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Monday, June 17, 2024

What Lies Ahead for the Retail and Consumer Sector in India in FY2025?

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The retail and consumer sector in India experienced marginal growth in FY24. The sales of fast-moving consumer goods (FMCG) saw a 4.5% decrease in Q3, affecting both urban and rural markets. This decline was influenced by factors such as low consumer confidence, erratic monsoons impacting rural income, and increased prices of essential and non-essential items.

The retail and consumer sector holds a central position in India’s consumer economy. With personal consumption expenditure driving almost two-thirds of the gross domestic product (GDP), it is expected that India’s retail and consumer sector, as one of the fastest-growing economies, would continue to thrive. However, the growth in this sector was unexpectedly limited for most of FY24.

Furthermore, despite the festive season, the overall sales of fast-moving consumer goods (FMCG) declined by 4.5% in Q3 compared to the previous year, impacting both urban and rural markets. The nine-month overview for FY24 shows marginal improvement, with an overall FMCG value growth of about 2%, and rural growth at just 0.4% compared to the previous year. Contributing factors to this decline can be categorized as demand- and supply-side drivers.

Demand-side drivers:

  • Depressed consumer sentiment: The Reserve Bank of India’s bi-monthly consumer confidence survey, tracking the current situation index, has stayed in the pessimistic zone below 100.
  • Divergent recovery in formal and informal employment: Urban areas show relatively better recovery post COVID-19 compared to rural markets, with agriculture GDP growing at one-third of its long-term rates.
  • Reduced outlay on rural job-guarantee scheme: A 17% decrease in FY24 has diminished rural buying power and overall consumption.
  • Unpredictable monsoons affecting rural income: The FY24 monsoon ranged from 82–100% of the long-term average, impacting rural income generation.

Supply-side drivers:

  • Increased pricing across essential and discretionary categories: Inflation for these categories outpaced overall consumer price inflation, with FMCG goods remaining at elevated prices.
  • Utilizing Kirana stores for growth: Continued investments in market reach in semi-urban and rural areas have escalated costs of reaching end consumers.
  • Market share gains by regional players: Smaller regional players in categories such as tea, edible oils, biscuits, and laundry have provided better value offerings compared to national or branded players.

According to PwC’s 27th Global CEO Survey, 62% of the surveyed CEOs in India are very or extremely confident that their companies will achieve revenue growth in the next 12 months. With key elements of India’s growth engine strengthening, optimism is warranted as we approach FY25. With a per capita GDP of approximately USD 2,500 per annum, India’s consumption across categories has begun to surge. Branded personal consumption in India makes up about one-third across categories, with low penetration indices and per capita consumption, indicating a substantial growth potential. To fully seize the growth opportunity in the next 12 months, key paradigms should be considered:

  • Optimizing pricing to stimulate volumetric growth in response to underlying commodity price reductions
  • Rural growth’s potential to propel urban FMCG growth, driven by election-related expenditure and optimistic forecasts for the rabi crop

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