Extremely clear that market is facing muted demand, says Nestle India chairman

New Delhi: Packaged food maker Nestle India Ltd said middle-income households are not buying enough packaged foods and beverages as high food inflation continues to cripple household budgets. This is especially true for consumers in large urban cities, even as a good monsoon ensured a revival in rural demand.

The company reported a 1% jump in September quarter revenue with demand especially stressed for milk products and chocolates. Volumes declined marginally year-on-year.

“The market is facing muted demand. It's extremely clear. The growth in the food and beverages sector which used to be double digits a couple of quarters ago, is now down to 1.5% to 2%. It is a combination of food inflation. The food inflation debate was once again rekindled a few days ago, when there were talks about a sharp uptick in (prices of) fruits and vegetables, and of course in oil prices. This is cause for concern,” Suresh Narayanan, chairman and managing director of Nestlé India told reporters in a select media briefing at the company’s plant in Samalkha, Haryana on Tuesday.

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“Tier-1 and below towns seem to be reasonably stable as far as we are concerned, rural is really reasonably stable, the pressure points are coming from mega cities and metros,” he added.

Consumer companies are in the middle of announcing their September quarter earnings. 

Last week, Tata Consumer Products Ltd too called out "softness" in urban demand. "We are probably underestimating the stress on the consumer in terms of the food inflation," Sunil D'Souza, managing director and chief executive officer at the company, said during the tea and salt maker's earnings call last week.

Narayanan has been among the few consumer goods CEOs to flag the impact of high food inflation on consumption. The market is currently “polarized”, he said, with middle income households shrinking their expenditure while the wealthy continue to spend.

“The ones (companies) who are offering fair-to-reasonable value for the middle segment are finding their fortunes temporarily shrinking. I don't think this is a long-term phenomenon,” he said.

India's retail inflation rose to a nine-month high in September due to higher food prices. Food inflation rose 9.24% annually compared to a 5.66% rise in August.

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Nestle saw a sharp deceleration in revenue growth in the September quarter as net revenue was up 1% year-on-year to ₹5,100 crore; gross margin was flat year-on-year. “Today the pain point that is being felt by most FMCGs (fast moving consumer goods) is that the middle segment is becoming a little bit tight. I would reckon this to be a problem for a few quarters,” he added.

Amidst the gloom, a good monsoon has been a "redeeming feature” especially for consumers in the hinterland. 

“One is expecting agricultural incomes to revive. One is also seeing some early shoots in some of the geographies. Premiumization is fairly strong—that’s what gives us some cause for cheer because as a company we are also increasingly innovating and premiumizing," he said.

Meanwhile, commodities such as coffee and cocoa, key to Nestle's portfolio in India have been on the boil. The prices of coffee and cocoa have seen a sharp uptick over the past 12 months with the former up 60-70%; prices of cereals and edible oils have also risen.

The company has taken between 15% to 30% price hike on coffee in the last 12 months. Nestle India sells packaged milk yoghurt, baby food, ready-to-cook foods, ketchups, and chocolates in India. 

Coffee prices are still very erratic and unpredictable, he said. Nestle will prioritize volumes over further price hikes. “The philosophy of the organization is very clear—penetration led to volume growth. I am anxious to get back to it as quickly as possible, which means that price increases will only be when there is no other mitigatory device that we have,” he said.

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Nestle is taking steps to address pockets of weakness, he added, such as taking steps to mitigate local competition and plans to boost ad spends. Nestle's brand Munch is facing competition from local players in the market.

“Action points are fairly sharpened during the course of this quarter and next quarter, and we are reasonably confident that the demand cycle for our products will start to increase in the coming quarters,” he said.