It was not that the warning signals were absent. Analysts have been saying it – that real incomes are shrinking; and consumption is slowing down. But it is when the big stakeholders get hit, it is time for everyone to wake up!
Nestle India experienced its slowest quarterly growth in 8 years when, for the second quarter this year, it reported a mere 1.4 per cent revenue increase year-on-year and a 1 per cent volume shrinkage. Articulating the frustration of the FMCG sector, which had taken robust growth at all price points for granted, Nestle MD Suresh Narayanan blamed his woes on the ‘shrinking middle class’.
In the most quoted of quotes in recent days, Narayanan said: “Premium consumption still continues to be fairly strong, but the middle segment, which used to be the segment that most FMCGs used to operate in, seems to be shrinking.”
Another bellwether indicator, car buying, has been struggling after runaway growth in the post-COVID years. The Federation of Automobile Dealers Associations (FADA) admitted in August that inventories at factories and dealerships had soared to an all-time high of over 7 lakh units, valued at Rs 73,000 crore. Even the fast-moving SUV segment has been slowing.
Slowing consumption
It is significant the government has finally given up its ostrich-like posture, and is now conceding that indeed there is a crisis of falling consumption. The Ministry of Finance’s latest monthly review acknowledged consumer demand was softening. It noted the sharp slowdown in FMCG sales and said there had been a 2.3 per cent contraction in automobile sales. The decline in housing sales and launches in the second quarter also finds mention.
Most of these FMCG and auto companies and realtors selling homes have hinged their business plans on this ephemeral ‘middle-class’, defined as those with substantial disposable income and a huge appetite to spend on the good things of life. Accounting and management firms, using questionable ‘research’, first bandied rosy numbers in the early, heady days of liberalization. The magical figure then touted was a middle-class 450-million strong that would drive growth and consumption in India.
When the dust settled, everyone realized the 450-million middle class was wishful thinking. Two decades later, the more realistic figure is about one-fifth the earlier estimate. The US-based Pew Research Centre projected the pre-Covid strength of the Indian ‘middle class – defined as those earning between USD 10-USD 20 a day or Rs 25,000-Rs 50,000 a month – at about 99 million.
How fragile the middle class’s income and consumption is can be gauged from the Pew Research’s data that said about one-third of this segment fell out of the ‘middle class’ during the Covid freeze, effectively reducing it to about 66 million. Those numbers that fell out have probably been restored and the ‘middle class’ is now over 100 million strong.
But the estimates continue to differ wildly. Ridham Desai, MD of Morgan Stanley says: “…a hundred million new households, which is 450 million people, which exceeds the population of US and the whole of Europe, are becoming middle class in the next 10 years.”
They got too greedy
Can business plans of FMCG and realtor companies be based on these projections? The answer from these companies has been ‘premiumization’ – the art of focusing on the top end of the market at jacked up prices and earning huge margins. If money is to be made there, why bother about mass products, affordable’ prices and the middle class?
The spending splurge post-Covid and the high profits made from the exorbitantly priced premium goods saw a couple of good years for these companies; but the ‘premiumization’ strategy focused on the upper and rich segments has run of steam as, on its own, it is too small a market.
The official NSO projection for the first quarter of FY2025 for growth in private consumption was 7.2 per cent, up from 4 per cent in 2024; but with receding sales and poor quarterly results of companies we are now seeing, this will have to be revised downwards.
What seems to have happened is the 2-3 post-Covid years of rapid growth emboldened these companies. They got greedy and hiked prices. No decent car today costs less than Rs 10-12 lakhs. White goods prices have seen repeated hikes. No home buyer in a major city can find a decent flat for less than Rs 50 lakh. The slowing of consumption today is nothing but pushback by consumers. Thus far, and no further, they are saying. What Nestle CEO Narayanan is not admitting is he and other companies have axed their own feet by hiking prices beyond tolerable levels when the going was good.
The situation has worsened with retail food inflation persisting. Despite a fair monsoon food inflation has shot up to 9.22 per cent in September from 5.66 per cent in August. In the food basket, pulses are up 9.8 per cent, vegetables are higher by 36 per cent. This has left less money in consumers’ pockets for other optional purchases.
The answer to the mystery of the shrinking middle class lies with Nestle’s Suresh Narayanan and Hindustan Unilever’s Rohit Jawa. They have to moderate prices and cast a wider net. Just because 450 million people own cell phones, it does not make them active consumers.
