Consumption Gets a Bharat Boost
From electronic products, furniture and cars to apparel, fashion accessories and food, smaller towns are outpacing metros and big cities in consumption revival. Will this sustain?
October 18, 2020 BUSINESS TODAY : Ramesh Iyer, Managing Director, Mahindra Finance, was pleasantly surprised to know that his team had disbursed 30,000 vehicle loans in June, a huge increase from April and May when business was almost zero. “We have opened 1,100 rural branches and there are footfalls and enquiries about tractor and car loans like before,” says Iyer, admitting that some part of this could be pent-up demand also. “Through April and May, customers took advantage of the loan moratorium, but now they are beginning to pay up. They are requesting us to bring down the instalment amount. Can you give us a Rs 8,000 /10,000 per month EMI instead of Rs 12,000 is what they are asking for.” Besides, there is also demand for additional short-term loans. “They had borrowed money during the lockdown. Now they are asking for short-term loans, which they are confident of paying back within the next 6-12 months along with the main loan. People are cautious, but they have certainly not lost hope,” adds Iyer.[/vc_column_text][/vc_column][/vc_row]
The Rebound
At a time when GDP for FY21 is estimated to shrink, and the Nielsen consumer confidence index at 123 points is 15 points lower than 2019, Iyer sounds a bit too optimistic. Add to this the job losses and salary cuts across sectors, and there’s little to cheer about.
Here perhaps banking on a silver lining, though most consumer goods companies, auto as well as other sectors saw either muted or negative growth in first quarter of FY21, rural and semi-urban (Tier-II, III, IV) markets bucked the trend. A recent Nielsen report says rural FMCG sales grew at three times the pace of urban India sales in June.
While overall industry grew at 4.5 per cent in June (vis-a-vis June 2019), rural markets saw 12.5 per cent growth, according to the Nielsen report. In contrast, urban grew by just 0.4 per cent. The consumption appetite in Tier-II, III towns and cities, according to KPMG India’s consumer sentiment survey, Time To Open My Wallet, is 1.9 times more than that of metros and Tier-I cities. “Our survey indicates that Tier-II, III consumers are more liberal than Tier-I consumers in spending habits, hence these could be the next focus area for retailers to expand their presence. Around 22 per cent of consumers in Tier-II and 30 per cent in Tier-III cities said their spending will either increase or remain the same as prior to Covid,” says Harsha Razdan, Partner and Head, Consumer Markets and Internet Business, KPMG India.
From FMCG majors such as Hindustan Unilever (HUL), Britannia, ITC and Marico to auto companies such as Maruti Suzuki and Hero Motors, and appliance majors such as Godrej Appliances and Panasonic – the Bharat or small town India story has played out well. According to HUL Chairman and MD Sanjiv Mehta, rural and smaller markets played a big role in the company’s 7 per cent growth in Q1FY21. “The last three months have seen a clear bounce back by rural India,” says Mehta. Similarly, for Britannia, rural sales have grown three times (38-39 per cent) faster than urban sales, says MD Varun Berry.
For another major player Dabur, rural contributed 45 per cent to its Q1FY21 sales, while for Marico India, it was 35 per cent. A significant number of 5,63,426 motorcycles and scooters Hero MotoCorp sold in the first quarter was in small town India. The rural share of India’s largest carmaker Maruti Suzuki in the first quarter of the current fiscal went up to 42 per cent as against 38.5 per cent a year ago.
Caution Is Key
But experts are not ready to uncork the bubbly yet. According to Crisil Chief Economist Dharmakirti Joshi, rural and smaller markets may be less hit compared to larger cities, but are far from booming. “Consumption has indeed gone up in these markets compared to April-May, but the transition to normalcy will not happen until a vaccine is available.”
One of the reasons for the demand uplift in rural and smaller markets is lesser number of Covid cases. The pandemic has been rampant in bigger cities. The government has also done its bit to step up spending with initiatives such as the Rs 40,000-crore allocation for MGNREGA and the Rs 1-lakh-crore Agri Infrastructure Fund. But the biggest factor, of course, has been the normal progress of the monsoon. This year has seen a record rabi harvest. The kharif outout is also expected to rise.
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A large part of the small town India consumption story is also due to the reverse migration of labourers post the lockdown. In fact, reverse migration, says Madan Sabnavis, Chief Economist, Care Ratings, brought down per capita income of rural households – there are now six-seven people working in a farm, compared to four-five earlier.
He, however, adds, “While one advantage is that the amount of acreage of cultivation has increased since there are more hands, the income also has to be distributed among a larger section of people. So, per capita income will not increase significantly. The talk that rural economy will propel consumption will not happen that easily since more people are working there now.”
In fact, R.S. Sodhi, Managing Director, Amul, says consumption in small town India, especially in Bihar and UP, which has seen the highest percentage of reverse migration, isn’t actually as high as it was in April and May. “Most of these migrants had money when they went back which they spent, but now their resources have dried up and hence spends have dipped considerably. I don’t think schemes such as MGNREGA have helped consumption. Prices of cotton, poultry, vegetables have come down. Barring Gujarat, milk prices have dipped by over 25 per cent. The farmers are under a lot of pressure.”
New Trends
Iyer of Mahindra Finance agrees there is indeed a cautious approach among consumers in small town India. “Customers are approaching us for loans for second-hand tractors, cars or motorcycles. They want to buy a new vehicle, but would rather wait for a while to make the big purchase.”
The approach has led to a new consumption trend. Consumers are buying shampoo, cooking oil or even biscuits, but opting for smaller pack sizes. According to a report by Snapbizz, a service provider for retail billing softwares, there has been a massive growth in Rs 5-10 snack and biscuit packs. “Consumers are choosing to downtrade within their trusted brands,” says Koshy George, Chief Marketing Officer, Marico India.
“There are more takers for our value brands such as Garnier and even there it is the Rs 50-100 price-point which is doing well compared to the more expensive offerings at Rs 250-300 price points. This trend will continue till the end of this fiscal. We are headed for a year of belt tightening among consumers as they reprioritise expenditure,” agrees Amit Jain, Managing Director, LOreal India.
And those buying larger packs are mainly doing it for stock-piling, especially in case of staples. “Coronavirus has created a fear that shops will close down without prior notice and there will be no essentials at home. During the lockdown, customers even bought large packs of biscuits and snacks. Now, most of them are buying smaller packs of products such as biscuits, snacks and even shampoos and soaps, but when it comes to staples such as rice, dal, oil and floor-cleaners, people want to hoard. A lot of them are buying five-litre jars of sanitisers too,” says Pranav Patel, owner of Satguru Kirana store in Kadi town of Gujarat.
Covid-19 has made consumers a lot more hygiene conscious, resulting in a move towards packaged products. Also, thanks to job losses and a slowing economy, value products are taking centrestage. Arjun Choudhury, owner of Maa Bhavani Traders in Mathaniya, a few kilometres from Jodhpur, says he is now selling packs of loose commodities such as atta, sugar and rice. “The atta I sell costs Rs 30 less than established brands, but consumers are happy to buy the packed atta.”
