Rising Input Costs and Inflation Squeeze FMCG Firms: Price Hikes Looming - Read Now

FMCG companies are, for now, battling the pernicious effects of input cost inflation and food inflation that have squeezed the consumption of the urban market. Most of the large FMCG companies, including HUL, Godrej Consumer Products Ltd (GCPL), Marico, ITC, and Tata Consumer Products Ltd (TCPL), also reported lower profit margins for the September quarter, mostly due to the increase in the prices of palm oil, coffee, and cocoa.

According to industry officials, 65-68 percent of the total FMCG sales face severe pressure by urban consumption. GCPL's Managing Director Sudhir Sitapati said while addressing the recent earnings call, "We think it is a short-term hit, and we will be able to recover the margin through judicious price increase and cost stabilization." The urgency with which FMCG firms feel these changing conditions in markets can be gauged.

Dabur India attributed this to a challenging demand environment. It cited "high food inflation and a resultant squeeze in urban demand." Consolidated net profit fell by 17.65% for the company, and revenues slipped 5.46%. Nestle India's Chairman, Suresh Narayanan, shared the same view: "The middle segment is particularly vulnerable as high food inflation continues to strain household budgets.". Growth in the F&B sector has decelerated to 1.5-2 per cent, he noted-the biggest deceleration as the growth had been so spectacular earlier in double digit growth.

The rising prices of raw materials like fruits and vegetables, oils push the FMCG companies into next best option and the thing is that is that it is to increase price in order not to loss; hence, the Narayanan said that it was not easy time even on high price of coffee as well as cocoa. If this situation would not prove to be sustainable, consumers also have to be charged upon.

It's interesting to note that though urban markets are shrinking, rural areas are gaining and doing well. The CEO of HUL, Rohit Jawa, said that rural growth is now above urban growth in the past quarters. Besides, Marico said that growth in the rural market is double of that in urban markets. This too, reflects changing consumer preferences.

As companies steer themselves through such turbulent times, their prime focus remains the protection of revenue growth amid stringent vigilance for pressures in margin. "Urban has softened, impacting consumer spending," said TCPL's MD Sunil D'Souza. It marks yet another reflection of the speed and sensitivity needed by FMCG majors toward market changeability.

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