Rising rural prosperity in the last few years has had a positive impact on India’s fast-moving consumer goods (FMCG) market. A host of government-run programmes, coupled with higher prices for agricultural produce, have triggered the rural growth that Hindustan Unilever (HUL) and Dabur, among others, have capitalised on. They have expanded their presence significantly in the hinterland, resulting in strong rural demand for their products.
This year, the picture might just be different. With the monsoon playing hide and seek so far, the India Meteorological Department has raised concerns about a possible drought. In fact, the central government has already announced a drought relief package for five provinces.
August began with a 19% deficiency in rainfall. While the monsoon has recovered encouragingly since then, it is a late surge and it is still 10% short of the average, affecting cereal and pulse production and threatening to impact rural demand.
These are not encouraging signs for FMCG companies, who would now need to alter their strategies to face this challenge. While their sales growth momentum was not impacted during the quarter ended June 2012, the pressures are expected to be felt over the second half of this financial year.
Sectoral analysts and experts, however, stressed that FMCG companies should not get too “nervous” and focus on their business activities as “normally” as possible.
Our detailed research and insights note, ‘Impact of Drought on the FMCG Sector’, offers a perspective on the emerging situation.
It also analyses how FMCG companies in India coped with droughts between 2002 and 2009. In 2009, for instance, they focused on expanding volumes across rural areas and avoided price hikes as far as possible. In contrast, in 2002, these companies focused on select brands in their portfolios to deal with the weakened rural demand.
The note offers several recommendations on how to deal with a similar situation this time around. From launching more value-for-money products to stepping up sampling of products, there are several options before FMCG companies.
Given that they’re already dealing with the economic slowdown, can FMCG firms manage to work around a drought? I hope it doesn’t come to that. But, if it does, it will be very interesting to see what strategy they adopt.