How inflation and volatility is affecting FMCG companies?

How inflation and volatility is affecting FMCG companies?

by 5paisa Research Team Last Updated: Dec 12, 2022 - 06:08 pm 16.8k Views
Listen icon

For the majority of consumer staples companies, the last 12 to 18 months have seen a decline in gross margin due to unprecedented inflation and volatility in input costs across commodity baskets. However, recent price declines in a few commodities and management remarks are probably to blame for the general expectation of operating margin growth in 2HFY23.

A few essential commodities for FMCG companies have recently experienced corrections. While some commodities, including crude, palm oil, and PFAD, have recently experienced a correction, others, like tea and copra, had already begun to do so earlier this year. Consensus anticipates that this will lead to an increase in operating profit for FMCG companies.

Over the past 12 to 18 months, raw material inflation has been unprecedented across raw material baskets of agricultural commodities, commodities linked to crude, and palm oil. Over the past ten years, the level of input inflation has been among the highest. FMCG businesses were unable to fully pass along price increases to customers because of the fear of the negative effects of price elasticity on volumes due to price elasticity across market segments impacting share of wallet, inflation volatility, and limited scope for grammage reduction due to price-pointed packs. Therefore, a small adjustment in input prices is likely to make up for the difference for businesses. In essence, such a slight reduction in raw material prices is more likely to restore than to increase gross margins.

The demand for FMCG products has been moderate, with many of the categories either declining or remaining stable. 
If the higher consumer price index is retained at all, one of these two outcomes is more likely: 
1) The disorganized may profit. Consumers may likely choose less expensive options or better value propositions given the (still challenging) demand conditions.
2) Market leaders keep their prices while competing brands pass the costs onto consumers.

Consumers are likely to switch to challenger brands offering better value propositions in similar circumstances as in the past. Market leaders and organized players face a similar outcome in both cases—a risk of losing market share.

For example, Marico has been very aggressive in passing on the input correction to end users because it had previously lost market share to unorganized competitors while attempting to postpone passing the benefits or keep some of the benefits during prior commodity inflation cycles. Similar instances with Hindustan Unilever have also been observed in the past.

Since covid, FMCG companies have underinvested in advertising and promotions. In comparison to FY20, they cut back on advertising spending by 190 basis points in FY22. Due to lower advertising rates caused by a lack of competition from non-FMCG companies (non-essential products scaled back their advertising during covid) and FMCG companies (especially MNCs) delaying their new product launches and initiatives during covid, advertising and promotion spending for these companies fell significantly in FY21.

FMCG companies are seeing inflation in their primary operating expenses in addition to advertising and promotion expenditures. Fuel inflation, which raises freight costs, is one of this's main effects. Higher labor costs (talent retention) are also probably to occur. Additionally, a number of optional and non-essential expenses, such as travel, have returned in FY23E. Overall, the opportunity for operating margin expansion will be further constrained by inflation in other operating overheads.

How do you rate this blog?

Start Investing in 5 mins*

Rs. 20 Flat Per Order | 0% Brokerage


About the Author

Our research team is composed of some highly qualified research professionals, their expertise range across sectors.


Investment/Trading is subject to market risk, past performance doesn’t guarantee future performance. The risk of trading/investment loss in securities markets can be substantial. Also, the above report is compiled from data available on public platforms.
Open Free Demat Account
Resend OTP
Please Enter OTP
Mobile No. belongs to

By proceeding, you agree to the T&C.

Latest Blogs
Mukka Proteins IPO Allotment Status

About the Mukka Proteins Ltd IPO The stock of Mukka Proteins Ltd has a face value of ₹1 per share and the price band for the book building IPO has been set in the range of ₹26 to ₹28 per share. The Mukka Proteins IPO will be entirely a fresh issue of shares with no offer for sale (OFS) component. A fresh issue tends to bring in fresh funds into the company, but is also EPS and equity dilutive.

M.V.K. Agro Food Product IPO Allotment Status

Building blocks of the M.V.K. Agro Food Product Ltd IPO The stock of M.V.K. Agro Food Product Ltd has a face value of ₹10 per share and it is a fixed price issue. The price for the book building issue is set at ₹120 per share. Being a fixed price IPO, the question of price discovery does not arise in this case. The M.V.K.

Amazon is set to take on Meesho with its Amazon Bazaar

The battle of the giants in Indian e-commerce is heating up as Amazon is set to challenge local favorites like Meesho and Flipkart's Shopsy with its latest venture, Amazon Bazaar.  In a bid to tap into the burgeoning market of value-conscious consumers, the global giant Amazon is set to disrupt it with its new venture.