poorer states drive rural fmcg sales

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Poorer states drive rural FMCG sales

Namrata Singh, TNN | Nov 9, 2011,

MUMBAI: That rural markets are driving consumption of FMCG products is well

known, but the fact that comparatively lesser developed eastern states such as Bihar,

Orissa, Chhattisgarh and Assam are leading rural sales is a trend that is being closely

tracked.

While villages of Punjab, Maharashtra and Tamil Nadu may have upgraded faster to

consume more premium FMCG products, it is these eastern states-which have a

significantly higher percentage of rural population compared to the country's

national average-that are driving rural FMCG sales. In these eastern states, the

contribution of rural FMCG sales to the total is more than 50%, against 40% in a

richer state like Punjab, says an industry report.

Richer states like Punjab, Tamil Nadu and Kerala spend three times more on FMCG

goods compared to poorer states like Bihar and Orissa. But, according to a research

report by HDFC Securities, the disparity in FMCG spending is lower than income

disparity between the richer and poorer states. "Our estimates show an income

disparity of 3.4x between the richer and poorer states. So, the lower differential

between spends on FMCG products shows that catch-up between poorer states and

richer states in consumption will be much more faster," the report states. This

essentially means that poorer states are now expected to catch up faster with thericher ones in terms of FMCG consumption.

"The disparity between the rich and poor rural markets is likely to get bridged in less

than a decade. We will formulate marketing strategies accordingly," says M P

Ramachandran, CMD, Jyothy Laboratories, which owns brands like Ujala and

Maxo.

A strong rural franchise has become a source of competitive advantage in the poorer

states. "We believe that companies with a significant rural presence are likely to do

well in these states. Compared to this, the percentage of rural population is much

lower in states such as Tamil Nadu and Maharashtra," the report states.

"There are two kinds of rural markets-prosperous and the not-so prosperous where

there is a critical mass. A prosperous rural market is one where there is a higher

proportion of cash crops, floriculture, etc. Consumption in such rural markets is no
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different from urban markets. There are other rural markets which may not be very

prosperous but have a large population. These markets are difficult to reach. So

having a distribution reach in these markets becomes a source of competitive

advantage," says Saugata Gupta, CEO (consumer products business), Marico.

Stratification

Given the significance of poorer rural markets, FMCG companies are following a

stratification strategy in product portfolios to cater to the different needs of rich and

poor rural markets. "In recent times, we are witnessing a clear segmentation in the

structure of consumption growth in rural markets linked to demographic/geographic

advantages and differential investments that are going into rural economy across the

country," says Hemant Bakshi, executive director (sales & customer development),

Hindustan Unilever (HUL), which draws about 40% of its turnover of Rs 20,000crore from rural markets. Bakshi said the rural growth story continues to be strong

in India, while adding: "Starting from low consumption levels and with increasing

incomes, growing access to urban centres and education is together leading to

significant growth."

HUL follows a strategy of straddling the pyramid, wherein every category has

stratification based on pricing. This stratification is now visible not only in products,

but geographies, demographics and consumer segments as well. Today, most FMCG

companies, which have larger portfolio of products, have put in place a segmentation

strategy based on pricing.

Earlier, fewer FMCG companies were expanding their rural market penetration

given the challenges involved in doing so. Today, government-sponsored schemes

like NREGA, higher support prices have boosted rural sales, prompting more

companies to undertake the rural journey for their products. While premium

products are being targeted at rural markets where consumers have a greater

propensity to spend, popular/mass products are being shipped to the hinterland

where the population is large but the spending power is less.

Quoting Nielsen data, the HDFC Securities report shows that in Bihar the rural sales

percentage is as high as over 60%. In Assam, Chhattisgarh and Orissa, it is about

50% and above. However, in terms of FMCG spend variation between states, richer

states like Punjab (almost 100%), Kerala (over 90%) and Maharashtra (over 80%),

Karnataka (70%) are higher compared to Bihar (about 30%).


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The FMCG sector has been growing at 15% CAGR (compounded annual growth rate)

since fiscal year 2005. Compared to this, growth in the earlier phase (fiscal year

2002-05) was a tepid 6%.

poorer states drive rural fmcg sales

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