Drought conditions have hit consumption in rural markets, with volume growth slowing to 3-4 per cent in the past two quarters, compared with the 10 per cent growth at the start of financial year 2016.

According to data from market research agency IMRB, consumption volume in rural areas, across three categories – household goods, personal care and food & beverage – grew by just 4per cent in January-February versus the corresponding period last year.

In terms of value, too, growth has shrunk to 6 per cent compared with 11 per cent growth at the beginning of 2016.

This is bad news for FMCG companies, which are looking to rural consumption to fuel demand as the volume growth in urban consumption had slowed down a year ago.

“In the past two quarters, household consumption in the rural markets has come down from 10 per cent in the April-June quarter last year to 3 per cent in the October-December quarter as rural consumers have pulled back on spending. Volume growth is dropping and this will continue in the next two quarters, which can be attributed to the drought conditions. There is unlikely to be great times ahead for the FMCG industry,” said K Ramakrishnan, General Manager & Country Head, Household panel, IMRB Kantar World Panel.

Among the three broad categories, it is the consumption dip in the food & beverage category that primarily accounted for subdued rural demand.

“Volume growth in the food & beverage segment brought down overall demand – from 11 per cent in the April-June quarter last year to 3 per cent in the last quarter and the first two months of this year.

“This has happened despite FMCG companies bringing down prices and the government taking several measures in the Budget to spur rural consumption. It will take at least another two quarters for the benefits to trickle down. There will be volume growth, but at a much lower pace in rural India,’’ observed Ramakrishnan.

Gearing up

Meanwhile, FMCG companies are gearing up to face the drought-affected markets.

“There is a lag effect when it comes to robust growth in the rural markets. Schemes like the Jan Dhan Yojana can help in cutting short the lag,” said Sunil Duggal, CEO, Dabur, at an analysts meet. Others like Marico, which has a 34 per cent share coming from the rural markets, is extending price drops on certain products in drought-affected States – Maharashtra and Telangana. According to IDFC Securities, volume growth in the fourth quarter of FY 16 is estimated to be 3-4 per cent for Dabur and Colgate, while HUL may see 6 per cent growth.

“Volume growth for the FMCG industry continues to be challenging in Q4, especially in rural markets where growth has continued to slow down. With crude oil prices recovering from their lows and inflation resurfacing in certain commodities, we expect pricing-led growth to come back in FY17, albeit at a lower level,” said an analyst at IDFC Securities.

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