FMCG face cost pressures, margin squeeze in H2

New Delhi: FMCG companies face sustained margin pressure in the second half of the current fiscal year as rising input costs squeeze profitability, with firms weighing post-Diwali price hikes against the risk of hurting consumer demand, particularly in price-sensitive mass-market and rural categories.Input-cost pressures intensified in the September quarter, reversing some of the moderation seen in the preceding quarter, which squeezed margins even as companies absorbed part of it to protect consumer demand during the festive season.The increase has been uneven across commodities, with crude-linked derivatives, packaging materials, palm oil and sugar emerging as key pressure points, said Naveen Malpani, Partner and Consumer Industry Leader at Grant Thornton Bharat."In rupee terms, palm oil prices were approximately 21 per cent higher year-on-year in September, while sugar prices remained around 18 per cent higher year-on-year despite correcting 8 per cent month-on-month," he said.Higher costs have not been fully offset by price increases and operational efficiencies, putting pressure on operating margins, Malpani said."Pre-results analyst estimates projected operating-margin compression of approximately 45 basis points year-on-year across a group of major consumer staples companies, with some estimates indicating declines of up to 150 basis points for the companies covered," he said.Companies operating in mass-market categories had limited room for aggressive price increases due to affordability concerns, making cost optimisation, procurement efficiencies and calibrated pricing crucial to protecting profitability without hurting demand."The sector should therefore prepare for continued margin pressure through H2, with recovery contingent on actual commodity movements rather than an assumption that the cost cycle has peaked," Malpani added.Parle Products Chief Marketing Officer Mayank Shah told PTI that rising inflation was a major concern for the FMCG industry, which is "definitely worrisome".However, he also said companies were trying to absorb a bit of "margin shock" by offsetting higher input costs through efficiency improvements and cost cuts rather than immediately raising prices.Shah said demand remained robust across urban and rural India as companies refrained from passing on the entire increase in costs to consumers.However, he indicated that price increases could be considered after the festive season, depending on the movement of agricultural commodity prices and the broader geopolitical situation."Most decisions on price hikes would be taken only post festive season... So, you may see some sort of thing happening from December onwards," Shah said.Companies are also looking at reducing discounts and advertising expenditure to manage costs, Shah said, adding that protecting demand remained a priority.Nestle India Chairman and Managing Director Manish Tiwary also acknowledged the issues last week and said "rising inflation, particularly food inflation" is a "reality".In its commodity outlook, Nestle India said coffee and wheat prices were expected to remain range-bound, while sugar and edible oils would stabilise at elevated levels in the December quarter.Cocoa remained volatile because of weather-related crop concerns in key producing regions, while milk prices had strengthened seasonally but were expected to ease with the arrival of flush supplies, it said.Moreover, this inflationary environment poses a challenge for FMCG companies in the second half of FY27, when festive-season demand gives way to the need to sustain consumption momentum and restore profitability."Outlook for H2 FY27 remains cautious," said Malpani, adding, " Companies may continue to face cost pressures, with any meaningful margin recovery dependent on commodity prices easing and earlier pricing actions flowing through.The risk is particularly relevant for packaged foods, home and personal care products and other categories exposed to edible oils, crude derivatives and agricultural commodities.The potential strengthening of El Nino conditions during October-December also adds uncertainty to the outlook for agricultural production and food prices. Its impact on Indian agriculture, however, will depend on broader ocean-atmosphere conditions and regional weather patterns, and higher food inflation is a risk rather than a certainty.The impact on consumer demand will be another key factor to watch. While price increases can support value growth, they may not translate into higher underlying volumes if consumers cut purchases, shift to cheaper brands or opt for smaller packs."If food inflation rises or rural incomes weaken, consumers may trade down to lower-priced brands, choose smaller packs, reduce purchase frequency or defer discretionary purchases. The uneven monsoon and potential El Nino impact add uncertainty to rural purchasing power," he said.