Diverging Demand Dynamics: Urban Slowdown Vs. Rural Recovery in 2QFY25 Consumer Staples

Consumer staples in 2QFY25 saw contrasting trends as rural areas rebounded while urban centers faced slowdowns due to inflation. Products like soaps and noodles struggled, whereas items such as coffee and chocolates performed well. Companies battled inflation through price hikes, impacting growth and operating margins amid rising costs.

In the second quarter of FY25, consumer staples displayed a notable divergence in demand trends, with a recovery observed in rural and semi-urban markets, including Tier-3 and Tier-4 cities. In contrast, urban centers, metropolitan areas, and Tier-1 cities experienced a slowdown, a recent Systematix Institutional Equities report reveals.

Inflation and income dynamics impacted consumer spending, leading to decreased demand for products like soaps, tea, juices, noodles, and paints amidst rising inflation and competition. However, categories such as oral care, detergents, coffee, chocolates, biscuits, aerated drinks, spices, edible oils, and cigarettes showed resilience.

Modern trade and e-commerce channels recorded substantial growth, prompting a strategic shift from general trade to these platforms. Inflation severely affected lower-income and middle-income groups, particularly non-salaried households facing rising food costs and stagnant incomes.

To mitigate rising input costs, companies increased prices in categories like tea, soaps, biscuits, and paints. This approach, while offsetting some inflationary effects, also risked hindering volume growth in the latter FY25 period. Revenue growth ranged from -5% to +5% YoY, with negative pricing trends affecting realisation growth.

Margins encountered pressure as operating profit margins decreased by 100-400 basis points YoY, driven by inflation in raw materials, investment in branding and distribution, and competitive pressures. Despite price increases, ongoing challenges in absorbing raw material inflation and operating deleverage are expected to continue into 3QFY25.

Companies positioned with urban demand resilience, robust pricing strategies, and category-specific advantages are anticipated to perform better amid these challenges. (ANI)

(With inputs from agencies.)