India’s FMCG sector is showing urban-rural growth shifts due to price-volume dynamics. Consumers favor local brands amid inflation, emphasizing value and health. Private labels rise with a focus on healthier products, reshaping strategies.
In the Fast-Moving Consumer Goods (FMCG) sector, the Asia Pacific region (APAC) recorded a 4% growth rate in the Year to Date (YTD) figures as of June 2023 when compared to the same period the previous year
The current growth is twice the rate of +2% in the period of FY22 vs FY21 and was driven mostly by price growth though there are signs of slowdown in price growth and a recovery in consumption.
India stands out as one of the few markets (along with Hong Kong and China), where value growths are driven by growth in volume (not in the chart), while across the region the value growth is still price-led.
In the backdrop of a persistently fluctuating macro-economic landscape, the FMCG sector in India remains subject to a series of challenges and opportunities. The enduring volatility stemming from various macro-economic factors has cast a significant influence on the industry
Nevertheless, amid these intricacies, a promising and encouraging trend surfaces, strengthening the growth narrative of the FMCG sector in India. One such aspect is the potential of Tier 2 cities.
Accounting for 14% of India’s total population, T2+ cities already contribute 46% to the GDP, offering a significant boost to the Indian economy. T2+ cities are home to a majority of our MSMEs, and these small and medium enterprises play a crucial role in propelling India’s growth, contributing approximately 30% to the GDP. A parallel force in driving growth is the Indian startup ecosystem, which boasts the third-largest number of unicorns globally. This ecosystem is actively seeking to capture the consumer base in Tier 2 cities.
Furthermore, delving into the present macroeconomic indicators, India’s GDP witnessed a growth of 6.1% in Q1’23, propelled by optimistic consumer sentiments (as reflected by the CCI index standing at 88.5% in Apr’23). This upswing is also influencing industrial output, which has experienced a 5.2% growth compared to the previous year, subsequently mitigating inflation to a level below the RBI threshold of 6%. (Source: RBI data, MOSPI)
Unveiling FMCG Landscape India
According to NielsenIQ’s FMCG Retail Measurement Service (RMS), for 12 months ending Sep’23 (MAT Sep’23), the FMCG industry (FMCG + Non-alcoholic Beverages) in India is valued at Rs. 6,51,375 crore, growing at a pace of 10.7%. The growth is driven by urban markets with a contribution of 63%, growing at 12.2% over year ago in value terms. It is also observed, from a retail universe of about 11.5 million outlets across India, 42% of these stores spread in urban areas have seen an increased penetration while rural markets that account for the rest of the 58% retail stores had a slower growth. The categories within the Cooking Medium and Impulse Food baskets show significant penetration within the broader FMCG retail store landscape.
In the July-August-September (JAS) ’23 quarter, this growth has been 9% YoY in value basis, led completely by consumption growth of 8.6% in volume terms and a price growth of 0.3% [Fig no.2]. This is indicative of positive consumption patterns at an All-India level.
This value growth has been driven by both urban India continuing to grow over the last few quarters as well as rural markets showing signs of recovery albeit a bit slow. India’s villages grew 6.4% by volumes up from 4% in the April-May-June (AMJ) ’23 quarter after reporting a 0.3% jump in January-February-March (JFM) ’23 quarter volumes.
Though the rural recovery is slow, with uneven distribution of rainfall and deficient monsoons impacting rural consumption, FMCG companies are hopeful of improvement in these demand trends on the back of festival season, MSP increases, and government infra spending.
The FMCG sector witnessed a further reduction in price growth from last quarter and has given necessary impetus to consumer spending power, evident in rural markets where an uptick in consumption is seen across categories. Within the retail sector, Modern Trade is experiencing robust double-digit consumption growth at 19.5%. Traditional Trade is also on the rise, with consumption improving to 7.5% in JAS’23, up from 6.2% in the preceding quarter (AMJ’23).
The Food Products market in India is pegged at Rs. 4,32,814 crore as of MAT Sep’23 and contributes 66% while Non-Food categories are valued at Rs. 2,18,562 crore constituting 34% of the FMCG pie.
At All India level, both the Food and Non-Food sectors are contributing to the growth in consumption. In JAS’23, Food sector grew at a rate of 8.7% in volume, compared to the same period last year (YA), up from 8.5% in AMJ ’23
Similarly, the Non-Food sector exhibited growth at a rate of 8.7% in volume in JAS’23 versus YA, a significant increase from the 5.4% volume growth seen in AMJ’23. While Non-Food grew faster in terms of value, the growth is supported by higher price growth compared to Food sector.
Food posted a value growth of 7.1% in JAS’23 over the same period last year, purely driven by consumption growth. The slowdown of price growth in food is largely attributed to a substantial decline in edible oil prices for Refined, Non-Refined and Palm Oil. Also, the growth in food is primarily driven by products falling under the Impulse basket– categories such as salty snacks, chocolates and confectionery; and habit-forming categories such as biscuits, tea, coffee, etc.
