Consumption Gets a Bharat Boost
Ajita Shashidhar September 30, 2020
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.
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.
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."
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."
The move towards in-store brands is high in cities as well. "In Tier-1 cities, people were going for premium brands in April-May, but now they are shifting towards packed items. The percentage of kirana stores selling loose items in Tier-1 markets has reduced from 50 per cent to 35 per cent," says Prem Kumar, Founder and CEO, Snapbizz.
Car and motorcycle buyers are opting for cheaper models too. "Popular brands such as Splendor, Passion, HF Deluxe, Maestro Edge, and Pleasure+ continue to attract customers. However, given the negative impact on the economy, customers may downshift to a lower variant within the intended model, although it may be too early to read into trends," says Naveen Chauhan, Head of Sales and After-Sales at Hero MotoCorp.
"With income levels going down, people are buying smaller cars. They are holding on to their old cars for longer. Replacement buying has come down, but first-time buying has gone up," says Shashank Srivastava, Executive Director, Maruti Suzuki.
The KPMG survey says 30 per cent of Indians (both in metros and smaller markets) have expressed interest in either upgrading their existing washing machines, microwaves or refrigerators or are first-time buyers. The consumer durables industry, according to a report by the Retailers Association of India, has been among the fastest to bounce back in the Covid-19 era. The sector reported a fall of 19 per cent, compared to sectors such as apparel, beauty and jewellery, which shrunk 60-70 per cent.
Manish Sharma, CEO and President, Panasonic India, says there has been a significant drop in impulse buying among consumers across metros and smaller markets. However, the new reality of working from home and not having the luxury of domestic help have led consumers to invest in durables. "Consumers are investing in technologically advanced appliances that are easy to use, connected (enabling them to multi-task), and are energy efficient. For instance, because of Do It Yourself (DIY) cooking trend, we are witnessing a huge demand for our microwave ovens across markets. Similarly, the rise in rich content across OTT platforms has led to demand for smart LED TVs across smaller markets and metros."
Similarly, there has been a huge spurt in demand for large-sized refrigerators across markets. The refrigerator penetration in small town India is just about 30 per cent, but according to Kamal Nandi, Business Head and EVP, Godrej Appliances, "Unlike other categories where consumers are down-trading, I don't see that trend in the consumer durables sector. A washing machine or a large refrigerator is being looked upon as essential as people have to manage without domestic help. We are seeing demand across value and premium offerings."
Ritesh Ghosal, Chief Marketing Officer, Croma, says sales of stores located in Tier-II and III markets such as Kolhapur, Nashik, Mandya and Vapi have doubled in the Covid era. "There is a lot of first-time demand coming from these places. Also, people are coming to large spaces from a safety perspective."
The lockdown has forced children to do home-schooling through online platforms such as Zoom. This has led to a surge in sales of value smartphones between the price points of Rs 6,000 and Rs 10,000. Anshu Shukla, owner of Lucknow-based handset retailer, Shukla Agencies, says while the demand for high-end smartphones has dipped by over 90 per cent, there are a lot of takers for cheaper models. Amit Sharma, CEO, Shop X, says over 40 per cent of mobile retailers his company distributes to, have seen a 20 per cent increase in demand in the value category. "In fact, most retailers, who have experienced a decline in sales, are seeing an increase in margins. There is low price sensitivity among customers for this category, which is leading to higher margins. The average consumer does not want to go to multiple stores and compare prices due to safety reasons, so the pricing pressure on retailers has reduced. Even though there is a drop in demand, it is being made up by higher margins," explains Sharma.
Shukla of Shukla Agencies agrees. Margins have increased by 20-30 per cent, he says. "Companies could not manufacture during the lockdown, so supply is limited. We are now selling at MRP and not giving the 5-10 per cent discount that we usually do, which has improved margins."
