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Consumer Demand: Will The Trend Reverse Next Year?
May 17, 2016

Latest inflation data has trickled in. And it indicates the first rise in the WPI after a period of seventeen months. The key culprits this time around are food and manufactured products. Food inflation rose by 4.23%, led by higher sugar and potato prices. Food articles have a 14% weightage in the WPI index.

While it may be too early to comment on whether this is a reversal in trend from a long term perspective, there will be a lot of debate on how this will have an effect on interest rates and consumer demand.

Regarding the latter, the chart below helps put things in perspective. It shows the year on year change in volumes for various categories in both the markets - rural and urban - for the quarter ended March in the past four years. In most cases earlier, the rural markets grew at faster pace than urban markets when it comes to volume growth. As the managements of FMCG majors kept saying in unison, rural growth was about 1.5-1.75x that of urban markets. However, all of this changed in the past few quarters given the impact of poor monsoons and slow wage growth.

As you can see in the chart, the urban markets outperformed the rural markets across categories in the quarter ended March 2016.

Can the trend reverse going forward? becomes difficult to say as a lot hinges on aspects such as the monsoons and the trend in inflation.

But one thing is for sure. Companies in the FMCG space this time around are way more conscious about market share and volume led growth; and will look to absorb the price increases - as long as margins are way above average - in case of an inflationary trend.

Data Source: Economic Times,
IMRB Kantar Worldpanel; PC - personal care

This Chart Of The Day was published in The 5 Minute WrapUp - When the Going Gets Tough, the Tough Buy Nestle

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