HUL To Parle: FMCG Majors Brace For Tepid Year-End With Little Optimism For 2025

Faced with weak demand and rising costs, the fast-moving consumer goods industry may end the year on a choppy note. After the crucial festival season failed to provide the much-needed relief, several top executives now remain cautious about growth for the year ahead, as inflation and unemployment continue to weigh on consumer sentiment.

Consumer bellwether Hindustan Unilever Ltd. has flagged concerns about growth in big cities trending down. At its Capital Markets Day held on Nov. 29, Chief Executive Officer Rohit Jawa told investors that there were "no major changes" in demand trends, presenting a "cautious near-term" growth outlook.

Parle Products Pvt. echoed similar sentiments. The festive months of October and November did not turn out as expected, said Vice President Mayank Shah.

"Urban stress is very much palpable," he said, hoping to close the quarter with 4-5% growth versus expectations of 8-9%. "We expect sales in the second half to be better than the first, but double-digit growth is still some time away."

The rural recovery, however, offers a glimmer of hope. Yet, not many are excited about the current pace of recovery in the smaller towns and villages. The pick-up in rural, according to industry executives, may not entirely offset the shortfall in urban mass spending, as these markets comprise only a third of sales for FMCG companies.

"The rural growth is reasonable, but they're not the kind of growth that we've seen in the past," according to Britannia Industries Ltd. Managing Director Varun Berry.

The operating environment is also tough. Commodities such as wheat, tea, cocoa, palm oil are all moving northwards resulting in price hikes of 2-9% across categories such as biscuits, chocolates, soaps, shampoos, flour, etc. Even laminates and corrugated boxes are showing signs of inflation.

"There was deflation about seven-eight months ago, and now there's high inflation. So, it's a tough environment," Berry said, hinting at a 4-5% price hike in third quarter. "In the next six-nine months, we will be very careful about how we treat price increases, and how we route for volumes. But we will balance it well."

These price hikes are expected to translate into value growth in the coming quarters, executives said. But the volume growth is still elusive and may remain so on the back of planned price hikes.

"Historically, the market has grown roughly half price, half volume," Jawa said. While pricing will turn positive with low-single digit growth amid price hikes in tea and soap, this may hurt the fragile volume.

Moreover, the Covid-19 pandemic has irrevocably altered consumer behavior, with a noticeable shift towards online shopping. The retail and wholesale trade was facing severe cash constraints, which could also hurt growth, say executives.

"There is a considerable stress in general trade, particularly in metros," said Angshu Mallick, managing director of Adani Wilmar Ltd. Part of this demand is being met through e-commerce channels, but even without that the "urban pull" is missing from the growth story, he said.

Unlike the discretionary categories, however, the staples businesses, are largely defying the slowdown, giving the industry hope that a rebound in demand is not too far away. "I'm optimistic about a strong Q3, thanks to sales boost from weddings and the ongoing expansion into new towns," Mallick said.

Economists, however, say that the macroeconomic indicators aren't firing, which could potentially delay recovery. "A double whammy of low income and persistently high inflation continues to strain household budgets," said Teresa John, economist at Nirmal Bang Institutional Equities. Besides, government capex remained under pressure even in October, down 8.4% over the previous year. Credit growth is slowing down sharply. "It remains to be seen if the slowdown can lead to delays in private capex," she said.

Bikaji Foods International Ltd. is hopeful of a significant turnaround only in fiscal 2026. "We anticipate that Q3 will be little muted for us compared with Q2, as retailers stocked up inventory ahead of Diwali," according to Manoj Verma, its chief operating officer. "In terms of offtake, though, October has been fairly good," he said, projecting a 15% growth in the packaged sweets and ethnic snacks businesses in Q3 over last year. "But overall, we don't see any significant turnaround in terms of volumes before the next fiscal."

Analysts concur. A low single digit pricing growth, combined with high single-digit volume growth, could drive double-digit revenue growth in fiscal 2025. While price increases are anticipated to ease pressure on revenue growth, volumes may fall short to boost overall growth, they said.

"For the second half of FY25, we expect gradual urban recovery," said Karan Kamdar, research analyst, Deven Choksey. However, the rural markets are seen as the demand driver, backed by stable monsoons, government initiatives and rising minimum support price.

Market researcher Kantar said that the average consumer household spend has increase by 18% in last two years, significantly more than average inflation. As a result, consumer confidence has been stagnating. As high inflation continues to bother households, Kantar expects the FMCG sector to report flat volume growth in 2025.

"This year has proven to be a challenging one for many brands and categories, with volume growth slowing down and consumers unable to take further price hikes," according to Deepender Rana, executive managing director, South Asia, insights division, Kantar. "As we look forward to 2025 and beyond, India indeed finds itself at a crossroads."