FMCG sector likely to face Q3 slowdown as inflation hits margins

Fast-moving consumer goods (FMCG) companies are bracing for a challenging third quarter in FY25, as inflationary pressures and rising input costs are expected to weigh heavily on their performance. Analysts predict that most FMCG makers will report a low single-digit rise in revenue, marking a return to a cycle of value-driven growth rather than volume expansion. However, higher input costs and pricing measures could lead to a contraction in gross margins and a modest-to-flat operating profit during the October-December period.
Several companies have reportedly resorted to price hikes in response to escalating costs of raw materials such as copra, vegetable oil, and palm oil. While this strategy aimed to mitigate the impact of inflation, it coincided with subdued urban demand, affected by high food inflation, low wage growth, and increased housing rental costs. In contrast, rural markets, which account for over one-third of the FMCG sector, demonstrated resilience and outpaced urban markets in growth. Factors like government incentives and good monsoon rains supported rural consumption.
Home-grown FMCG major Dabur reportedly highlighted the inflationary challenges faced during the quarter, stating that these pressures were partially offset through tactical price increases and cost-efficiency measures. Despite these efforts, the company expects low single-digit growth in revenue and a "flattish operating profit" for the quarter. Dabur also noted that alternative sales channels, including modern trade, e-commerce, and quick commerce, performed strongly, while general trade, comprising neighborhood kirana stores, struggled during this period.
Meanwhile, Marico expressed a cautious outlook for the quarter, highlighting "higher-than- anticipated gross margin contraction" due to elevated prices of key inputs such as copra and vegetable oil, though crude oil derivatives remained stable. The rising input costs weighed on profitability, leading the company to anticipate modest operating profit growth and a sequential uptick in domestic volume growth, supported by improving rural consumption. Despite a gradual recovery in consumer sentiment, Marico’s product portfolio, including brands like Saffola, Parachute, and Livon, continued to face significant margin pressures. Adding to the challenges, Nuvama noted that urban demand remains under strain, with headwinds likely to persist for two to three more quarters, while rural demand is gradually recovering, aided by favorable agricultural conditions. Nearly 30% year-on-year inflation in palm oil and tea has further strained margins in key FMCG categories.
Market analysts have observed a shift in consumer behavior, with many opting for smaller product packs in categories such as soaps, snacks, and tea following price hikes. This trend negatively impacted volumes, exacerbating the challenges faced by FMCG companies. Additionally, the late arrival of winter further affected the sales of seasonal products like body lotions and health supplements such as Dabur Chyawanprash.
Industry experts also point to broader challenges, including competition from direct-to-consumer (D2C) brands and the rapid expansion of quick commerce platforms, which are reshaping the FMCG landscape. Despite these pressures, Anand Ramanathan, Partner at Deloitte India,reportedly noted that the harvest season from January to April is expected to alleviate some of the strain on agricultural commodity prices, providing much-needed relief for the sector.

( Business Correspondent)