After Nestle India, Hindustan Unilever points to urban demand pressures hurting growth- The Week

Festive season should typically mean good times for consumer goods makers. Instead, companies like Nestle and Hindustan Unilever are grappling with slowing urban sales, as consumers impacted by food inflation spend less on packaged goods. To add to it, inflation in key raw materials like palm oil and tea is also biting, forcing companies to hike prices in a few segments, which while protecting margins raises the spectre of impact on volumes.

Just a day after Nestle India pointed to muted demand, especially in the foods and beverages space, rival Hindustan Unilever (HUL) too has pointed to moderating growth in urban markets.

On Wednesday, HUL reported a 4 per cent year-on-year decline in standalone net profit for the July-September quarter at Rs 2,612 crore, from Rs 2,717 crore. The maker of Dove soap and Bru coffee said revenue for the quarter rose 2 per cent from a year ago to Rs 15,319 crore from Rs 15,027 crore. Volumes (number of packs sold) in the quarter rose 3 per cent. In the June quarter, volumes had grown 4 per cent.

Company officials pointed that in the base quarter, there was a one-off indirect tax credit from a favourable resolution of past litigation, which benefited both topline and bottomline in the beauty and wellbeing segment.

Over the past several quarters, urban growth had led the growth, while rural growth had been impacted due to poor monsoon rains last year and volatile food prices. The tide now seems to be turning, with rural markets continuing to recover gradually, but major metro markets now emerging pain points.

“FMCG market has witnessed moderating growth in urban market, while rural continued to recover gradually. Even at MET levels, volume growth has slowed down over last few months,” said Ritesh Tiwari, the chief financial officer of HUL.

The company has seen a slowdown in two major segments – personal care and foods and refreshments. Personal care segment declined 5 per cent with negative pricing and low-single digit volume decline. Foods and refreshments declined 2 per cent with also a low-single digit volume decline.

“There are so many macro factors in this complex big ecosystem of the country that are in play. Its quite logical to assume that real wages, inflation, the agri-economy and employment levels all have an impact on the economy. But, we are not equipped to comment on. What we really know well is what is happening to our business. What we do read is a trending down of urban, a sustained but a gradual increase in rural and therefore an overall tepid growth this quarter. We expect it to probably stay there for the near-term,” said Rohit Jawa, the CEO amd MD of HUL.

HUL is taking calibrated price hikes in the current October-December quarter in tea and skin cleansing segments, to offset rising prices of tea and palm oil respectively. How this impacts demand going ahead is something that will have to be watched out for.

Last week, Maggie noodles maker Nestle India had also reported disappointing earnings for the September quarter, with consolidated net profit declining marginally.

“While there are some greenshoots like moderation in CPI inflation, a good monsoon and populist announcements by some of the state governments, the overall expenditure increase by states remains modest. The consumer is still facing high food inflation. Raw material costs have started inching up and telecom tariff hikes could also hurt FMCG,” Kunal Vora of BNP Paribas Securities had warned in a recent report.