The fast-moving consumer goods (FMCG) sector is caught in a double whammy of rising input costs and an urban demand slowdown. This is eroding growth in the sales and profits of major companies in the sector. The trend is reflected in their September-quarter earnings and was also noted by the finance ministry in its latest monthly review released last week.
The urban slump marks a reversal from the rural slowdown in earlier quarters. Urban consumers are becoming increasingly cautious with their spending due to inflation, and this is clipping the demand, analysts say. A Mint analysis of 21 listed players that belong to the BSE FMCG index and have declared their Q2 results shows that their combined top-line grew modestly at 10% year-on-year in the September quarter, compared with 7% in the previous quarter. The bottom-line growth was even weaker: After an 11% rise in Q1, it slowed to 8%.
On a quarter-on-quarter basis, aggregate net profit shrank nearly 5% and operating profit 4%.
Raw material expenses of this basket of companies surged 9%, the sharpest in seven quarters. (four of those seven quarters had seen raw material costs decline.)
“Revenue growth in Q2 is expected to be modest at around mid-to-high single digit, largely driven by mid-single-digit volume growth,” said Kaustabh Pawaskar, deputy vice president at Sharekhan by BNP Paribas. “PAT (profit after tax) growth is expected to be lower due to lower margins impacted by input cost inflation.”
Rising raw material costs affected consumer goods companies of all sizes. After six quarters of either declining or posting marginal increases, raw material expenses rose steadily during the first two quarters of 2024-25.
In terms of net profit, medium-sized companies were hit the hardest in Q2 with their combined bottom-line contracting by 7% sequentially, while large companies witnessed a decline of about 5%. Smaller ones managed to grow their bottom-line by 11%, despite a 25% increase in raw material costs.
The size categories are based on an equal split of the set of 21 companies: seven large (revenue ₹4,000 crore or more), seven mid-sized ( ₹1,000-4,000 crore), and seven small (below ₹1,000 crore).
The impact across the sector also reflects exposure to different market segments. Urban demand has taken a beating, caught in the crossfire of rising inflation and escalating costs, as companies have mentioned in earnings calls. Nestlé India's chairperson and managing director, Suresh Narayanan, noted that urban sales volumes were significantly hit by a "shrinking" middle class, traditionally considered the sector's core consumer segment.
He, however, pointed out that the premium segment consumption remained robust. The resilience of this segment highlights an interesting dichotomy in FMCG markets.
"The secular trend of premiumization remains intact as premium products are doing better than popular and mass-market categories in urban areas," said Rohit Jawa, Hindustan Unilever’s chief executive officer and managing director. "We have no plans to move away from our premiumization strategy due to the broader urban slowdown."
According to NielsenIQ's latest report, consumption volumes in premium FMCG categories are growing at almost twice the pace of price increases. Categories such as home care and processed foods have emerged as particular bright spots, with consumers showing a marked preference for premium brands despite the overall slowdown.
The damp consumption stretch marks a shift from historical patterns where urban demand, which forms two-thirds of overall FMCG sales, typically stayed resilient. The finance ministry’s economic review confirms the reversal, attributing the urban dip to softening consumer sentiment, limited footfalls due to above-normal rainfall, and seasonal purchasing patterns.
Market intelligence platform Bizom also reported that rural areas outpaced urban regions in FMCG volume growth across multiple product categories during the September quarter.
Soaring costs of essential raw materials that FMCG makers use have compounded the pressure on their gross margins, reversing the uptrend observed in the last quarter for the selected companies. Aggregate operating margins (operating profit as a share of revenue) dropped 140 basis points to 20.4% on a quarter-on-quarter basis in Q2; net profit as a share of revenue also dipped from 13.9% to 13%.
“PAT growth is expected to be lower than revenue growth (in the rest of the year) due to a dip in operating margin impacted by higher input prices,” said Sharekhan’s Pawaskar. “Though the companies are taking price hikes, it will not be in line with the exact inflation in the input cost, and margins will remain under pressure.”
However, there's a silver lining. Rural demand, a persistent concern for FMCG companies in recent quarters, is finally showing signs of revival, riding on an above-normal monsoon, higher minimum support prices for rabi crops, and sustained government spending on rural welfare schemes. Analysts expect this could offset some of the impact from the urban drop-off.
But, the urban trend raises broader economic worries, given that private consumption accounts for nearly 60% of India's GDP. Going forward, FMCG companies will likely face continued margin pressures as they struggle to fully pass on rising input costs to consumers. The sector's performance hinges on urban recovery and rural resilience.
