What HUL and Nestle results tell us about the recovery in discretionary spending

Although it is effectively equivalent to a price increase, consumers respond better to a deflation than to a regular price increase. According to data analysis by Nielsen, companies have adopted shrinking for a wide range of products including biscuits, chocolates, salty snacks, washing powder, soaps, hair oils and others.

Recent developments indicate that India’s hinterland is still feeling the pressure of inflation and that volume growth has come mostly from urban markets. Overall, FMCG volumes have declined in India, but this is largely due to sluggish demand in rural and semi-urban markets, with urban volumes either flat or slightly higher.

A look at the financial results of two major players can be enlightening. Hindustan Unilever, India’s largest FMCG firm with a diverse portfolio of brands, announced its Q4 (January-March 2023) results last week. Food and beverages maker Nestle India did the same.

HUL (in which Unilever owns 61.9%) is a major subsidiary of the multinational firm, contributing around 12% of its sales revenue. HUL disappointed investors in Q4, reporting 10.6% revenue growth compared to a year ago. Volumes grew by only 4% and all of this growth came from metros and other urban markets. Rural volumes declined 3% year-on-year, but improved marginally from the third quarter, resulting in market share gains for HUL.

Inflation continued to impact margins but raw material inflation eased Q-o-Q due to fall in commodity prices. The company’s guidance indicated it would be open to adding additional weights in smaller packs and pouches if raw material costs fall further. It cut prices on laundry and skin care products, and management expects lower price increases and higher volumes in the future.

Category-wise, home care (35% of total sales including Rin, Vim, Sunlight, etc.) revenue grew by 18.7%. Personal Care (35% of total sales including Dove, Lifebuoy, Fair & Lovely, Vaseline, Closeup, Pepsodent, Clinique) revenue grew 10.1% year-over-year. Food and beverages (27% of total sales, including Red Label, Bru, Knorr, Taza, Lipton and Horlicks) revenue grew only 2.6% year-on-year. HUL says its premium brands (those priced at 20% or more above category-average prices) performed better than cheaper ones.

Nestle India, a small company, is also a subsidiary of a huge multinational company. It operates in some of the same markets as HUL but is strictly about food and beverages and lacks presence in personal care, washing powder, home care etc.

While HUL reported Nestle reported that 14,893 crores in net sales in January-March 2023 4,830 crores. However, Nestlé saw a sharp increase in revenue (nearly 21% on-year) — the most growth in a decade. This was coupled with volume growth across multiple categories. Despite concerns about raw material inflation, which it termed as “unprecedented”, the company managed to pass on costs to customers through price hikes and saw volume growth of around 5% in FY23.

Growth in individual, geographic regions was interesting. Nestlé said it saw 12% revenue growth in metros, 21% growth in metros, 5% growth in tier 2-6 cities and 26% growth in villages (which it classifies as places that where at least 70% of the population is engaged in agriculture. It attributed better distribution and deeper penetration to the village’s growth.

Growth was strong across all categories, with nearly double or double-digit growth in milk products, confectionery, beverages, prepared dishes and out-of-home segments. Sales through the new e-commerce channel grew 41%.

Looking at these two market leaders, we get a sense of the direction in which FMCG is headed. There is no clear sign of rural or semi-urban revival, but urban growth may return. Premium categories and indulgences (such as chocolates) are performing better than general categories.

Nestlé believes that the out-of-home category (vending and food services) will grow rapidly due to demographic trends as people working in urban areas appear willing to spend more on eating out. Meanwhile, deflationary inflation looks set to continue.