The split personalities of Indian FMCG

**Akshara** (0:04)
In today's episode, we'll break down one interesting story in depth, followed by a shorter story. First, we'll talk about the split personalities of Indian FMCG, and then we'll talk about why India's net NPAs are at a historic low.
Welcome back to The Daily Brief by Zerodha, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara, and today is Friday, 28th August. Before we begin, in the latest episode of Subtext, we host Dr. Rohit Chandra, who is the Assistant Professor at IIT Delhi School of Public Policy, to give us a history of India's power sector and the role of coal in it. The podcast uses coal and broadly energy as the centerpiece to talk about various episodes in the history of the Indian economy, from the 2010s NPA crisis, to how India's biggest PSUs work, to our Cold War strategy, to ministerial turf wars within the Indian government, and to vertical integration. You can watch the full episode on YouTube or listen to it on Spotify and Apple podcasts. Coming to the first story. For quite some time, the big consumer goods giants of India have been navigating a tricky landscape. For one, that pack of biscuits or chips, or even the bottle of skincare lotion you buy, might have been feeling a little lighter by weight while being the same price. It's also possible that prices of these items have increased slightly. They've been playing a game of seesaw of value and volume to protect profits. At the same time, the companies making these daily essentials are now promoting a lot of high-end products like protein snacks, face serums, and so on. That's in line with the trend of premiumization that we've been talking about on The Daily Brief for so long, and much of it has been driven by urban consumers rather than rural ones. Meanwhile, raw material costs have spiked due to a historical oil crisis, creating an urgency for the industry to find new growth drivers as soon as possible. Now, these sound like disparate images, but they're really part of one cohesive story for which we'll be looking at the latest quarterly earnings calls of four FMCG companies HUL, Marico, Britannia, and Nestle India. Now, for a long time, FMCG earnings reports looked great on paper, but that wasn't necessarily because they sold more. The sales of soap bars, packets of tea, or bags of chips have been fairly flat, and in some cases, even falling. Which only means one thing. Revenues went up because of a price effect. Now, that could mean a price hike, but mostly FMCG firms pursued another strategy, shrinkflation. So instead of raising prices outright, companies quietly trimmed a few grams of a package while keeping the price at a familiar 10 rupees or 20 rupees. And companies do this knowing that it might hurt volumes.
Obviously, there's a limit to how small a biscuit packet can get before consumers notice and start looking for alternatives. This is where companies diverged this quarter. Marico, for instance, chose not to implement any additional grammage reductions on its flagship parachute coconut oil, and instead management attributed the brand's resurgence to adjusting prices downward on its larger family loyalty packs. So Marico saw some of their fastest quarterly growth in a while, and that's also why it recorded its highest profit growth in nearly 2.5 years. But Marico was an outlier. Many companies committed to more shrink inflation or even price increases. Britannia, for instance, openly admitted to still trimming packet sizes, and HUL, meanwhile, actively implemented price hikes this quarter, while also signalling future hikes are possible. This was primarily done to offset cumulative palm oil and packaging inflation, which we'll eventually talk about. But yet, despite that, these companies also benefited from very strong volume growth. Britannia saw sales volumes recover, while HUL enjoyed price and volume growth equally, contributing towards their best growth period in 13 quarters. And there are clear signs that volume growth seemed to have returned across the board. Now, with the festive season approaching, FMCG firms expect to drive even higher volumes, which is why they've stepped up their ad spending at a blistering pace. Nestle India, for instance, hiked its ad spend by over 40%, while HUI spent over Rs 1,657 crore on brand building in a single quarter. So, to see where this actual volume growth is coming from, you will have to look at two very different parts of the Indian economy. Small rural kirana stores and 10-minute delivery apps in cities. So, let's start with the former. Between 2021 and 2023, rural sales were sluggish as village households dealt with high food inflation and unpredictable monsoon seasons. But recently, rural India seems to have staged a comeback, as FMCG rural volumes seem to be outpacing, or at least matching, that of urban areas. So, what made rural demand come back?