India's biggest consumer companies are increasingly choosing to absorb rising costs rather than pass them on to shoppers, a sign that high inflation is squeezing household budgets and forcing businesses to protect sales volumes even at the cost of their own profit margins.
Inflation in India accelerated to an almost two-year high of 5.54 per cent in September, driven largely by food costs. Food inflation jumped to 7.74 per cent, with prices rising sharply across vegetables, fruits, edible oils, sugar and prepared foods. For companies that sell everything from burgers and soft drinks to paint and clothing, that combination — higher input costs on one side and financially stretched consumers on the other — has created a difficult trade-off.
At least 15 consumer-facing companies are now cautious about raising prices or are holding the line altogether, according to company statements and earnings calls. The list includes fast-food operators, paint makers, retailers and beverage bottlers. Their reasoning is consistent: pushing prices up too far risks driving away customers who are already cutting back, and losing a customer is harder to reverse than absorbing a few quarters of thinner margins.
Westlife Foodworld, the operator of McDonald's restaurants in western and southern India, is among the companies taking a careful approach. Its chief executive officer, Akshay Jatia, told Bloomberg News that the company is "quite conservative" about raising prices beyond its standard annual increase, in order to keep store traffic strong. "We need to make sure that we don't shoot ourselves in the foot over there," he said.
The caution extends across the industry. Devyani International and Sapphire Foods India, which operate KFC and Pizza Hut outlets, leading paint maker Asian Paints, and retailer V-Mart Retail have all flagged concerns about an uneven demand outlook as a reason for restraint.
Instead of broad price increases, several companies are trying other ways to manage costs: offering more products at entry-level price points, improving efficiency, and cutting spending in areas that customers do not see.
For some companies, the pressure is already showing up in their results. Varun Beverages, PepsiCo's bottler in India, has warned about lower margins as it holds back on price increases. "There is margin pressure due to raw material price," Varun Jaipuria, the company's executive vice chair, told analysts on a conference call on October 30. "Everybody is under pressure, they're figuring out what to do and how do you negate the cost."
The strain is most visible at the lower end of the market, where consumers have the least room to absorb higher prices. For United Spirits, the Diageo unit in India, the rising cost of living has started to hit lower-income consumers and has hurt its portfolio of entry-level spirits. "The bottom end of the urban consumer is feeling the inflationary pressure," Praveen Someshwar, the company's chief executive officer, said on an earnings call last month.
The challenge extends to food products, including snacks. Analysts at Motilal Oswal warned in a report published on October 15 of the risk that higher commodity costs could weigh on Nestle India. Rather than raising prices across the board, Nestle India is focusing on "operational efficiencies" to cushion its bottom line, choosing to find savings inside the business instead of asking shoppers to pay more.
The picture is similar across the wider consumer goods sector. Companies including ITC, Hindustan Unilever, Godrej Consumer Products, Emami, Havells, Reliance Retail and Aditya Birla Lifestyle Brands are combining selective price increases with cost-cutting measures, seeking to protect demand and sustain a recovery in volume growth.
They are cutting trade investments, rationalising vendor networks to negotiate better rates through higher volumes, and absorbing part of the impact into their own margins.
Godrej Consumer Products chief executive Asif Malbari said inflation across crude oil-linked derivatives, palm oil and other commodities intensified last quarter, resulting in a high single-digit rise in input costs, one of the highest increases in raw material costs in several years. Reliance Retail, the country's largest retail chain, has started absorbing part of the input cost increase to protect demand.
Its chief financial officer, Dinesh Taluja, said inflation was at a two-year high and was weighing on consumers' purchasing power.
Aditya Birla Lifestyle Brands managing director Ashish Dikshit said the company offset cost increases through a 6 per cent price increase, with a larger portion of the additional costs not passed on to consumers. Even so, companies did implement average price increases of 3 to 6 per cent across branded apparel, daily essentials and personal care products, suggesting that the restraint has limits and that some of the burden is still reaching shoppers.
The reason companies are so reluctant to raise prices is that demand itself is weakening. Indian consumption growth is expected to slow to 3.5 per cent in the current quarter, compared with 5.2 per cent in the three months to June 30, according to data from Worldpanel by Numerator.
Suvodeep Rakshit, an economist at Kotak Mahindra Bank, said in an interview that with monetary and credit conditions tightening substantially, discretionary consumption is likely to moderate over the next few quarters.
That has made many consumer brands wary that further price increases could chip away at sales growth. Devyani International, for example, is offering more products at entry-level price points to keep customers coming through the door. "With food inflation firming and interest rates beginning to rise, we expect discretionary spending to stay under pressure," Manish Dawar, the group's chief executive officer, told analysts in a post-earnings call on November 2.
The dynamic reveals how inflation travels through an economy. When food prices rise, households spend more on essentials and less on everything else. For a restaurant chain, that means fewer visits.
For a paint company, it means postponed home improvements. For a snacks maker, it means shoppers trading down to cheaper options. Companies can respond by raising prices, but if they raise them too much, they lose the volume that keeps their business growing.
If they do not raise them at all, their margins shrink. The current moment is one in which many of India's largest consumer companies have decided that protecting volume matters more than protecting margins.
There is also a seasonal dimension. The festive season, which includes Diwali, is traditionally a period of strong consumer spending in India, and companies will be watching closely to see whether demand holds up. A weak festive season would confirm the fears expressed on earnings calls; a strong one might give companies more confidence to pass on costs in the months ahead.
For households, the immediate effect of corporate restraint is that the prices of many everyday goods and services are rising more slowly than the cost of producing them. That is a small relief at a time when food inflation is running at 7.74 per cent. But it is not a solution to the underlying problem: as long as input costs keep rising and incomes do not keep pace, either consumers or companies must absorb the difference, and neither can do so indefinitely.
The coming quarters will test how long this balancing act can last. If inflation eases, companies will be able to rebuild margins without raising prices sharply. If it stays high, the pressure to pass costs on will grow, and the price restraint that has protected consumers so far may begin to unwind. For now, India's consumer giants are betting that holding prices is the best way to hold on to their customers.
(Reporting based on NDTV and Business Standard.)