scorecardInflation burns a hole in the pockets of India’s lower income households. From FMCG goods, flip flops to crackers, consumption takes a backseat
  1. Home
  2. finance
  3. article
  4. Inflation burns a hole in the pockets of India’s lower income households. From FMCG goods, flip flops to crackers, consumption takes a backseat

Inflation burns a hole in the pockets of India’s lower income households. From FMCG goods, flip flops to crackers, consumption takes a backseat

Inflation burns a hole in the pockets of India’s lower income households. From FMCG goods, flip flops to crackers, consumption takes a backseat
Finance4 min read
  • From crackers to clothes to basic household items, lower middle classes have been spending very little in the last few months.

  • Most consumer companies are seeing sales and volume growth in their premium products while volumes in value buys are truncating.

  • The current festive season which reported bumper sales also saw little participation from the lower middle classes as per RAI.
Mahadev Samarth (name changed), a firecracker seller from Meerut enjoyed a bumper sales season this year. Yet he has a lot of inventory left over in bijli crackers or match crackers – which never got sold. Not because they were too expensive, but because the lower income households that buy such crackers could no longer afford them.

“Most of my pricey range of rockets and more were sold but at the lower end, there are barely any sales,” he told Business Insider India.

The lower middle classes also seem to have held off their festival celebrations and that’s evident in sales of other goods as well, be it clothes or household items.

“Retailers were indicating that items at higher price points were witnessing better sales than discretionary items at lower price points in the month of August, which was also a non-occasion month. This may indicate that the lower middle class may have put a temporary pause on shopping due to inflation,” said a report by Retailers Association of India (RAI) at the end of September. The October sales in general have been robust, as per RAI’s latest report.

The lower middle classes have been becoming tight fisted for a long time now, and even the upbeat festival mood has not changed that. In fact, lagging growth in rural areas (where half of India’s lower middle class resides) and its slow recovery is affecting many large companies in their value buy segment.

Price cuts are not helping

There is another indicator to tell us the spending habits of India’s vast lower middle class – hawai chappals or the humble flip flops. With prices starting from around ₹100, they are the most value-buy purchases in the footwear segment known for their comfort and longevity.

The segment has seen a degrowth of 20% in the last six months in terms of value, as per Relaxo Footwear’s Q2 earning commentary.

“So in the shoe division, our growth in the last six months is around 30%. So there is a healthy growth coming in the shoe division, which is sports shoes and sports sandals. So that has grown well, but open footwear, which is Hawaii, has degrown,” said Gaurva Dua, executive director of Relaxo, who also said that they are facing pricing pressures in the segment.

At the same time, their sports shoes and out-of-home footwear segments performed well – indicating the dichotomy in spending patterns as seen in the case of cracker sales.

Marico too says it has seen its business growing at one end and truncating at the other. And, reducing prices is not helping, indicating either heavy reduction in consumption or downtrading to local or unbranded products.

Its popular hair oil brand’s Parachute’s volumes reduced 3% and revenue by 11% in the second quarter. Its price reduced by 8% and the company has rolled out further cuts in Q3, says an Axis Capital report. On the other hand, its premium personal care segment posted a strong 40% year on year increase.

The heat of inflation

The consumption story which had started to show an uptrend post-lockdowns has been exhibiting an uneven growth. This is especially true after consumer price inflation hit an eight-year high of 7.79% in April this year. Ever since it remained above 7% every month, easing only temporarily to 6.7% in July, until it reached similar levels in October.

Even as retail inflation eased to a three-month low in October, food inflation remained at around 7%, with essentials like meat, cereal, milk and vegetables eating into the household budgets of the lower middle classes.

And this softened consumption story is showing little signs of recovery if the earnings commentary of consumer product and FMCG companies are to be believed.

Dabur too has taken a hit in the second quarter, as around 46% of its revenues come from the value segment, targeted to rural markets. This time, however, its urban growth lagged too, for the first time in six quarters.

Unlike Marico which believes that its overall volumes will grow at mid-single digits volume growth in the second half of the year, Dabur expects only a marginal growth.

“Dabur’s 2Q rural demand (as tepid with 1% y-y growth) and lagged urban (6% y-o-y growth) for the first time in six quarters, with downtrading to smaller packs visible owing to inflationary pressures. Management expects near-term pressure on volumes to continue, but to be marginally better q-q,” said a report by Nomura.

The Indian middle class accounts for around 28% of India’s total population – at 1.3 billion. Of this, the lower middle class makes up for around 14%, as per a Mint report. Apart from making up a distinct consumption class, this aspirational segment and its growth momentum is key to the nation’s GDP growth.

However, they are also the most vulnerable. In times of most crises, be it inflation or economic slowdown, the lower classes are the first to be affected and the last to recover – a factor that’s now taking a toll on companies and retailers who build their business models around them.

(With inputs from Sudhanshu Singh)

SEE ALSO
Tata's mega aviation merger is poised for flight, but the skies are not clear yet

Nykaa’s fashion foray and pipeline-style biz model worries analysts


READ MORE ARTICLES ON




Advertisement