India's consumer goods industry expanded at its fastest pace in six quarters during the April–June period, driven by softening inflation and an upswing in rural consumption, according to market research firm NielsenIQ.
The value growth of consumer goods stood at 12.2% during the three months until June. This marks an improvement from the 10.2% growth in the previous quarter and the 10.9% growth witnessed during the corresponding period last year, NielsenIQ's Q2 snapshot showed.
This increase was fueled by higher consumption growth of 7.5%—the highest in two years— aided by price cuts, the report said.
Retail inflation fell to 25-month low in May this year. But the rebound in consumption faces a risk as prices rise again, driven by tomatoes and vegetables. Economists polled by Bloomberg expect consumer inflation to cross the 6% tolerance mark of the central bank in July. That, however, is still below the previous peak of 7.79% seen in April last year.
"The softening of the inflationary rate and decline in food inflation are good news for the industry," said Satish Pillai, managing director, NIQ India. This has led to confidence in spending, and that's reflected in retail channels across the country, he said.
The drop in prices driven by the food categories has also had a positive impact on consumers. "And it is anticipated to be mirrored in the buildup to the festive season," Pillai said.
Demand for soap-to-staples has been under pressure in recent quarters, particularly in rural areas. Higher prices have forced people to curtail expenditure on essential daily items as well as discretionary products. However, as inflation eased in April and May, companies passed on the benefits to consumers to bolster volume. In the June quarter, rural markets posted staggered growth, with volume climbing 4%, according to NielsenIQ.
This was an improvement from the 0.3% rise in the previous quarter. Rural market volume had experienced a decline over the preceding four quarters, primarily driven by the non-food category. Rural consumption for non-food, however, clocked a growth of 1.4% in the June quarter as compared with a 3.9% decline in Q1. However, certain segments, such as home care and personal care, continue to decline.
Overall, the food category continues to drive consumption growth at a rate of 8.5%, up from 4.3% in the March quarter. Non-food volume rose to 5.4% in the June quarter from 0.2% in the preceding quarter, according to Nielsen.
The urban markets continued to see momentum in consumption growth and have doubled to 10.2% in the April-June period as compared with growth for the previous quarter.
"Q2 thus far is the best quarter in a year and a half," said Roosevelt D'Souza, lead, customer success, NIQ India, adding that rural recovery combined with 21% growth in modern trade augurs well for the festive season.
Inflation also led to a marked shift towards low-priced purchases, favouring local brands. Companies including Hindustan Unilever Ltd., Britannia Ltd., and Nestle India Ltd. have called out the resurgence of local brands in their quarterly earnings calls. They expect competition to intensify as these brands begin to eat into their market share with low prices and localised marketing strategies.
Smaller packs continue to drive demand as well. "Although there is an upward trend seen for average pack sizes, it continues to remain negative across markets, except urban markets," D'Souza said.
"At this stage, it is important to focus on the right assortment and pack sizes of products. The reduction in input costs, if continued to be passed on to consumers, will only increase consumption, benefiting manufacturers, retailers, and consumers," according to him.
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