Rural demand in India’s food industry has seen significant growth, surpassing urban demand in Q1 2024-25. Therefore, the industry is focusing on distribution network in rural areas, aiming to sustain growth and improve performance, explains Rajat K Baisya.
In the last issue of PFI, I discussed the impact of food inflation on the performance of the food processing industry. With the onion price at Rs 90 a kg and tomato at Rs 100 a kg, the cost of running the kitchen of an average household has increased by 33%. Consumers’ buying power with lesser disposable income has reduced demand for processed food.
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Challenges Facing the Food Processing Industry
The cost of the product also increased due to higher raw material costs, resulting in a decline in sales volume. The food industry is going through difficult times. In addition to escalating prices of primary foods, there are issues like unemployment and climate change resulting in heat waves in the northern region; poor rainfall has made it more difficult for food processors to deliver the targeted growth rate over last year’s actual.
The financial year 2024 will thus be a difficult year for the food industry. Very small-scale and home food processors have already said that their cost of production has gone up by 30 per cent, and they are not increasing the selling price. Instead, they preferred to absorb the rising cost and operate with a much lower margin for fear of losing customers.
Rural Market Demand Recovery
In the first quarter of FY 2024-25 there was good rainfall in many agriculture-rich states. Although there was excess and adequate rainfall in some areas and less than normal in some other areas, but in overall terms the food industry has reported volume growth in the first quarter ending in June 2024, largely driven by rural market demand. Dabur, Marico, and Adani Wilmar hinted at volume growth due to rural market demand recovery and even surpassing the urban growth rate.
Rural market demand was lagging behind for several quarters on the back of patchy monsoon rains in key agricultural regions but has picked up pace since March 2024, surpassing the urban demand. Rural demand is moderate at the moment, but with a good monsoon, it is expected to be better. Intensive rural distribution of FMCG players like Dabur, HUL, and Nestle, having wider coverage of villages, will be able to sustain the growth and deliver improved performance in the current fiscal. Adequate rainfall is crucial for agriculture, which is the backbone of rural livelihoods and can significantly increase crop production, leading to increased farmers’ income and overall rural prosperity.
Varied Impact of Rainfall on Rural Income
Although variation in rainfall in different areas can result in differential growth in rural income, overall, the scenario seems to be good for the food industry in the current year compared to the last year. As per the estimates of AC Nielsen, the rural sector has shown higher growth compared to the urban sector after two years. Crisil estimates the FMCG sector to see a revenue growth of 7-9% in FY25 against 5-7% growth in FY 24, helped in parts by the revival of rural demand. Parle Products is expecting strong growth coming in from rural regions in this fiscal year. A good monsoon can only sustain the demand momentum of the industry.
If the rural market has to provide the desired growth of the food industry in the current fiscal year, then those low-unit-price SKUs will be more in demand. Rural customers will not buy large packs. Those manufacturer–marketers who have such low unit price stock will have a natural advantage. For example, Parle G has Rs 5 a pack, which sells in huge quantities in the rural market, and as such, they will have to service an increase in demand in the rural sector. Many other food product brands have small SKUs for SEC C and D category customers, like Rs 5 potato chips or extruded snack items.
Certain product categories like tomato ketchup and sauces in small pouches for single use are priced Rs 1 or 2 to accelerate rural demand. The compounded annual growth rate in villages between 2023 and 2024 was 3.4%, while the urban growth rate was 2.8%, as per the report. The consumption-led growth is only 1.1% in rural India, which is only 30% of the total rural market growth. According to a report from market researcher Kantar, the remaining two-thirds of the growth is driven by population increase. For certain products, it will be Re 1. Within that kind of pricing, trade margins have to be ensured.
Challenges for Export-Oriented Industries
Certain food industry categories will not be able to reap any benefit from rural demand; these are export-oriented industries. They will suffer from the impact of the inflation. The incremental cost cannot be easily passed on to the buyers. Because exporters must compete with other countries, you cannot hold stock to sell later because cost still mounts and quality deteriorates. So, processors suffer losses. Merchant exporters will buy less if the market conditions are tough. If the transaction is not profitable, merchant exporters will not purchase stock to prevent losses. However, manufacturer exporters have no choice. They thus face the inevitable and incur heavy losses.
Indian seafood exporters seem to be going through a very difficult phase. They got caught in a five-fold increase in the freight cost, which they cannot pass on to the buyers in the US and Japan, the two biggest importers of marine fish from India. The marine processing industry goes through periodic production, pricing, international demand fluctuations in addition to compliance and regulatory issues. As such, their fortune fluctuates. Most of the large buyers’ agents come and camp in India during the season with bulk letters of credit, what they call master L/C, to buy from processors.
They, therefore, also know the problems, including short-term difficulties that local processors face, and accordingly negotiate for lower prices and then open letters of credit at a price advantage. The problem of an unusual increase in freight cost is due to large-scale advance booking of Chinese processors to take advantage of exporting before the rise in the import duty on Chinese goods by the USA which will take effect on August 1. India’s 7.3 billion US$ seafood industry has raised the alarm about a five times surge in shipping freight rate in less than two months, saying that it is staring at potential losses as it cannot pass on the increased freight cost to its buyers. Marine processors need refrigerated containers to ship their products.
Challenges for Small and Medium-Scale Industries
According to the Seafood Exporters Association of India (SEAI), the freight cost to Los Angeles from Chennai has shot up 255% to US$ 10,500 per ton from US$ 2950 per ton in the month of May 2024. Processors cannot hold the stock as the orders not executed in time will automatically lapse and can even attract penalties. Quality also deteriorates on holding. Apparently, there is no solution to this kind of man-made problem.
During difficult times, small- and medium-scale industries suffer the most. They have less flexibility. They have a very limited product range to offer. They depend on fewer customers, which is also true in a limited geographical area. If they are selling in the urban market, then they don’t get any advantage of the rural market growth in demand. If, however, they are based in rural areas, they can also be a potential beneficiary of the expected growth in demand in the rural market in FY 25. HUL reported a 3% increase in net profit in the first quarter ending June 2024, driven by a surge in rural demand. But HUL’s portfolio includes personal care products in addition to food. The food category only contributed 1.7% growth in revenue for HUL in the first quarter ended in June 2024.
Strategic Shifts and Market Adaptations
HUL does not keep any product or brand in its portfolio if it is not delivering the desired level of performance. In fact, they sold some of their food brands earlier, like Captain Cook salt and Annapurna Atta, for low profit and growth categories. The brands were sold to Uma Global Foods and Uma Consumer Products, which are subsidiaries of Reactivate Brands International and an affiliate of CSAW Aqbator (Singapore), for Rs 60.4 crore – a nearly 50% discount to the 2021-22 turnover of Rs 127 crore clocked for the salt brand. Annapurna brand was sold for an undisclosed amount to the same party.
HUL is known for building food business in India through acquisition, and they also are known to sell the brands and business which do not deliver the expected performance. But others have built their food business organically and have to face changing market environment to stay relevant to sustain their business. For them, growth is a key imperative.
*Author is the chairman of Strategic Consulting Group and served as Professor and Head of the Dept. of Management Studies, IIT Delhi. He can be reacheded at rkbaisya @ hotmail.com
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