Slowing Consumption in India: A Wake-Up Call for Consumer Goods Giants

Diminishing Demand in Urban Markets

Consumption in India's cities and towns has taken a sharp downturn, casting a cloud over the prospects of domestic consumption. This worrying trend is reflected in the earnings report of Hindustan Unilever Ltd (HUL), a bellwether for the packaged consumer goods industry.

HUL reported flat volume growth for the third quarter, raising concerns about a slowdown in demand. The company has observed a shift in consumer behavior towards purchasing smaller packs, a trend that has intensified during the quarter.

"In recent quarters, urban demand has been easing, while rural demand has been recovering and gradually growing," said Rohit Jawa, CEO and managing director of HUL. This urban slowdown is unlikely to reverse in the near term, as 60% of HUL's sales come from urban markets.

Budgeting Influences Shopping Habits

"Households are managing their budgets, which is driving the trend towards smaller pack sizes," Jawa explained. However, he highlighted that premium brands are still experiencing growth even with the reduced pack sizes.

Ebitda Margin and Profit Surges

For the three months ended December 2022, HUL reported a 2% increase in sales to ₹15,195 crore. Ebitda margin stood at 23.5%. Net profit surged by 19% year-on-year, driven by a one-time gain from the divestment of the Pureit water purifier business.

Inflation Impacts Volume Growth

High tea and crude palm oil prices have prompted HUL to increase prices in its tea and soaps portfolio. Analysts expressed disappointment with the flat volume growth, attributing it to price hikes in these categories.

Rural Markets Offer a Glimmer of Hope

While HUL reported declining volumes in urban markets, they experienced sequential growth in rural areas. This signals a shift in consumer spending habits to smaller towns and villages.

"Elevated food inflation and real wage growth are impacting urban consumption," said Jawa. "We are hopeful that government initiatives will address these concerns."

Demerger and Acquisition

HUL approved the demerger of its ice-cream business into Kwality Wall's (India) Limited. Additionally, the company acquired Minimalist, a direct-to-consumer personal care brand, to expand its presence in higher-growth demand spaces.

"This acquisition signals changing consumer behavior towards new and innovative products," Jawa said, highlighting HUL's focus on emerging market opportunities.

Conclusion

HUL's disappointing quarterly performance is a wake-up call for the consumer goods industry. Slowing consumption in urban markets poses a significant challenge. While rural growth offers some respite, it cannot fully offset the urban slowdown.

Inflationary pressures and changing consumer preferences are forcing companies to adapt their strategies. Focusing on smaller pack sizes, premium brands, and expanding into emerging market segments will be key to riding out the current wave of sluggish consumption.