FMCG sector faces margin squeeze amid inflation and high input costs in Q3 FY25

New Delhi: Fast-moving consumer goods (FMCG) companies are grappling with inflation, rising input costs, and pricing pressures, leading to shrinking gross margins and flat-to-modest operating profits in the October-December quarter. Revenue growth is expected to remain value-driven, with only low single-digit increases anticipated.

Several FMCG firms raised prices during the December quarter to offset higher costs for inputs such as copra, vegetable oil, and palm oil. However, these hikes coincided with subdued urban consumption, weighed down by high food inflation. In contrast, rural markets—accounting for over a third of the total FMCG market—outpaced urban growth, showcasing resilience.

Dabur, in its Q3 update, highlighted "low single-digit growth" and a "flattish operating profit," citing inflationary headwinds in certain segments. Tactical price increases and cost-saving measures helped mitigate some pressures, the company noted. Alternative channels such as modern trade, e-commerce, and quick commerce delivered strong growth, while general trade faced challenges.

Similarly, Marico reported stable rural demand and improving sentiment in urban markets compared to the previous quarter. However, the company warned of a "higher-than-anticipated gross margin contraction" due to rising input costs, particularly copra and vegetable oils. Despite these challenges, Marico expects sequential volume growth and modest operating profit gains.

Analysts from Nuvama flagged a challenging urban demand environment, impacted by inflation, low wage growth, and rising rental costs. Rural demand, supported by good rains and government freebies, continues to recover and outpace urban consumption. However, price hikes in essential categories like soaps, snacks, and tea are driving consumers toward smaller packs, dampening volume growth.

Margins in key categories are under strain due to significant inflation—30% year-on-year for palm oil and tea. Additionally, the late onset of winter affected sales of seasonal products like body lotions and Chyawanprash.

Deloitte India’s Anand Ramanathan noted that competition from direct-to-consumer (D2C) brands and the growth of quick commerce platforms are adding to margin pressures. However, he expects the January-April harvest season to ease the burden on agricultural commodity prices, providing some relief.

While the FMCG sector navigates these headwinds, the focus remains on balancing consumer affordability with margin preservation in a challenging economic landscape.