Nestle India and Hindustan Unilever slipped past quarterly earnings predictions on Thursday, offsetting a decline in rural purchases with increased spending by city people on reasonably priced pick-me-ups like coffee and biscuits.

In an atmosphere of inflation, consumer products firms such as Nestle India, Hindustan Unilever, and Britannia Industries have been facing challenges due to consumer spending cuts, which has resulted in a sharp increase in the cost of necessities like dairy and vegetables.

However, Hindustan Unilever, the company behind well-known brands like Closeup and Lifebuoy, claims that urban spending drove the increase for consumer goods manufacturers, pointing to the introduction of smaller packages and some price reductions as factors that have helped create demand.

VS Kannan Sitaram, partner at venture capital firm Fireside Ventures, stated that Nestle’s dominance in the coffee segment is “distinctly an urban phenomenon.” The corporation, which has brands across different price points, is profiting from the desire for “premium” products in urban markets.

Profits at Unilever increased by 4%, but Nestle, the company that makes Nescafe, saw profits surge by 37.3%. Both exceeded analyst predictions from LSEG IBES.

“They are getting the upside of the urban economy continuing to perform reasonably well,” Sitaram said.

Analysts noted that while price reductions benefited Hindustan Unilever, Nestle benefited from greater exposure to cities and towns.

“Nestle India remains a preferred pick given strong volume growth visibility as it is under indexed in small towns and rural India,” said Amnish Aggarwal, an analyst at Prabhudas Lilladher.

But he cautioned that rising commodity prices could be a blow in the upcoming months, potentially undermining any significant margin expansion from the high levels of the September quarter for Nestle and Hindustan Unilever.

Hindustan Unilever’s stock closed unchanged ahead of its reports, while Nestle India’s shares increased by as much as 4.1% to reach a record high following the results.

“Rural recovery is likely to remain gradual,” Hindustan Unilever said in a statement, adding it could take further price cuts if needed. Nestle India warned uneven rain would “impact” the production of major ingredients.

Listed in Switzerland Nestle’s nine-month sales increase was less than anticipated, as consumers reacted negatively to higher product costs.

(Adapted from Reuters.com)