850 million people live in the Indian hinterlands. The rural Indian economy contributes more than 50% to the Indian GDP. When Coronavirus made landfall in India, it triggered a massive migration of workers returning to their villages. Agriculture emerged as a social safety net for the Indian economy. A good monsoon coupled with the increased demand for primary goods like cereals, pulses, etc., ensured the safe passage of the rural economy through the onslaught of the pandemic on the world economy.
Growth of Consumption in Rural Markets
Two years before the pandemic, the rural sector was driving down growth for the FMCG sector. Now, The FMCG sector is being propelled by rural markets. People’s huge migration resulted in a huge increase in value consumption items like biscuits, flour, oil, etc., as people remained conservative on their spending. Value items saw double-digit growth during the harshest quarter in independent India’s history.
With growing rural internet users, rural Indians are vying for premium consumer goods and expensive items. It will be interesting to see the growth in premium consumer goods consumption in the coming years.
Not only did the rural economy survive, but it also thrived. Rural spending on consumer goods increased. Consumption growth in rural India outpaced consumption in urban areas. By June 2020, consumption had touched 85% of pre-Covid levels in the hinterlands. According to Nielsen, the Fast Moving Consumer Goods (FMCG) sector will grow at 10% in FY 2020-2021. The FMCG sector is slated to touch the $100 billion mark by the year 2025.
Reasons for the Growth of Consumption in Rural Markets
1. Increase in demand due to reverse migration
In March, the Central Government feared that they were unprepared for the virus and declared a strict nationwide lockdown. During the day, everything had to be closed except for essential services. With the economy shut down, businesses were unable to pay workers. These workers, who had left their villages searching for better-paying jobs were left with no option but to return to their homes.
It is estimated that 40 million workers migrated back to rural areas. An increased rural population contributed to increased demand for consumer goods like Maggi, which helped Nestle clock a 1.7% growth in the June quarter despite a harsh lockdown.
2. Farm income
2020 witnessed a great monsoon season. Reverse migration meant that tens of millions more were engaged in the agriculture sector. During tough times, people start buying more primary goods like rice, cereals, wheat, etc. All this means that the agriculture sector will grow at an impressive rate of 2.5% in the FY 2020-2021, while the Indian economy struggles.
When the pandemic wreaked havoc on the economy, farmers churned out the highest ever Rabi output and record levels sowing of Kharif crops. Agriculture served as a successful social net for the tens of millions who had to migrate back to rural areas. A strong rural economy helped consumption growth massively in rural markets.
3. FMCG sector capitalizing on the rural market
The FMCG sector realized the potential of the rural market. FMCG companies like Nestle improved their supply chains. They doubled outreach points by creating more wholesale hubs. Nestle segmented the Indian market with 15 clusters. These clusters were identified to have different consumption patterns, habits, and preferences. Each cluster was considered to have a different market. As a result, Nestle saw a growth rate of 12% in the rural market in the September quarter, while the urban market saw only a 5% growth.
4. Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) Scheme
The Government realized that tens of millions of migrating to rural areas would be a massive problem even with a strong agriculture year. The Government increased its MNREGA spending to pump more money into rural areas. The Government spent an additional 40,000 crores on the scheme, which guaranteed 100 days to workers. The higher spending resulted in the sustenance of millions of rural workers. This also contributed to the growth of consumption in rural markets.
5. Strong retail channels
The FMCG sector has the most robust distribution channel in the country. When the pandemic hit, everything was shut down except for essential services. Essential services were the only thing that did not suffer a drastic disruption in their channels. The essential services included India’s beloved Kirana stores. These stores served as the backbone for the growth in consumption of value items.
The Road Ahead
Rural markets emerged as the silver lining amongst a sea of dark clouds. The FMCG sector capitalized on markets and made huge changes to their functioning to accommodate and encourage consumer goods’ rising demand. However, the rural market is still growing, and companies are vying to capture more market share. FMCG companies and SMEs can focus on the following things to unlock the potential of rural markets:
- A strong distribution channel
The most crucial step in capturing the rural market is getting the goods to the hinterlands as fast as possible. Even before appealing to target consumers, companies like Nestle have found that they need a strong distribution channel to get their goods to the rural dwellers. Nestle, which reaches 52,000 villages directly, plans to double its reach in the coming years. It is setting up more and more wholesale hubs to have a robust distribution channel in place. Sales and distribution approaches will be a crucial determining factor in who captures the rural markets.
- Identifying customers
Identifying customers is the next most important thing. India is a diverse country with different consumption patterns and habits. SMEs and FMCG companies should identify clusters of villages with the same consumption habits. Companies should invest in market surveys to collect relevant information about the rural markets. Companies can also chance upon novel customer segments in their market research. Using data insights will help them solidify their position in the rural markets.
- Convergence of lifestyle
The 4G revolution in India made high-speed internet affordable to the people of India. Rural India quickly pounced on it, and now hundreds of millions of rural dwellers use the internet daily. They are seeking out information on the internet. As disposable income grows and rural consumers become aware of expensive brands, rural consumption of priced items will increase multi-fold. Currently, FMCG companies are focusing on providing value items easily in the hinterlands. But with increasing disposable income, they should start focusing on promoting premium consumer goods in rural areas. The growing rural internet users lead the way in the convergence of lifestyle in the rural and urban areas.
- Capitalizing with the help of language
India is rich in culture. Every few kilometers, culture and language change. Rural consumers are using the internet extensively. But most content on the internet is in English, and most rural consumers are not fluent in it. The rise of high-speed internet and the growing rural internet users will increase the demand for premium consumer goods in rural areas. To capitalize on the multilingual rural market, Small and Medium Enterprises should have their website translated into various local languages to reach the masses. Process9 brings you MoxVeda, which will localize your entire website in the language of your choice in only four simple steps. You can try out for a free demo now.
- Channel partners
With stiff competition in the market, forging a bond with channel partners becomes immensely important. Companies should engage with channel partners, retain and reward them, and keep them motivated. Channel partners like small shop owners, distributors, and wholesalers are massively important in the rural markets. A symbiotic relationship with channel partners will help SMEs and FMCG companies scale greater heights.
- Lower per-unit prices
Companies should launch small variants of their popular products. A lower-priced small variant will be more popular in the rural areas which have low disposable incomes. Premium consumer goods such as Ferrero Rocher might see an increase in consumption with small variants that sell at a fraction of the price of the usual variant.
- Gaining brand loyalty
Companies should look to gaining brand loyalty in rural markets. They can do so by incorporating their companies into the social fabric of rural markets. For this, they can try outreach programs, CSR activities like remedial education programs, and other social efforts in the rural areas. Other than that, companies should provide rural consumers with good quality goods consistently. With heavy competition, it will be tough for any brand to gain loyalty in rural markets.
Rural markets saw an impressive growth in consumption. An excellent monsoon, higher Government spendings, reverse migration, and consumer goods companies’ ingenuity were the primary reasons for the growth spurts. The Indian economy is growing through a technical recession, and rural markets have emerged as the only silver lining. As more and more companies look to increase their market share, it will be interesting to see who takes the cake at the finish line.