Crisil Moderately Upbeat On FMCG, But Urban Demand, Input Cost Woes To Continue
Prices of essential inputs like palm oil, coffee, copra, wheat, tea and cocoa have risen over the past year, putting pressure on margins despite a decline in crude oil prices.
The fast-moving-consumer-goods sector is set for a mild revenue recovery of 100–200 basis points to 6–8% in the next financial year, aided by steady rural demand and price hikes to counter rising input costs, Crisil Ratings said on Wednesday.
However, urban recovery will be slow as benefits from easing inflation, lower interest rates and the budget boost take time to reflect in spending., according to the report.
A study of 82 FMCG firms, covering a third of the sector's estimated Rs 5.9-lakh-crore revenue, suggests volumes can rise 4–6% next fiscal, the report found. Companies have already taken price hikes of 4–20% to offset cost pressures in palm oil, coffee and wheat, and a further 2–4% hike is expected.
In order to sustain growth amid competition from regional and direct-to-consumer brands, traditional FMCG players are ramping up digital marketing, acquiring startups and expanding quick-commerce offerings.
Urban Demand Trails Rural
Urban markets, which contribute around 60% of the FMCG revenue, have been under pressure due to high food inflation, elevated interest rates and sluggish wage growth. These factors impacted discretionary spending in categories like personal care and select food and beverage segments.
Rural consumption has outpaced urban for four straight quarters, aided by a good monsoon and increased incomes from higher government support.
"We expect a modest recovery in volume as moderating food inflation, easing interest rates and tax-relief measures announced in the Union Budget encourage urban demand," Anuj Sethi, senior director of Crisil, said. "Rural demand will grow steadily, given continuing allocation to welfare schemes and a hike in minimum support prices."
Input Costs Bite Into Prices
Inflationary pressures in key raw materials continue to pose a challenge for the FMCG companies. Prices of essential inputs like palm oil, coffee, copra, wheat, tea and cocoa have risen over the past year, putting pressure on margins despite a decline in crude oil prices.
Companies like Hindustan Unilever Ltd., Emami Ltd., Marico Ltd., Godrej Consumer Products Ltd. and Adani Wilmar Ltd. have already raised prices by 4–20% in the first half of the current fiscal across different product categories. Another round of price hikes, ranging from 2–4%, is expected in the coming quarters to mitigate the impact of rising commodity costs. This can further strain consumer spending, delaying a broader recovery in demand.
Pushback Against D2C, Quick Commerce
Traditional FMCG companies continue to face intense competition from regional players and D2C brands, which have gained traction due to changing consumer preferences and digital distribution. However, a meltdown in D2C startups is expected to continue, with legacy consumer companies likely to regain lost market share over time.
"We expect legacy consumer companies to eventually win back all the market share," Abneesh Roy, executive director of Nuvama Institutional Equities said.
Most D2C startups in the FMCG will fail to survive and the best ones will be acquired. For example, Hindustan Unilever acquired Minimalist, the FMCG analyst added.
Crisil also pointed out that in order to counter competition, traditional FMCG players were increasingly acquiring D2C brands, expanding digital marketing efforts and launching more affordable product packs. Quick-commerce platforms now account for about 30% of the e-commerce channel, prompting companies to introduce exclusive packs tailored for these platforms.