Marketers are leaving no stone unturned to capitalise on the rising demand in smaller markets. "With migrant workers shifting back to their hometowns and the government announcing additional spend on MGNREGA and higher MSPs, rural consumption will see an uptick. A normal monsoon has further improved sentiment in the hinterland. Going forward, rural demand will continue to outpace urban demand. The gap between rural and urban demand growth may narrow a bit with labour returning to cities, but rural growth will continue to outpace urban," says Dabur CEO Mohit Malhotra. The company plans to increase its distribution footprint in rural areas to 60,000 villages by the end of FY21. "We are also expanding our product basket in the rural market by way of newer low unit price or affordable packs across categories to boost demand," he adds.
FMCG major ITC also plans to push its hygiene agenda in smaller towns and rural markets. "ITC Savlon launched its hand sanitiser at just 50 paise. The Savlon hand sanitiser in a sachet format at this price makes it probably the world's most economical hand sanitiser. The sachets address the issues of accessibility, affordability and availability. We expect quick adoption of Savlon sachets by rural consumers," says B. Sumant, Executive Director, ITC. The tobacco major, which is desperately trying to reduce its dependence on cigarettes by riding heavily on its FMCG businesses, recently launched a host of new products, including NimWash vegetable and fruit wash, Savlon Surface Disinfectant Spray, Savlon Germ Protection Wipes, Savlon Hexa body wash and soap.
Britannia and Marico are also reprioritising their product portfolios. Britannia has opted for the 80:20 formula and has chosen to manufacture only 20 per cent of its stock-keeping units (SKUs) which garner 80 per cent of revenues. "We sided with efficiency over variety, which was a prudent call," says Britannia's Berry. "We have tried to rationalise our portfolio because at a time like this complexity doesn't work. We have identified markets where lower price-point SKUs work better as well as markets such as Punjab and Rajasthan where there is more large-pack consumption," adds George of Marico.
According to Sanjesh Thakur, Partner, Risk Advisory, Deloitte India, companies have realised that in order to be successful in the next 10 years, they have to do everything that they can to tap into rural demand. "They are in talks with state governments to allow them to set up their manufacturing facilities closer to the market. If your logistics cost for a Rs 100 MRP product is Rs 8, you can reduce it to Rs 2 if you produce closer to the market," explains Thakur. In fact, Britannias MD Berry says it was distributed manufacturing and multiple plants that gave the company an edge over peers during the lockdown. "Between us and our contract manufacturers, we have got almost 40 plants, so we were closer to our consumers." Britannia, with revenue, EBITDA and PAT growth of 26.7 per cent, 81.7 per cent and 105.4 per cent, respectively, in Q1FY21, has surprised the market.
Thakur of Deloitte adds companies not only want to manufacture closer to the markets but are also looking at more agile supply chain mechanisms (like more direct-to-consumer models) even in smaller markets. "Supply chain agility will become important as customers, even in smaller markets, will not wait 10-12 days for a product."
While Tier-II and III markets contribute 65 per cent to Godrej Appliance's revenues, Panasonic has launched a business function called 'Bharat Marketing' to tap into this new customer base. "It will focus on gathering real-time information on inventory and identify insights from these markets in order to create and execute an effective strategy. For instance, in places where there are frequent power cuts, we offer our fixed-speed, window AC range, which helps regulate room temperature. Similarly, we have focused products such as direct cool refrigerators, semi-automatic washing machines and TVs in the starting range that are in demand across Tier-II, III and IV markets," explains Sharma of Panasonic.
Apart from considerably strengthening their sales force, especially in rural and semi-rural markets, auto companies are wooing consumers in smaller markets through flexible loans. "Consumers want flexibility, so, we have a scheme where one can skip three EMIs. People also want a smaller down-payment, so we have launched a step payment scheme. We have spoken to banks and have come up with tailor-made schemes for our consumers," explains Srivastava of Maruti.
