This year, key industries like auto and consumer goods found the going tough as urban demand slowed due to high inflation and weak market sentiment. Things could have been worse but for the silver lining in the rural growth story.
In a sense, rural India rescued the Indian economy at large. To fully appreciate the key role played by rural markets this year, it is necessary to understand what went wrong in urban markets, traditionally the driver of growth.
Urban demand stayed flat for a variety of reasons. But rural incomes rose at the same time. For, this year, monsoon was 20-30% above average, boosting farm yields and the government’s minimum support prices (MSPs). So, rural folks could afford to go buy tractors, two-wheelers, cars, mobile phones, fast-moving consumer goods, and even some discretionary items, so on.
This meant gains for companies with a presence in rural areas —Hero MotoCorp, Maruti Suzuki, Mahindra and Mahindra (M&M), Hindustan Unilever (HUL),
Dabur, Colgate and others of their ilk.
For instance, sales of tractors rose more than 20% on-year in the first two quarters (April-June and July-September) of this fiscal.
Similarly, sales of two-wheelers grew 5.78% between April and December.
“We estimate rural markets would constitute 40% of total two-wheeler demand. Hence, rural volume growth would help the overall segment sales,” wrote analysts Ashvin Shetty and Ritu Modi of Ambit Capital in a recent note.
Driven by the realisation that the elusive growth could be found in rural India, companies are slowly increasing their presence outside urban areas.
So much so that two-wheeler manufacturer Hero MotoCorp now derives 48% of its volumes from rural markets. Similarly, Maruti Suzuki, the country’s biggest carmaker, increased its rural share to 28% this year from 25% last year. Other automakers are now following suit.
In the consumer goods space, segment major Dabur launched Project Double (PD), an exercise to double its rural reach. Dabur believes PD helped it to tide over slowing volume growth.
Amit Burman, vice-chairman, Dabur, said: “We doubled our rural reach from 14,000 villages to 34,000 villages. This initiative (PD) happened at the right time for us. So, when the contraction started in the urban market, the rural market more than made up for it. If you take the first quarter of this fiscal and the fourth quarter of last fiscal, our rural business has grown 30-40% ahead of urban.”
What skewed the urban-rural share further was the slowdown in premium and discretionary categories. As a result, demand in urban areas came under further pressure.
In order to tide over this mess, several companies such as Marico, Britannia and GSK are strengthening their distribution and marketing efforts in rural areas.
Deepa Mathew, group business director, IMRB International, a market research company, points out that another reason for companies to tap rural markets is the narrowing gap in demand patterns.
“The urban-rural divide is blurring as rural catches up and mirrors its urban counterpart in both consumption behaviour as well as attitudinal similarities. And it’s a trend that is noticed not just in attitude but also in terms of consumption.”
For instance, an IMRB TGI & Star survey revealed that if 23% of the urban population strongly agree that being well-groomed is equated with success, then rural consumers are not far behind — 22% of them handed out the same response.
Another IMRB survey also revealed that personal care products are penetrating the hinterland deeper, with consumption percentage in rural areas closely catching up with urban. For instance, if hair oil penetration in urban India is 93%, it is in 73% in rural areas. Similar patterns obtain for shampoo and talcum powder.
As per estimates, rural consumption has grown 1.5 times faster than that in urban areas last fiscal. With a little more than a quarter to go this fiscal, it is possible the figure may well be higher.
For, mobile phone companies, too, are tapping the rural segment, led by home-grown smartphone brands that offer nifty low-cost handsets in the `3,000-5,000 range.
But the big question is, will the rural growth story continue, going ahead? Experts believe that it will likely endure for a while.