The Quick Commerce Effect: Decoding FMCG's Urban Growth Challenge
Leading FMCG companies have raised concerns about increasing input costs and margin pressures, with CEOs emphasizing the need to protect margins through price increases. However, a deeper analysis suggests that beyond cost pressures, the sector is experiencing a fundamental shift in growth dynamics, likely influenced by the rapid rise of quick commerce platforms.
Rising Prices Amid Shrinking Volumes
In July-September this year, the price per kg of FMCG goods rose from ?133/kg to ?137/kg (qoq), reflecting a 3% increase in just three months. While this price hike has helped sustain revenues, it has added to inflationary pressures for consumers. Meanwhile, volume growth slowed to 4.3% in the August-October period, compared to 4.5% in the previous three months, signaling growing challenges in maintaining demand momentum.
Moreover, shopping behavior has fundamentally changed from monthly stock-ups to need-based purchases, resulting in reduced package sizes across categories.
While comprehensive data on urban-rural volume split remains limited, market indicators suggest divergent trends. Rural demand continues to grow by approximately 6% in value terms, while urban growth has fallen below 3% - which is substantially lower than nominal GDP growth levels. Notably, while premium category demand continues to show strength, the drop in mainstream urban demand is a greater concern.
The Role of Quick Commerce in Volume Compression
One possible explanation for the compression in urban FMCG volumes is the shift from traditional (kiranas) and modern trade channels (hypermarkets) toward quick commerce platforms. Modern trade growth has crashed from over 20% to just 3% year-on-year, highlighting the impact of this channel shift. Quick commerce's focused, need-based shopping experience differs significantly from the discovery-led, impulse-purchase environment of physical retail, leading to smaller basket sizes and reduced cross-category purchases.
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The limited variant options in dark stores makes discovery of premium variants - like more expensive versions of detergents - less feasible. Moreover, shopping behavior has fundamentally changed from monthly stock-ups to need-based purchases, resulting in reduced package sizes across categories from biscuits to cooking oil to core grains, as consumers prefer to avoid storing these FMCG goods for longer periods.
Facing this volume pressure, FMCG companies that implemented price hikes in the previous quarter are now exploring alternative strategies, including reducing pack sizes and modifying product variants to maintain margins. This "grammage reduction" approach effectively translates to another form of price increase for consumers.
At this critical juncture, policy intervention becomes crucial to ensure that margin pressures in the FMCG sector don't manifest as broader food inflation. While FMCG finished goods may face legitimate input cost pressures and volume compression, it's essential to maintain price stability in core food items like grains and pulses, which are also marketed by these FMCG brands. As highlighted in our recent analysis*, these essential food categories are witnessing price inelasticity, where retail prices remain sticky at higher levels despite wholesale price moderation.
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1 个月We’ve seen the adoption of q-commerce in metros, but now, it’s making its way to smaller towns and tier 2 cities—places where speed and accessibility were once luxury concepts.
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1 个月As quick commerce continues its march across the country, I'm keen to see how companies balance speed with reliability and expand their offerings while staying true to customer-centric values. The future looks incredibly exciting, and the opportunity to serve newer, underserved markets is a thrilling prospect.
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1 个月You’ve raised an interesting point about the impact on product packaging and availability. Reduced package sizes and limited options in dark stores suggest a trade-off between convenience and variety. This is particularly relevant for premium variants, which might struggle to gain traction in a model focused on essentials and speed.