Hindustan Unilever (HUL) on Wednesday emerged as the third key fast-moving consumer goods (FMCG) company after Tata Consumer and Nestle India to flag demand concerns in urban areas, especially in larger cities. All three firms have attributed the urban slowdown to food inflation and a high base effect in the year-ago period.
After multiple quarters of driving growth, slacking urban demand though is the new risk factor for FMCG companies, which derive two-third of their overall sales from urban areas, sector experts said. Rural areas give FMCG firms a third of their sales.
“Rural markets are showing green shoots led by good monsoons and a likely good kharif output. Urban demand is moderating, especially in larger cities. It has been the engine of growth for some time. But we are seeing a slowdown across channels and segments in urban areas,” Rohit Jawa, CEO & MD, HUL,said on Wednesday.
HUL is now counting on rural demand and low-single-digit price growth to navigate the FMCG market in the coming quarters. More importantly, price growth, which had lagged volume growth owing to benign commodity costs and price cuts, may actually move ahead of volume growth from the December quarter onwards, HUL’s CFO Ritesh Tiwari said. This is as the firm takes “calibrated price hikes” in skin cleansing and tea.
“Crude palm oil and tea have turned inflationary by 10% and 25% each,” Tiwari said. “We will respond to this with calibrated price hikes in skin cleansing and tea to mitigate inflationary concerns. From a broader lens, however, price growth may actually begin to track ahead of volume growth,” Tiwari said, adding that he maintained a stable outlook for the FMCG market as rural growth would stay ahead of urban growth.
The company also said that it would continue to keep its focus on premiumisation despite tepid demand in urban markets. “The secular trend of premiumisation remains intact as premium products are doing better than popular and mass-market categories in urban areas,” Jawa said.
But Jawa did add that making products “accessible across brands” was something that the company was pursuing in rural areas aggressively. As rural growth improves, FMCG firms, experts said, are expected to increase their focus on rural markets, driving direct reach, pushing more affordable products into rural markets and increasing share of voice among rural consumers.
Jawa also said that the decision to separate the ice-cream business was driven by its limited synergies with the overall business of HUL.
“Ice-cream is a high growth, but equally high investment and low-margin business for us. With the brand and technology owned by Unilever, HUL would have to spend money to develop local capabilities if decided to keep the business,” Jawa said.
The separation of the ice-cream business may have two outcomes: a demerger or an outright sale. “The independent committee is deliberating on what route to take which is in keeping with shareholder interest,” Tiwari said.
From: financialexpress
Financial News
