The latest earnings reports are in, and they reveal a key trend: consumer spending in India is hitting a speed bump. FMCG, retail, cinemas are all feeling the pinch. Till a few quarters back, the discussion was centered around the depressed rural economy and its impact on consumer demand. Now, the chatter is about slowing urban consumption too.
GDP growth for Q2 FY25 was 5.4%, significantly lower than the RBI estimate of 6.8%. The slowdown in the economy is most likely temporary, since structural positive levers in the Indian economy remain intact. We are likely to remain the fastest growing major economy for some time.
Although, there is a temporary hit to demand, looking superficially at the growth numbers of some of these companies might lead to more pessimism than is warranted. What this data and commentary by companies may not directly reveal is the change in the underlying consumption pattern. Let us look at some trends to unravel what’s happening.
From Kiranas to Quick Commerce: A Retail Shake-Up
Kirana stores and other unorganised retail stores still contribute to 81% of total retail sales; however their share is expectedly shrinking. There is still headway for growth for organised brick and mortar players (in Tier-II and III cities) but the best growth prospects are in Quick commerce. No wonder established players in “traditional” ecommerce such as Flipkart and Big Basket also want a piece of the Quick commerce pie.
We looked at some company filings to gauge the extent of disruption being caused by Quick commerce. In Q2 FY25, sales per store for DMART grew by just 1.2%. The hit is even larger in the top five cities (where Quick commerce is dominant) – analysts estimate that sales per store likely shrank by 5% in these cities. This is in stark contrast to Blinkit’s 150%+ growth in the same period.
DMART sales analysis by IIFL
For now, Quick commerce is more of a Tier-I city phenomenon but it is quickly expanding to the rest of the country just like food delivery did (that both the major food delivery platforms have strong Quick commerce presence is not a surprise).
It will be tough for existing players to compete without a change in their business models. This also however shows that growth numbers of the incumbent large players may not be representative of the sector at large.
D2C Brands: Major Disruptors
Direct-to-consumer (D2C) brands are booming, riding the ecommerce and Quick commerce wave. D2C brands are expected to grow at 30%+ annually (see infographic below).
Some of this growth will be due to the underlying economic growth, category expansion, new products, new consumers etc. However, a significant chunk has to come via grabbing market share from incumbents. In sectors which are already largely organised, e.g. FMCG, some of the growth deflation in case of listed players has to be attributable to these D2C companies.
Additionally, there is rising health awareness amongst consumers. For instance, consumers now want less sugar, more protein and no preservatives in their food. Established companies are introducing their own product ranges to cater to this preference but find it difficult to change the perception of their brands. This provides a great opportunity for new D2C brands.
One way established players are counteracting this trend is by buying out D2C companies. There are examples such as the acquisition of Yoga Bar by ITC, Bewakoof by Aditya Birla, Caratlane by Titan and many more.
Here again, as in the case of retail, the growth numbers of large players may not be completely representative of the underlying sector.
Entertainment and Leisure: Competition Beyond Rivals
In the case of travel, leisure and entertainment, young and old alike are exploring new options. Cord cutting has come to India. PVR is now competing with Netflix and Coldplay/Diljeet concerts for time and wallet share.
Have a look at this slide from PVR’s quarterly investor presentation. Although the dry run of Bollywood movies is also a culprit, the fall in sales of movie tickets is concerning.
On the flip side, businesses which are able to deliver value to consumers continue to thrive. Indian Hotels, for example, boasted a growth of 28% in this quarter. Demand is clearly sustained at the higher end of the income spectrum and also in products/services which are differentiated/premium.
As investors, what do we deduce from these data points and trends?
Surely, demand has been subdued recently – many indicators are pointing to that. We have two take-aways from the above analysis.
Firstly, it may be prudent to keep a lower allocation to consumption driven stocks at this juncture and wait for a rebound before increasing this allocation.
Secondly, keep a constant eye on who’s delivering. These are situations where good management teams shine over the rest. The time to buy such stocks may not be very far in the horizon!