Mixed Signals from FMCG Companies as Costs, Weather, and Channel Disruption Weigh In

Quick commerce is experiencing a boom as convenience and rapid delivery redefine consumer expectations, with many companies aggressively expanding their dark store networks. However, the FMCG (fast-moving consumer goods) sector, a key supplier to these platforms, seems to be facing headwinds. Early trading updates for the September quarter show a mixed performance across the sector, highlighting challenges such as fluctuating raw material prices, adverse weather conditions, and disruptions in traditional distribution channels. These negative forces appear to be tempering positive trends like recovering rural demand and easing consumer inflation.

Godrej Consumer Products: Caution on Margins
Godrej Consumer Products Ltd (GCPL), a major player in home and personal care, recently provided an update on its outlook. While the company reiterated its FY25 guidance of high single-digit volume growth in India and Indonesia and mid-teens EBITDA growth, it also flagged some immediate challenges. Higher palm oil prices and increasing competition are expected to put pressure on margins in the September quarter.

Malaysian benchmark palm oil prices have risen nearly 20% since January, with a spike in the past month. Although GCPL has taken a cautious approach to passing on these cost increases to consumers, the company is investing in brand development to safeguard market share and drive volume growth. As a result, margins are expected to remain flat for now. This margin strain is further compounded by competition in the personal care segment, which necessitates gradual price hikes to maintain competitiveness.

Rising Crude Prices Add to the Cost Pressure
Crude oil prices have also added to the cost burden for FMCG companies. Earlier in the quarter, Brent crude prices fell to around $70 per barrel, providing hope for some cost relief. However, geopolitical tensions pushed prices back to approximately $80 per barrel. This reversal is reducing the anticipated margin improvements that many companies were counting on.

Godrej, like other FMCG firms, will have to navigate these unpredictable cost structures while maintaining competitiveness. Companies that use petroleum-based products, such as packaging and certain personal care items, are particularly exposed to these fluctuations, making it harder to pass on cost increases to consumers in a competitive market.

Dabur’s Weather and Channel Challenges
Dabur, another significant player in the FMCG space, recently provided a less optimistic update. The company faced a dual setback: weather-related disruptions and channel-specific challenges. Heavy rains during the quarter hurt out-of-home consumption, negatively impacting its beverages business. Additionally, Dabur encountered channel disruption as consumer demand shifted towards organized retail and e-commerce, leaving traditional kirana stores and chemists with excess inventory. As a result, Dabur has been forced to take back unsold stock from distributors, a rare event that will weigh on sales growth and margins for the quarter.

While this disruption may be temporary, it highlights the broader shift in consumer behavior toward online and organized retail channels. As quick commerce gains momentum, traditional retail channels could face similar challenges, creating inventory imbalances and distribution inefficiencies for FMCG companies reliant on these outlets.

Marico: Rural Growth vs. Rising Costs
Marico has delivered a relatively positive sales outlook, driven by stronger growth in rural markets compared to urban areas. However, like its peers, the company is grappling with rising input costs. The combination of higher vegetable oil prices, increased import duties on cooking oils, and competitive pressures is likely to compress Marico’s operating margins. Although sales growth is robust, margin pressures mean that operating profit growth may lag, a concern that investors will closely monitor in the upcoming quarterly results.

The Bigger Picture: Challenges for FMCG Giants
While companies like Hindustan Unilever, ITC, and Nestlé India do not typically provide quarterly guidance, they are likely facing similar pressures. These companies, with their diverse product portfolios, may be better positioned to offset margin challenges in some categories with strength in others. For example, ITC’s cigarette business remains relatively immune to raw material price volatility and was unaffected by tax changes in the recent budget, offering the company some protection from the broader sector’s challenges.

Investor Caution Building
The challenges facing the FMCG sector are already being reflected in market sentiment. Since reaching a peak in late September, the BSE FMCG Index has fallen by 6.2%, indicating growing investor caution about the sector’s near-term prospects. While the long-term fundamentals of the FMCG industry remain strong, the next few quarters may see uneven performance as companies navigate rising costs, weather disruptions, and shifts in distribution channels.

In conclusion, FMCG companies are walking a fine line between managing input cost pressures, adjusting to channel disruptions, and maintaining market share. Investors will be keen to see how management teams across the sector tackle these challenges in their upcoming quarterly results.

The image added is for representation purposes only