Impulse categories such as salty snacks, chocolates, confectionery, and biscuits continue to exhibit strong consumption growth translating in value growth with a marginal price growth. Growth recovery was also seen in habitforming categories such as tea and coffee after five quarters.
A slowdown in price is visible for the fifth consecutive quarter across staples, impulse foods, and habit-forming baskets. A notable revival in consumption for habit forming categories is seen in rural market for JAS’23 quarter. Impulse categories also recorded a slightly higher growth rate in consumption in rural at 14.9% as against urban at 13.9%
Consumers Quotient: The era of calculated & healthy spending
The persistent and extended pressures of inflation have instigated a shift towards more deliberate and measured spending patterns among consumers. This transformation in consumer behavior is closely aligned with the recent deceleration in inflation rates and macro-economic conditions where individuals and households are becoming increasingly conscious of their financial choices
However, it’s essential to recognize that the compounding impacts of disruption, economic shifts, and external factors are still very much at play, and consumers find themselves continuously preparing for what lies ahead.
Consumer wallets shift during pressured times:
In the recent “NIQ Mid-Year 2023 Consumer Outlook” survey, a look at the consumer wallet for the next 12 months proves a steadfast commitment to sustaining or potentially increasing their expenditure in categories deemed crucial, with the aim of securing a more prosperous future.
Presently, the prevailing circumstances appear to be advantageous for the Food industry, as consumers express a desire to allocate a larger portion of their budget to groceries and household essentials. Notably, this inclination leans heavily towards the purchase of fresh produce, healthconscious products, and dairy items, reflecting a clear consumer preference for these essential and nutritionally significant categories.
All eyes on price, regardless of brand: When it comes to purchasing preference at the time of wallet restrictions, the primary focus for many consumers revolves around the price, regardless of the brand or any other attributes of the product.
When asked ‘what is the source of preference while making the purchase decision’, Price was the most important driver, regardless of the product.
For example, in all the significant food categories, including Alcohol, Beverages, and Snacks, the foremost consideration was the Price, with Trusted Brand ranking second in importance. However, for categories like Dairy, Bakery, Frozen Food, and Packaged Food, while Price remained a crucial factor, the quality of the ingredients emerged as the secondmost significant consideration.
It’s possible that in the case of products such as Alcohol, Beverages, and Snacks, consumers tend to prioritize affordability more, given the regularity of consumption and the abundance of choices. Conversely, in categories like Dairy and Bakery, there may be a greater emphasis on the quality of ingredients due to the association of these products with freshness and health-consciousness.
Balancing act: Local for affordability while national brands for loyalty: The Covid-19 pandemic witnessed a surge in demand for local and regional brands. This shift in consumer behavior can be attributed to various factors. Firstly, the pandemic prompted a heightened sense of community and support for local businesses, as people sought to bolster their local economies.
Additionally, logistical challenges and supply chain disruptions led consumers to prioritize locally available products, ensuring a more reliable supply. Further, fluctuating prices and the emergence of a recessionary mindset suggest a year focused on precaution, consumers are increasingly adopting saving strategies.
Following this trajectory, regional or local brands consistently demonstrate a strong presence in the growth phase. In the past 12 months ending Sep’23 (MAT Sep’23), the volume of regional or local brands has increased by +1.1% compared to the same period last year, showcasing growth nearly twice as fast as that of national brands
Across Food, this is majorly driven by daily essential categories like Refined Edible Oil, Packaged Rice and other categories like Coffee, Ketchup, Snacks and Vermicelli and Noodles.
Consumers often find that local and regional brands offer larger quantities or better deals for the same or lower price compared to more prominent brands. This translates to increased value for money, allowing individuals to stretch their budgets without compromising on the items they need.
In conclusion, consumers choosing affordable local and regional brands aren’t solely about saving money; it’s considered a strategic and socially responsible choice.
Private Label – a growth story: Private labels have become an increasingly viable option for many consumers across the past 3 years as value has become the key priority for more people. It continues to be an option while managing costs, such as a growth of 31% in Private Label for MAT Sep’23 compared to the same period last year. This growth is
approximately twice as fast as the Overall Food segment. This faster growth is largely driven by categories like Packaged Rice and Breakfast Cereals
As per the recent NIQ Mid-Year 2023 Consumer Outlook survey, in India:
- 33% of consumers think store brands usually are ‘good value for money’
- 34% think store brands products are a ‘good alternative’ to the named brands
- 31% think some store brand products are ‘equal or higher quality’ than the named brand
In the long term, it is essential for industry players to recognize that private labels will be an increasingly important part of grocery dynamics.
Differentiation, innovation and finding unique space away from the “cheaper alternative” is one strategy worth considering. Additionally, collaboration within the retailer and manufacturer relationship has also been a proven, winning approach to align on evolving strategies with private labels in mind. Some of the benefits for collaborative retailerowned private labels include the potential for category captaincy and gaining an early view on assortment and category changes.
