In last few years, FMCG sector has grown tremendously in rural areas. Demand uptick in rural areas have also resulted in increase in its contribution to FMCG market growth to 50%. A notable shift of market has been noticed in FMCG industry from Urban to Rural India. With such room available for growth in Rural India, FMCG Giants like ITC, HUL, Nestlet, etc. will also try to grab good amount of market share in rural areas.
Why FMCG Players are scaling up distribution in rural market?
1)Discretionary FMCG Spends impacted by COVID-19 pandemic
- Pandemic led to the overall revenue from urban areas in shambles and consumption pattern was also heavily affected due to lower demand for discretionary and luxury products.
- Despite there was big hit on revenue side in urban segment of FMCG, but surprisingly there was a very lower impact on their rural segment.
2) Increasing Rural Consumption:
- The pandemic affect on FMCG sector also presented view to FMCG players regarding the growth space available in rural India.
- CY 2020 also noticed a strong rise in rural consumption in terms of FMCG spending.
- The driving factor for increased consumption in rural India was:
- High expenditure by GoI on MNREGA.
- Reverse Migration: Migration of human resource from Urban areas to Rural areas during lockdown.
- Good Monsoon: Year 2020 was good in terms of Monsoon as India received above normal rainfall which led to good kharif harvest.
3) Increasing Market Share of Rural Market in Overall FMCG sector:
- In 2019, the market share of Rural Market in overall FMCG sector was just 45%.
- But in a year, the market share of Rural Market has appreciated by 5% and has touched half of the market share of FMCG business.
- The Government (Central as well as State) and also the market players are reducing their dependencies on Urban India Segment.
4) Low Penetration in Rural Market:
- There was already adequate space available for growth in Rural India as there is lower penetration of branded products in Rural India.
- Presence of favorable demand offers a huge growth opportunity as well for the FMCG players.
Challenges faced by FMCG Companies:
- The utmost challenge of FMCG companies was the direct distribution network in rural market was very low.
- Companies are trying hard to develop and increase their direct distribution channels in rural areas in order to increase their market share.
Why Direct Distribution Route in Rural Markets?
1) Rural household sales of packaged consumer goods hit almost 7-years low in Q2FY21:
- Despite favorable situations in Rural Areas, it was recorded 7-years low in sales of packaged consumer goods in rural areas in the Q2FY21.
- The reason behind this downfall was:
- Earlier the FMCG players did not follow a direct route for distribution of goods rather they have a distribution network via Wholesale Channel. And thereby, Due to Covid-19, there was a great slowdown in Wholesale Channel.
- The main challenges faced by the Wholesale channel was the Liquidity Issue and Impact on Supply Chain & Logistics due to Pandemic.
- Further, all these obstacles led to reduced stock of inventory and hence the sales were hampered heavily in the lockdown period.
- In short, FMCG performance in rural India was mainly impacted by supply chain issues and nt due to lower demand.
- As a result of this , FMCG companies are now looking forward to follow a direct route in rural market and drift away from traditional wholesale supply chain.
Why FMCG players are betting on Direct Rural Route?
- FMCG players now focusing on establishing direct connection with retailers.
- Using Data Analytics, the FMCG players like HUL, ITC, etc. are influencing purchasing behaviour in Rural India. Further to support this step, a direct distribution route will be more favorable.
- Increase market reach in rural India via advertisement, promotions, etc. and communicate their product portfolio.
- Also, increase the number of their outlets as well as the introduction of new products.
- Overall, they want to increase their efficiency of Distribution Management of companies.
Current Direct Rural Route of Major FMCG Players:
- Till now, company is able to reach 37% of the Rural Market directly. They have ample amount of growth still available to increase their reach in rural market.
- To expand their market reach, HUL, is adding 6,000+ new stockiest in Rural India. They are reacting aggressively towards the reduction of dependencies on Wholesale Channel.
- In FY20, they have doubled their Rural Stockist Network.
- They have also added 80% new Additional Handle Base which take the figures to around 65 lakhs in rural areas.
- They are also focusing on improvement of efficiency of distribution network in Rural India.
- Marico is also targeting to cover 33% growth in Rural Stockist by September 2022 i.e.H1FY23.
- Nestle is also aiming high on increasing distribution network in rural India.
- They have aim to reach 1.2 lakh villages directly by 2024. If so happens, it may provide boost to their revenue.
- Dabur is not also lagging behind in setting up direct distribution route in Rural India.
- They have a target of establishing fresh 15 lakhs direct outlets in Rural India by 2022.
FMCG bet against Direct Rural Route:
i) All India Basis:
- FMCG players have direct distributors of 8,575 as of January 2020.
- In Time Span of 1 year, these direct distributors have raised by 42% to 12,192.
- These 12,192 direct distributors have a great reach and deal with 75 lakh retail stores.
ii) Rural India:
- In Jan. 2020, the direct distributors in Rural India were 7,312, and this number has increased by 51% and has reached 11,024 by January 2021.
iii) Urban India:
- On Contrary, there is negative growth in direct distributors in Urban India.
- There were 1,263 direct distributors in Jan. 2020 and it has declined by 8% and reached to 1,168 direct distributors in Jan. 2021.
- The main cause behind this fall in direct distributors in Urban India is due to growth of Organised Retail and Online Channel.
On the grounds of certain basis, we have discussed in this article, there might be notable shift in FMCG market share in terms of Revenue from Urban India to Rural India in future. The pace of growth of FMCG in rural India may witness some ups and downs but with increasing disposable income in rural India as well as low penetration levels , rural market provides a huge growth opportunities for FMCG Players.