Nestle's lower rural biz comes to its rescue

Chennai: Lower exposure to rural markets, new launches and higher advertisement and marketing spend has helped Nestle to beat the blues of a general economic slowdown. Being a defensive sector, FMCG won’t be impacted much in comparison to some other sectors, finds Nestle.

The FMCG major reported a net sales growth of 11.35 per cent and increase of 10.83 per cent in net profit in the second quarter ended June 2019. Nestle was one of the top-performing companies in the sector.

Nestle’s chairman and managing director Suresh Narayanan attributed this growth to several factors, including lower exposure to rural markets. Compared to the urban market, the rural markets have been witnessing lesser demand growth in the past several quarters.

Rural market accounts for 20 to 25 per cent share of the total sales of the company. It has remained at those levels in the past few years, though the company aims at doubling its presence in villages in two to three years. Currently, Nestle has presence in 52,000 villages.

“The tier II and III markets are also holding up quite well. Urban demand growth too has slowed down, but not as much as rural growth,’ he said.

The company also has been aggressively launching new products and variants. It has launched 61 new products in the past three years. The innovation spends as a part of the total sales have been going up in these years. It stood at 2 per cent in 2016 and has moved up to 3.7 per cent.

In June quarter itself Nestle launched Maggi Veg Atta Noodles, Maggi Veg Oats Noodles, Maggi Fusian Noodles range, Ceregrow Organic Selection and Nestea Iced Tea in Tetrapaks. The company also has been spending on advertising and marketing, though FMCG companies largely tend to tighten their purses during slowdown.

Last year, the company spent 5.5 per cent towards marketing and advertising and this has gone up to 6.1 per cent this year. New products are receiving more than 40 per cent of this spend.

“Focus on innovation, launches, market share and premiumisation is envisaged to boost volume-led growth. Also, the company’s new strategy—top line and market share focus—is encouraging,’ said Abneesh Roy, executive vice president, institutional equities, Edelweiss Securities.

Nestle is confident of beating the slowdown blues, though Nielsen has revised its growth forecast for the sector. Nielsen had earlier projected 11-12 per cent growth for 2019, but has lowered it to 9-10 per cent recently.