Similarly, Hero is offering customised financing solutions to its rural customers with initiatives such as flexi cash and tie-ups with micro financiers. It is also using digital platforms for faster document management. "Retail finance is not only a tool, but a necessity for the huge population of 'intending buyers', which enables them to purchase a two-wheeler. Our captive finance arm Hero FinCorp is present at almost all our channel partner stores and ensures region-specific finance products," says Chauhan.
The lockdown has increased the number of digital natives. According to Chaudhury, who runs a kirana store in Mathaniya, a few kilometres from Jodhpur, over 40 per cent of his clientele have switched to WhatsApp shopping in the Covid era. "Earlier, people preferred coming to the store and buying. Nowadays, most of them prefer coming just once in a month and buy in bulk," he explains. What is even more interesting is that this town in the interior of Rajasthan, with a population of less than 5,00,000, has taken to digital payment in a big way. Chaudhury says 50 per cent of his clients prefer paying through Google Pay. According to the KPMG survey, consumers have embraced online shopping more than ever before, and those in Tier-II and III cities are more inclined towards shopping online via digital payment modes. "E-commerce segments (such as grocery, pharmacy, fitness, etc) have seen a sharp spike in customer adoption during the pandemic. These segments have seen 60-100 per cent increase in orders per day compared to pre-Covid levels. These new customers have been acquired at a significantly lower cost in the past three-four months, leading to better unit economics," says Rishav Jain, Senior Director and Consumer and Retail Lead, Alvarez and Marsal. Discounts for some of the online segments have reduced by 5-15 percentage points in the past three-four months, leading to better gross margins, he adds.
Companies, from FMCG to auto and finance, have been on an aggressive digital engagement spree. Srivastava of Maruti Suzuki says consumers are asking for digital interfaces even in smaller towns instead of dealer visits. "Earlier only 3 per cent of enquiries came from our digital platform. Last year, it increased to 13 per cent. Today, 35 per cent of enquiries are coming from our website."
"The moment we get an online enquiry, we give the details to our local dealers. Web customers want immediate response and our target is less than one hour," he adds.
Godrej Appliances, on the other hand, invested in training its dealers to have their own digital interfaces during the lockdown. "More than 15,000 of our 26,000 dealers have e-stores. Their sales through digital are steadily moving up," claims Nandi of Godrej Appliances.
What Lies Ahead
But the big question is, will the Bharat story sustain?
Not everyone is hopeful. "Only 30-40 per cent of the rural income comes from agriculture. The rest of it is non-agriculture... An SME in a rural area, which supplies leather to industries in other parts of the country, cannot function well if the demand for his products comes down in the urban markets," explains Sabnavis of Care Ratings.
"Rural demand will not pick up until urban picks up. Rural can produce only if urban consumes," agrees Sodhi of Amul. Moreover, with the number of Covid cases increasing in smaller towns, one isn't sure if those markets still have an advantage. "If you look at the latest list of cities impacted by Covid-19, there is Vishakapatnam, Kakinada, Lucknow, etc, so the precious protected status that Tier-II India had is no longer there," points out Jain of LOreal.
Kumar of Snapbizz calls the recent surge in demand an increase in sales in smaller markets and not so much an increase in consumption. "When you say increase in consumption, you say people are eating and drinking more or are upgrading their purchasing behaviour. Just because 100 people moved from a city to a village, one can't say there is an increase in consumption. Once there is frustration with jobs, they will all go back to cities to make money." Kumar calls it a supply chain correction that will not last too long. "People are going to be conservative about the way they use their money," he adds.
"Consumption hasnt gone up. We have stores across 17 locations and demand isnt buoyant. Consumption hasnt picked up in smaller markets either," says Arvind Mediratta, CEO, Metro Cash & Carry
So, what will growth be like going ahead? "The alphabet will be scripted by Covid. It all depends on when there will be a vaccine. As per Crisil, 10 per cent of the GDP will be completely lost, it will be a big hit," says Joshi.
So, though India Inc. is investing heavily in smaller markets, one needs to wait and watch whether the Bharat story will actually play out in the long run.