Good morning [%first_name |Dear Reader%],

If there’s one thing every fast-moving consumer goods (FMCG) investor wants to know, it’s this: how worried should they be about the slowdown in rural demand?

That’s a very legitimate question.

FMCG sales volumes in rural areas have been on the decline for some time now, thanks to inflation and deficient rains in some of India’s largest states.

What makes this striking is the turnaround in demand in urban centres.

Earlier this month, Marico Ltd, which makes a wide range of FMCG products, including the Parachute oil brand, referred to a “muted consumption sentiment” in rural areas. And Tata Consumer Products Ltd (TCPL), owner of Tata Tea and Tata Salt, said it was seeing “continued stress” in the rural segment.

Hindustan Unilever Ltd (HUL), on the other hand, sounded hopeful on its latest earnings call.

Now, rural demand did contract at a slower clip in the quarter ended December 2022 than during the corresponding period of the previous year. And it rose over the previous quarter. But the jury is still out on whether FMCG companies are out of the woods yet.

So, one would have expected Nestlé India Ltd to add clarity to the debate when it announced its financials last week. After all, it’s the country’s third-largest FMCG company by market cap, after HUL and ITC Ltd.

But Nestlé’s only made things more complicated.

Nestlé and the rural demand puzzle

We throw around the words ‘urban’ and ‘rural’ without having a definite explanation for either of them. We think a city or town is urban, and everything else, rural.

This categorisation is not bad, except it’s still very, very ambiguous.

But there’s a more precise way of slotting places by population. Here’s the Reserve Bank of India’s system of classification:

If you think I’m rambling, no, I’m not. I needed to know what the terms meant when I saw this in Nestlé’s investor presentation.

So in this chart, TC1, or Town Class 1, is urban and TC2-6 is semi-urban, going by the RBI’s classification. It’s not surprising that urban centres have been growing for Nestlé over the past few quarters.