The stress in consumption in the economy shows no signs of abating. Growth in the fast-moving consumer goods (FMCG) sector slid to a three-year low of 9.7 per cent in 2019 largely due to a steep contraction in rural market, data analytics firm Nielsen said on Tuesday. In 2018, the sector had logged a growth of 13.5 per cent.
From a high of 13.6 per cent growth in the first quarter of 2019, the slowdown has deepened to 10.3 per cent in the second quarter and just 7.9 per cent in the third quarter. In the last quarter of the year, growth rate slumped further to 7.3 per cent. In Q4 of 2018, the sector had grown at more than double the pace at 15.7 per cent. It had peaked in the third quarter of 2018 (July-September) when the growth rate was 16.2 per cent.
"2019 has been a tough year for the FMCG industry with over four-point decline but we do see it stabilising in the last quarter. A mix of macro-economic, channel and zone factors driven by manufacturers, coupled with consolidation of smaller players have been instrumental in the slowdown," said Prasun Basu, South Asia Zone President, Nielsen Global Connect. "A lower pace of innovation has further limited consumer demand pick-up. However, 2020 offers a stable outlook for the industry arresting the 2019 decline."
For this year, Nielsen is projecting a growth of 9-10 per cent and has added that the first quarter this year (January-March 2020) may see a growth of 8-9 per cent. While this is sequentially higher than the 7.3 per cent growth of Q4 2019, it would still be the slowest pace of growth for the first quarter in three years.
"The last quarter of the year when the festive months kick in, is when we generally see an uptick in demand. This year saw a rebound in October but it did not sustain beyond that one month," said Nitya Bhalla, Lead, Data Science, Nielsen South Asia. "The big reason for this was high inflation that pulled down the overall growth."
The rate of inflation rose to a five-year high of 7.35 per cent in December 2019, breaching the upper limit of 6 per cent set by Reserve Bank of India. Nielsen said a moderation in inflation will be key to any prospects of a revival in the sector.
"We cannot say for sure if the worst is over but it does look like the deceleration has been arrested in the last quarter. Even in rural markets, which traditionally have grown much faster than urban centres, the growth was at 5.2 per cent in Q4 versus 5.3 per cent in Q3," Bhalla added. "We expect a gradual recovery from here on as we know that the rabi crop season has been good and there is an expectation of more government action that may act as a stimulus to the economy."
"There are a few concerns. Inflation needs to be reined in and we expect it to taper off by March 2020. We are also expecting a boost from the union budget so our projection of a 9-10 per cent rate of overall growth in 2020 is based on these enabling factors."
Nielsen's projections are more or less in line with what another research firm CRISIL has predicted. CRISIL said an expected recovery in rural demand, coupled with steady urban demand, will lift revenue growth in the Rs 4 lakh crore sector to 10-11 per cent in fiscal 2021, close to the levels witnessed in fiscal 2019.
"That would follow a nearly 400 basis points (bps) moderation in growth to an estimated 8-9 per cent in fiscal 2020. Rural demand is expected to recover gradually from March-April 2020, riding on an increase in farm incomes," it said.
"Next fiscal, growth in rural FMCG revenue will recover to 11-12 per cent from lows of about 8-9 per cent in fiscal 2020, largely driven by better agriculture GDP growth. Besides, higher spending by the government on rural infrastructure could benefit rural incomes and thereby demand for FMCG products," said Anuj Sethi, Senior Director, CRISIL Ratings. "Growth in urban FMCG revenue, meanwhile, is expected to hold steady at 8 per cent, as growth and share of modern trade continue to improve."