Rural demand only recovering gradually; Hindustan Unilever focusing on scaling up in premium space

In January-March quarter, HUL reported a 6 pc year-on-year drop in net profit


Fast-moving consumer goods companies like Hindustan Unilever have faced a double whammy over the last few quarters. On the one hand, demand, especially in rural markets has been slow to recover, which has weighed on volumes. On the other hand, as commodity prices have cooled, companies have passed on the benefits to consumers via price cuts. That means little to no value growth too. 

In the January-March quarter, HUL reported a 6 per cent year-on-year drop in net profit at Rs 2,406 crore from Rs 2,552 crore. The maker of Surf detergent and Bru coffee saw revenue grow marginally during the fourth quarter to Rs 14,693 crore from Rs 14,638 crore. 

While the overall sales growth for HUL was just 1 per cent, volumes (number of packs sold) grew 2 per cent. A key challenge for FMCG companies has been sluggish demand, more so in rural markets, on the back of poor rains last year. 

Company officials say things have begun to pick up, but gradually. For now, the expectation is that monsoon rains this year will be good, and if that scenario plays out, demand should get a boost. 

"Last year, at one point, rural markets were declining in almost double digits at the peak of inflation. From that low point, markets have recovered quarter after quarter for the last four-five quarters. It is still not accretive to overall FMCG demand, but the good news is it has started to recover. We do hope that with improving monsoon situation, with improving macro situation, we should start seeing this recovery continuing to happen going forward as well," noted Ritesh Tiwari, chief financial officer at HUL.

In the near term, pricing-led growth is expected to decline, turning positive only towards the end of the financial year, he further added. 

While the mass market is recovering, albeit gradually, demand in premium categories has been growing rapidly and companies like HUL are increasingly focusing on these categories to boost overall sales. 

The company says it is making "disproportionate investments" towards market making and premiumisation, which means increased innovation, as well as media spends there. This comes at a time when HUL and other established FMCG companies are seeing increasing competition from new-age consumer companies like The Good Glamm Group and Honasa Consumer, which owns brands like Mamaearth and The Derma Co. 

"As far as the rural and low-end part of the market is concerned, that depends a lot on improvement in market conditions. We are not waiting for the macros to turn, but we are already leading in and going where the growth is and that is in the areas that are more premium, in modern trade and e-commerce. In those segments, we are already seeing smart growth well in excess of double digits across categories. We are investing more in innovations in that space, in media (spends) and brands that serve that segment," said Rohit Jawa, CEO and MD of HUL.

In December, HUL had announced a split of its beauty and personal care business. It has now identified six areas—face cleansing, sun care, light moisturisation, serums and treatments, weatherproof body care and masstige (mass prestige)—as it scales up its beauty play.

Jawa noted that the company had already built a Rs 2,000 crore scale in these six bets and was seeing a 50 per cent growth in e-commerce. The company has in recent times launched several digital-first brands like Simple and Love Beauty & Planet in the beauty space. HUL already has 19 brands, clocking over Rs 1,000 crore in annual sales and it continues to expand these established brands, he added. 

"Market is not a zero sum game. It is a huge market, all forms of players have an opportunity. Our job is to ensure we offer the right portfolio, which is designed, is superior and competitive in every which way. If there is more competition in the market, that makes us more sharper," said Jawa.

With Indian FMCG consumption at just about $50 per capita, he says there are many years ahead for the market to grow a lot. 

According to consultants Red Seer, beauty and personal care is among the fastest-growing consumption categories. The Indian beauty and personal care market is growing 10 per cent annually and is the fastest-growing beauty and personal care markets among large economies, it noted. Red Seer expects the GMV (gross merchandise value) of the Indian beauty and personal care market to touch $30 billion by 2027.

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