Why spending from urban cities drops while rural shows rise?

Urban markets struggling, rural on safe side

The finance ministry's review stressed early signs of artificial intelligence displacing workers, which could contribute to shifting consumer behaviour. The report notes that several major consumer goods companies, including Nestlé India, Hindustan Unilever, and ITC, have reported sluggish urban demand in their recent quarterly earnings. Interestingly, while urban markets are struggling, rural consumption appears to be on the rise, with these companies noting a revival in rural demand.

The review suggests that there is potential for a boost in urban consumer demand as the festive season progresses and consumer sentiments improve. However, initial signs do not paint a promising picture. The review says that despite increasing volume sales in fast moving consumer goods (FMCG) and a rise in sales of three-wheelers and tractors, rural demand remains the brighter spot in the economic landscape.
Price hike of vegetables

The broader economic context presents challenges as well. Escalating geopolitical conflicts and deepening geoeconomic fragmentation could have negative wealth effects, potentially altering household sentiments and impacting spending on durable goods. While inflation appears to be largely contained, barring a sharp increase in the prices of certain vegetables, consumer confidence remains fragile.

Growth of premium FMCG brands

Recent consumer trends suggest that the urban middle class is experiencing a divide. Despite a reported uptick in consumption driven by social media trends and rapid online deliveries, major players in the FMCG sector are cautioning against overly optimistic assessments. While premium FMCG brands are reportedly growing at twice the rate of their non-premium counterparts, this trend does not seem to extend uniformly across urban markets.

Essential or wishlist?

The shift of the working population to major cities, largely driven by the resumption of office work, has introduced new complexities. This transition has increased living costs for many, forcing the urban middle class to juggle between essential and aspirational purchases. As a result, spending has become selective, with consumers opting for larger premium items at the expense of regular purchases of essentials. This shift has contributed to a sense of distress among younger urban spenders, further impacting overall FMCG sales.

Industry reacts

Suresh Narayanan, chairman and managing director of Nestlé India, as per CNBC, voiced concerns about the shrinking middle class and its direct impact on FMCG sales. He noted that the demand environment has been particularly challenging due to muted consumer sentiment. Sunil D’Souza, CEO of Tata Consumer Products, echoed this sentiment, citing flooding and food inflation in urban areas as additional factors dampening sales. Nevertheless, he expressed optimism that increased government spending could help revive urban demand in the coming quarters.

As the festive season arrives, stakeholders in the FMCG sector will be closely monitoring consumer behaviour and economic trends. The interplay between rural and urban consumption, alongside broader economic conditions, will be crucial in shaping the outlook for the months ahead.