FMCG firms feel the pinch: Will your favourite products cost more this Diwali?
The festive season may bring cheer to shoppers, but for FMCG companies, rising costs are turning out to be a bitter pill. With prices of key raw materials climbing, companies are struggling to protect their profit margins without making everyday products more expensive for consumers. The big question now is whether they can keep prices in check for much longer, especially in price-sensitive mass-market and rural segments.The pressure has increased in the September quarter, reversing some of the relief companies saw in the previous quarter. Firms absorbed part of the cost increase to keep products affordable during the festive season, but this has squeezed their margins.The rise in costs has not been the same across all commodities. Crude oil-linked materials, packaging, palm oil and sugar have emerged as major 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.Companies have not been able to make up for the higher costs through price increases and efficiency improvements alone, putting pressure on their 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.For companies selling everyday products to mass-market consumers, raising prices sharply is not an easy option. Higher prices could make products less affordable, leaving companies to rely on cost-cutting, better procurement and carefully planned price changes to protect profits 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.
Price hikes may have to wait until after the festive season
For now, FMCG companies are trying to absorb some of the cost shock rather than pass it all on to consumers.Parle Products Chief Marketing Officer Mayank Shah told PTI that rising inflation was a major concern for the FMCG industry and was “definitely worrisome”.However, companies are attempting to cushion the impact on their margins by improving efficiency and cutting costs instead of immediately increasing prices, he said.Demand remains robust across urban and rural India, Shah said, adding that companies had avoided passing on the entire increase in input costs to consumers.That could change after the festive season. Companies may consider raising prices depending on how agricultural commodity prices move and how the broader geopolitical situation unfolds.“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 cutting discounts and advertising expenditure to manage their costs. However, keeping demand steady remains a priority, the executive told PTI.
Food inflation keeps companies on their toes
Nestle India Chairman and Managing Director Manish Tiwary also acknowledged the challenge last week, saying “rising inflation, particularly food inflation” is a “reality”.The company’s commodity outlook suggests that cost pressures may not ease across the board in the near term. Coffee and wheat prices are expected to remain range-bound, while sugar and edible oils are likely to stabilise at elevated levels in the December quarter.Cocoa prices remain volatile because of weather-related crop concerns in key producing regions. Milk prices have strengthened seasonally but are expected to ease as flush supplies arrive, Nestle India said.This leaves FMCG companies facing a challenging second half of FY27. After the festive-season boost, the focus will shift to keeping consumers buying while trying to recover lost margins.“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 challenge is particularly significant for packaged foods, home and personal care products, and other categories that depend on edible oils, crude oil-linked materials and agricultural commodities.Apart from the cost of making products, companies must also consider how shoppers will react if prices rise. A price increase may help boost the value of sales, but that does not necessarily mean companies will sell more products.Consumers could cut back on purchases, switch to cheaper brands, opt for smaller packs or buy products less frequently. Any of these changes could limit the benefits companies hope to gain from raising prices.The outlook for food prices also carries some uncertainty. The potential strengthening of El Niño conditions during October-December could affect agricultural production and food prices. However, the impact on Indian agriculture will depend on broader ocean-atmosphere conditions and regional weather patterns. Higher food inflation is a risk, not a certainty.For rural markets, the combination of food inflation, incomes and weather conditions will be particularly important.“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 Niño impact add uncertainty to rural purchasing power,” he said.
