Inflation bites FMCG margins, wears down Q2 ad spends

In the second quarter of the financial year 2024-25, FMCG companies rebounded with improved operating revenues and a visible surge in incomes. However, alongside the sweet returns came a bitter challenge.

Profit margins took a hit due to inflationary cost pressures, particularly on palm oil—a critical ingredient in widely consumed products such as bread, instant noodles, soaps, shampoos, and more. This squeeze on profitability affected business strategies and led to cautiousness in advertising spends.

How palm oil pushed margins down and ad budgets took a hit

As per Hindustan Unilever’s estimates, crude palm oil saw a 10% increase in prices in FY25 Q2 when compared to the same quarter last fiscal. Similarly, there was a 5% increase in the commodity’s pricing in the same period.  This resulted in their margins turning out to be 23.8% for Q2’25, which was a drop of 2% from the second quarter of FY24.

This pressure shaved their margins down to 23.8% in Q2 FY25, a 2% dip compared to the same period in FY24.

To ease the strain on expenses, they also pulled back on advertising spends, adopting a more cautious approach to their marketing efforts.

Hindustan Unilever’s advertisement and promotion expenses fell 13% in Q2 FY25 to Rs 1501 crore, compared to Rs 1742 crore it spent in the same quarter last year. This figure was Rs 1,681 crore in the quarter ended 30 June, 2024. 

Companies were forced to recalibrate their marketing budgets, focusing on high-ROI campaigns while cutting back on discretionary spends, which in turn influenced the broader advertising ecosystem.

Then there was Dabur with EBITDA at Rs 704 crore for the second quarter of current fiscal but this same figure was at Rs 777.3 crore in the corresponding quarter last year, a YoY drop of 9.4%.

During Q2 FY25, Dabur’s advertisement and publicity expenses turned out to be Rs 225.63 crore, 4% less than Q1 FY25 when it was Rs 235.89 crore but also 4.2% higher than Q2 of FY 2023-24.

Dabur CEO Mohit Malhotra believes in this quarter, the sector faced challenges from heavy monsoons, floods, and high food inflation, which slowed down urban consumption, especially in the beverage category. “However, rural continues to be resilient and has outpaced urban growth for the last 3 quarters. We believe urban consumption has bottomed out and should see an improvement going forward.” 

Moving on to, Godrej Consumer Products Ltd, the FMCG company’s standalone EBITDA margin was at 24.3%. The already high prices were further exacerbated by the import duty on oil, Sudhir Sitapati, Managing Director and CEO, GCPL, said in the media release for the financial report. 

Contrary to the industry trend, their advertisement and publicity expenses for the quarter ended September turned out to be Rs 363.95, 10% higher than Rs 330.82 crore in the preceding quarter. But 0.5% less than the corresponding quarter of FY24.

Britannia also shared that slight inflation in palm oil in Q2 '25 is because of a demand and supply situation, which is creating shortages in the countries of origin, which are Malaysia and Indonesia. “The inflation is about 45% over Q1 and the reason for that is import duty of 40%,” stated Varun Berry, Managing Director and CEO, in their earnings call.

Even though palm oil was the major contributor to inflationary pressures on leading FMCG players, coffee, tea, tobacco leaf and other commodities etc., weren’t any better. ITC stated they witnessed inflationary headwinds too across several key inputs (viz. edible oil, wheat, maida, potato etc.) during the quarter.

Nestle India shared commodity prices remain elevated especially for coffee and cocoa, with prices of cereals and edible oils also being accentuated with recent developments.

Other reasons

According to Britannia, the prices of real estate have gone up and so have the rentals, which is creating stress for most consumers in large cities and metros. In their earnings call, Berry said: “50.8% of the workforce is non-salaried in urban areas and the non-salaried have seen a nominal increase of 3.4% in earnings over the last 12 months, while the salaried class have their earnings have gone up by about 6.5%. So there's stress in almost 51% of the workforce sitting in urban areas.”

This is creating a demand shortfall as far as urban and especially metros are concerned, he further explained.

Dabur’s Malhotra said, “Over the past couple of years, the brand has witnessed a market shift in consumer buying patterns in favour of quick commerce, driven by the convenience this channel offers.”

To address the changing dynamics in the marketplace and support their distributor partners in tiding over the challenges, Dabur said it took a proactive decision to rationalise inventory in the GeneraI Trade, which resulted in a temporary dip in states during the quarter. However, the move has resulted in improving the long-term health and hygiene of their business, paving the way for healthy growth going forward.

Stock speak

Nestlé India’s stock showed steady growth in Q2 FY 2024-25, opening at Rs 2568.10 and closing at Rs 2689.95, reflecting a 4.7% increase. The stock peaked at Rs 2755.50, highlighting investor optimism, but also saw a dip to Rs 2456.35, indicating some volatility.

Dabur saw moderate gains in Q2 FY 2024-25, with the stock rising 2.3% from Rs 610.95 to Rs 625.20. The quarter’s high of Rs 667.55 underscores positive sentiment around its Ayurveda and natural product segments as per experts.

HUL also delivered a stellar Q2 FY 2024-25 performance, with its stock surging 18% from Rs 2505.10 to Rs 2958.30. The quarterly high of Rs 3028.55 reflects significant investor confidence, potentially driven by robust earnings and successful product innovations.

ITC’s stock had an impressive Q2 FY 2024-25, rising 20.8% from Rs 429.05 to Rs 518.15, with a high of Rs 522.75. Its diverse portfolio, including cigarettes, FMCG, and hotels, likely contributed to this growth, making it a standout performer.

GCPL's performance in Q2 FY 2024-25 was flat, opening at Rs 1398.05 and closing slightly lower at Rs 1393.40, a marginal decline of 0.33%. The stock reached a high of Rs 1516.70 but couldn’t sustain the momentum, likely due to subdued demand in key product categories.

Britannia’s stock surged 15.7% from Rs 5476.50 to Rs 6338.15, the highest point during the quarter.

Mitigation strategies

ITC plans to largely mitigate the current challenging environment through premiumisation, supply chain optimisation, calibrated pricing actions, digital initiatives & strategic cost management.

Given HUL’s assessment, Jawa suggests this price increase is here to stay. They plan to now take calibrated price increases over the course of the quarter to negate to some extent. While crude oil remained benign during the quarter, there has been recent volatility in prices owing to geopolitical tensions.

“We remain vigilant and are watchful of any price fluctuations that seem to persist. In this dynamic environment, we continue to remain agile, taking actions to provide a competitive price-value equation to our consumers,” he added.

GCPL thinks this is a short-term hit and they will recover the margins through judicious price increase and stabilising of costs. “Our focus is on continuing and improving our volume growth story while the palm oil price volatility plays out over the next few quarters,” said their MD and CEO.

Britannia plans take up price increases. Berry said, “We are going ahead and taking a 5% price increase on our entire portfolio. Definitely, the inflation will be more than that and Palm oil will obviously be bigger than that because palm oil prices have gone a little haywire but I think they'll come back.”

The government will take the right measures and the import duty of 40% will, at some stage, be withdrawn and things will get better, as per him. Having said that, Berry stated, “For the time being, we will be careful. I don't think it will have a large impact on our profitability, but it's time to watch out and balance.”