Move over HUL, Dabur. Nestle, others are poised to lead next big growth wave

FMCG players Hindustan Unilever, Dabur and Colgate may have ridden the rural wave for the last decade but the new growth area will not be rural but urban, which means players like Nestle, GCPL, GSK Consumer and Asian Paints are going to see maximum gains from the revival in urban consumption.

Buoyed by higher rural spending allocations,job guarantee schemes like the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA), and rising minimum support prices (MSP), rural-oriented players such as HUL, Dabur and Colgate have milked the maximum they could from the rural consumer. According to a Motilal Oswal report titled ‘The Return of Urban Consumer, the stimulus for rural consumption has been fading since financial year 2011 which means rural spending by the government has also stagnanted. This is now being reflected in moderation in rural consumption growth too.

“After outperforming urban growth consistently for the last three to four years, growth differential between rural and urban has started narrowing for most categories, as per industry panel data,” the report said.

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Allocations for MNREGA have stayed flat for four years and with a GDP growth slowdown, the overall allocations for rural spending have declined in the last three years.

[caption id=“attachment_81791” align=“aligncenter” width=“600”]  Source: Motilal Oswal report[/caption]

Earlier too, Firstbiz had reported that rural wage growth and credit are showing signs of slowing down while there has been there a shift in government spending from rural to the urban sector of late.

For food categories, the rural-urban gap narrowed from 7.7% to 6.4%, while for non-food it reduced from 4.7% to 2.1% in calendar year 2013.

[caption id=“attachment_81793” align=“aligncenter” width=“600”]  Source:Motilal Oswal[/caption]

Secondly, forecasts of El Nino-led deficient monsoon this year can prove to be a potential sentiment spoilsport for rural consumption.

Thirdly, if elections result in a stable government at the centre, urban consumption is bound to improve.

“Urban consumption revival will be more beneficial for Foods/Processed Foods, Skin Care, Home Insecticides and discretionary categories like Paints, Jewellery, and Quick Service Restaurants industry. We believe that any recovery in urban consumption will disproportionately benefit Nestle, GCPL, GSK Consumer and Asian Paints in FMCG space, and Jubilant and Titan in retail space,” said Motilal Oswal.

And fourth, stability in the rupee, interest rates, a slight moderation in inflation and the recent stock market rally have all led to an improvement in the urban consumer sentiment.However, for a sustained pick-up in sentiment and spending, revival in disposable income growth and continued moderation in inflation is of utmost importance.

[caption id=“attachment_81796” align=“aligncenter” width=“600”]  Source: Motilal Oswal[/caption]

While the brokerage is not expecting a full-fledged urban consumption revival, it does expect urban consumption to outperform rural. It’s time FMCG majors rethink their strategy.