Consumer oriented sectors have been struggling most of last year with rural demand refusing to pick up. However, the last quarter of FY24 saw a slight narrowing in the gap between rural and urban demand, and FY25 may be better than last year but the recovery is going to be uphill.

Let us take a look at some of the consumer sectors that are seen as lead indicators in the economy and a sensitive barometer of consumer trends — fast moving consumer goods (staples and discretionary), automobiles, smartphones and credit cards.

FMCG: Rural recovery slow

During most of FY24, FMCG companies were focused on their margins and there were several rounds of price hikes that were taken during the early part of the year. Rural demand and recovery dominated the conversations of most companies but that recovery is yet to happen in a big way. The elevated interest rates, as well as higher food inflation kept rural demand subdued for most of FY24.

In the fourth quarter of CY2023, the FMCG sector reported a 6 per cent growth year on year in value with an underlying 6.4 per cent volume growth, according to Nielsen. However, there was a moderation in consumption growth compared to sequential quarters.

Nielsen’s head of customer success in India, Roosevelt Dsouza, observed that in Q4 consumption gaps between urban and rural markets narrowed for the first time. “Despite a sequential-quarter decline, the rural recovery narrative continued to evolve throughout the year. In Q4 of FY24, we observe an uptick in consumption, primarily driven by habit-forming categories in food and essential home products,” he said.

Rural consumers spent more on non-food products with the segment rising 8.7 per cent, compared to 3.8 per cent for food categories.

Outlook for FY25: Nielsen expects the FMCG sector to grow 4.5-6.5 per cent this year compared to 9.3 per cent in FY24. Kantar has projected a sluggish first half for the FMCG sector which is borne out by the March quarter performance updates by Dabur India and Marico. Dabur said that healthcare as well as food and beverages revenue will grow in low single digits. Marico also reported a slight uptick in its domestic business with most segments rising in single digits.

BNP Paribas, which has a negative view on consumer staples, says that in the past three months prices of key raw materials have started inching up, both sequentially and annually. With pressure on volumes, elevated margins and facing competition from unorganised players, FMCG firms have very little room to manoeuvre for price hikes.

A report by ICICI Securities points out that unlisted consumer staples companies have outperformed their listed counterparts.

Sales in the consumer discretionary segment were subdued last year with the retail sector seeing earlier end-of-season sales. Neither the wedding season nor the festival season saw the kind of demand that was expected, and this is expected to continue in the current year as well. Within the apparel and footwear sector, ethnic wear demand has been weak.

Inventory levels are still high in the apparel sector and price discounting will be likely to get rid of the excess stock. According to HDFC Securities, most discretionary categories, with the exception of jewellery and travel, will have moderate growth and negative to flat same store sales growth. A pickup in demand is expected only in the second half of the current fiscal year.

Automobiles: Higher discounting

The automobile sector has been a mixed bag with 2-wheeler and sport utility vehicles sales showing good demand while that of commercial vehicles and tractors has lagged. Automobile sales rose 10 per cent in FY24, data from the Federation of Automobile Dealers Association showed.

There was a resurgence in 2-wheeler sales fuelled by new launches, especially in electric vehicles and in the premium segment. In the passenger vehicles segment, SUVs with a 50 per cent market share led the growth in sales. The fourth quarter of FY24 saw sales in this segment dip sequentially and annually with heavy discounting and selective financing.

Truck sales rose a modest 5 per cent and most of the demand came from government purchases and bulk deals. The poor monsoon and low water levels in reservoirs affected tractor sales last year and volumes fell about a fifth.

Outlook FY25: New product launches, pricing, financing, interest rates, economic growth and the monsoon will drive sales in the current fiscal year. The dip in discretionary spending is expected to have an impact on automobile sales and if the Reserve Bank of India keeps the interest rates at the current level of 6.5 per cent, it would have an effect on the price-sensitive entry level vehicle sales which are already subdued.

“How the monsoon pans out will be the critical factor for the tractor segment,” said Kumar Rakesh, auto analyst with BNP Paribas. It would also have an effect on 2-wheeler sales that are an extension of rural demand, he added. Referring to the high availability of financing that has driven 2-wheeler demand, he said, “sustenance of that or potential expansion of further financing is something which will be an additional catalyst this year.”

He pointed out that the higher discounting seen in the passenger vehicles segment was due to the manufacturers chasing the same set of customers. If demand moderates, there will be higher discounting.

Smartphones: Led by Upgraders

It has not been a good year for the smartphone market in CY23 with a 1 per cent nominal increase shipments at 146 million, according to data from International Data Corporation.

However, while the first half of the year saw a fall, in the second half there was a rise of 11 per cent. There was an acceleration of sales towards the end of the year with the December quarter reporting shipments of 37 million units, up 26 per cent on year driven mainly by new launches, festive sales and offers. Several phone makers had reduced prices and offered additional channel margins to manage their inventories.

The year was marked by a 14 per cent rise in the average selling price to a record $255, the third consecutive year that prices have risen, restricting smartphone demand recovery. The share of premium phones rose to 10 per cent in the year from 6 per cent, accounting for the average price rise. Most of the decline in sales occurred in the mass budget segment in the price range of $100-200, while the entry level and super-premium segments showing brisk growth.

A significant development was a drop in shipments to online channels while that of offline channels saw an increase.

Outlook FY25: “IDC expects a decent start to the year,” says Upasana Joshi, Research Manager, Client Services, IDC India. The first quarter of CY2024 is expected to have ended with shipments of 33-35 million “led by affordable 5G launches, price corrections and new flagship device launches.” For the year IDC expects a 3-5 per cent growth.

However the concerns around growing ASPs will remain and that would impact consumer buying, she added.

“The organic shift from feature phones to smartphones is still daunted by the large price gap between the two categories, restricting growth coming from first time buyers of smartphones. Until this is addressed, smartphone market will continue to be led by only upgraders and show nominal growth YoY,” she said.

According to Counterpoint, which has pegged smartphone growth at 5 per cent this year, sales will be driven by premiumisation, diffusion of 5G in lower price bands and better macroeconomic conditions. It pointed out that one out of every three smartphones in India were purchased through financing.

Credit Cards

In the digital payments world where UPI transactions have the lion’s share, credit card transactions have shown a decent growth. According to a report by Worldline, that tracks digital payments, credit cards are powering the growth in card transaction values. Online transactions have a higher ticket size compared to point of sales terminals.

In the first half of CY2023 credit card transactions in volume was 155 crore with a value of ₹7.9-lakh crore. In the second half this increased to 178 crore and ₹9.4-lakh crore. “Credit card transactions (volume and value) have been steadily solidifying its position as the preferred channel for high value transactions,” Worldline said. “This is being observed on both PoS as well as online transactions,” it added.

The average ticket size of credit card transactions showed an uptick to ₹5,276 in the first half compared to ₹5,122 in the second half.

At the end of the year the total number of credit cards rose 21 per cent to 97.9 million with HDFC, SBI, ICICI, Axis Bank and Kotak Bank being the top issuers. At the end of February number of credit cards outstanding had crossed the 100 million mark, according to RBI data.

It is significant that debit card transactions both in volume and value have been falling with the UPI mode being increasingly favoured.

Outlook FY25: Credit card usage will rise as people use them for buying high ticket items, taking advantage of the mechanism of paying in instalments, said Sunil Rongala, Senior Vice President, Strategy, Innovation and Analytics, Worldline India. He said that based on past years and the usage seen, there will be 25-30 per cent growth in credit card transactions.