate with Gen Z consumers. The contribution of Q-commerce to the online grocery market, which is now just 10%, is projected to rise to 40–50% in the coming years.

"Our goal in the fast-paced year 2024 is to understand the consumer needs and preferences and fine tune our offerings accordingly," said Krishnarao S Buddha, senior category head, Parle Products.

"The year 2023 was filled with the challenges of slowdown, yet the key takeaways include keeping a careful eye on new trends and being present on digital platforms where our consumer eyeballs are," he said.

HUL has also hired a digital officer, who will take charge on Jan. 1. India's largest consumer goods maker split its beauty division into two: beauty and wellbeing, and personal care. The strategic move is expected to accelerate HUL's journey towards becoming an "intelligent enterprise".

The middle class is the key stimulants of consumer demand and increasing expenditure. To bolster growth, the FMCG companies are expected to take great interest in catering to this burgeoning middle class, predominantly concentrated in urban hubs, amid relatively progressive purchasing power, according to Anand Ramanathan, partner at Deloitte Touche Tohmatsu India LLP.

For mergers and acquisitions, 2024 can be a big year after taking a backseat this year amid valuation mismatches. Bisleri International Pvt. is charting its growth 2.0 under Vice Chairperson Jayanti Khan Chauhan after a potential deal with the Tatas fell off.

Capital Foods Ltd., the maker of Ching's Secret noodles, is considering an initial public offer as talks of potential stake sale with a host of large local and global peers remain inconclusive even after several months of negotiations, according to people with knowledge of the matter who spoke on the condition of anonymity.

However, Reliance Retail Ventures Ltd. has been an outlier as it picks up brands with an aim to take on incumbents in the sector. Wipro Consumer Care and Lighting, too, has been on an acquisition spree. The company has recently acquired three soap brands, marking its third acquisition in the last 12 months.

Meanwhile, companies like ITC Ltd. and Marico struck deals in the lucrative direct-to-consumer space.

Many, including Dabur and Nestle India Ltd., are scouting for acquisitions in the D2C space, be it in the personal care, healthcare or the food category.

The next year will also be fruitful for domestic companies tapping overseas markets to hedge against weak demand on their home turf. Varun Beverages Ltd., the second-largest bottling partner for PepsiCo Inc.'s soft drink brands outside the U.S., announced its entry into the South African market through acquisition of The Beverage Co. and its subsidiaries for Rs 1,320 crore. Axis Securities expects Varun Beverages to continue its strong momentum due to continued stance on market expansion in newer geographies.

The combined efforts will see volume reviving strongly next year, helping the consumer goods sector to shift in the fast lane once again.

On the positive front, most FMCG companies reported sharp expansion in gross margin and maintained their strong Ebitda margin performance amid benign raw material prices.

Analysts at Jefferies Financial Group Inc. said gross margin should trend well, but higher ad spends and volume focus from companies in a bid to ward off competition would cap near-term Ebitda margin upside.