Healthy needs, important to all: While health needs are universally significant, it’s crucial to tailor approaches for different markets. In the context of India, the hierarchy of top health concerns comprises environmental factors, physical health, sleep quality, emotional well-being, and dietary considerations, which diverges from the priorities observed in most other APAC markets, where physical health typically assumes precedence, followed by considerations related to sleep
Consistent with the observed themes, a trend-spotting survey conducted by NielsenIQ BASES has also identified the rise of Natural, Immunity, Holistic Wellness, and Sustainability as the prominent emerging consumer trends. Furthermore, when delving deeper into the realm of food trends, it becomes evident that consumers are showing an increasing preference in food for:
Clean labels: The clean label movement is driven by consumers’ increasing interest in knowing what they are eating and the desire for more natural and wholesome food options.
Nutrient and Healthy Ingredients: Nutrient and healthy ingredient trends in the food and nutrition industry have evolved over time based on research findings, consumer preferences, and health-related concerns.
Holistic Health: Holistic health concerns play a significant role in food choices, as people increasingly recognize the inter-connectedness of their physical, mental, emotional, and spiritual well-being.
Healthier Alternatives: Consumers have started seeing healthier alternatives in food for a variety of reasons, driven by both physical and psychological factors.
Taste + Health: If healthy food doesn’t taste good, it’s less likely that consumers will stick to a healthy eating plan in the long term. Taste has become a significant driver of food preference, and it can make healthy eating more sustainable and enjoyable
Future Trends in Food: BASES Trendspotting Survey 2023
Innovative Brands winning the market: Now when it comes to consumable goods, exclusion of bad things (low sugar, low calories) is still among the most important factors in innovation. However, consumers seek more than that now. They’re willing to try new things if they are affordable when it comes to food but also with good quality ingredients.
For example, for things which create excitement such as alcohol & confectionary, the idea of convenience needs to be there. These are more impulse and indulgent purchases; hence these factors matter. However, for normal beverages, the most basic need remains top of the list – which is to be refreshing, to quench the thirst. Similarly in Packed foods, consumers want healthy things, but are not willing to pay with today’s price tags on most healthy & sustainable items
Consumers are displaying a growing inclination towards seeking Food & Beverages products with reduced negative attributes, all while considering both the financial and physical benefits. Notably, in the recent unveiling of the Breakthrough Innovation Report (BIR) Awards by NielsenIQ BASES, the winning products once again align with these prevailing trends, emphasizing their commitment to promoting health attributes, such as ‘The Good Bites’, redefining the eating experience by allowing for ‘fun/ indulgence’, ‘making it easy’ to access and allowing for on-the-go consumption, and offering a wholesome delicious healthier product experience.
How to outperform in 2024 and beyond
In preparing for the journey ahead, it’s crucial to evaluate the forthcoming factors that will drive growth, maintain relevance, and foster imaginative thinking.
ADAPT to inflationary reality: Executing effective and consistent price management strategies is essential for preserving profitability during prolonged periods of inflation. Careful monitoring of consumer optimism becomes paramount, particularly in tandem with the impact of inflationary pressures and shifts in employment dynamics. It is imperative to align your brand seamlessly with consumers’ deeply ingrained habits, focusing on their judicious spending and saving strategies.
RESONATE with the consumer: Examining the economic segmentation of NIQ’s consumers to assess their “financial condition and future outlook” reveals a market polarization, with 46% of Indian consumers expressing a sense of vulnerability, while 54% adopt a cautious yet optimistic stance. This suggests a divergence in consumer spending, influenced by economic conditions. Observable changes in price tier dynamics highlight the continued significance of price as the primary factor in purchasing decisions. Therefore, industry players must acknowledge that private labels and local or regional brands will play a crucial role in the dynamics of the grocery market. Formulate strategies for coexistence rather than relying solely on price competition and differentiation, innovation, and carving out a unique space distinct from being perceived solely as a “cheaper alternative.”
OPTIMIZE your pricing strategy through understanding your price elasticities and driving efficient promotions. Understand the right promotion mechanics to drive incrementality rather subsidize sales that would have happened anyway
INNOVATE to drive sustainable volume growth: There is a discernible shift in consumer preferences, with an increasing inclination towards brands and products that exude a sense of being meticulously crafted for their unique needs. This entails a profound consideration for addressing specific concerns, including the minimization of negative attributes associated with products. This consumer-driven demand extends beyond mere functionality, encompassing both the financial and physical advantages entwined with the products. To meet and exceed these evolving expectations, it becomes imperative for businesses to infuse innovation into their offerings, ensuring that they resonate with the intricacies of individual consumer needs while simultaneously delivering holistic benefits that transcend the boundaries of financial and physical realms.
This strategic approach not only positions your brand as responsive to consumer desires but also fosters sustained volume growth by staying ahead of evolving market dynamics.
