Why McDonald's, KFC And Nestle Are Avoiding Price Hikes Despite Inflation

India's consumer giants are increasingly absorbing higher costs from surging inflation rather than passing them on to financially stretched consumers, a sign that weakening household purchasing power is beginning to squeeze corporate margins.

Westlife Foodworld Ltd., the operator of McDonald's Corp.'s fast food chain stores in western and southern India, is "quite conservative" about raising prices beyond its standard annual hike to keep store traffic strong, its Chief Executive Officer Akshay Jatia told Bloomberg News. "We need to make sure that we don't shoot ourselves in the foot over there."

Westlife is among at least 15 consumer-facing companies cautious on raising prices or holding the line, with firms such as KFC and Pizza Hut operators Devyani International Ltd. and Sapphire Foods India Ltd., leading paint maker Asian Paints Ltd., and retailer V-Mart Retail Ltd. all flagging concerns about an uneven demand outlook as a reason.

India's inflation accelerated to an almost two-year high of 5.54% in September, driven largely by food costs. Food inflation jumped to 7.74%, with prices rising sharply across vegetables, fruits, edible oils, sugar and prepared foods. Pricing pressure is also spreading beyond groceries, with costs for transport, restaurants and other services picking up, adding to the squeeze on household budgets.

"With monetary and credit conditions tightening substantially, discretionary consumption is likely to moderate over the next few quarters," Suvodeep Rakshit, an economist at Kotak Mahindra Bank, said in an interview.

That has made many consumer brands wary that further price increases could chip away at sales growth. As a result, some of these companies that are putting off price hikes, such as PepsiCo's India bottler Varun Beverages Ltd., are warning about lower margins.

"There is margin pressure due to raw material price," Varun Jaipuria, the company's executive vice chair, told analysts on an Oct. 30 conference call. "Everybody is under pressure, they're figuring out what to do and how do you negate the cost."

For liquor maker United Spirits, a unit of Diageo Plc in India, higher costs of living has started to hit lower-income consumers and have hurt its portfolio of entry-level spirits, Praveen Someshwar, its chief executive officer, said on an earnings call last month. "The bottom end of the urban consumer is feeling the inflationary pressure," he said.

That challenge extends to food products including snacks, with analysts at brokerages such as Motilal Oswal warning in a report published on Oct. 15 of the risk of higher commodity costs weighing on Nestle India Ltd.

Indian consumption growth is expected to slow to 3.5% in the current quarter, compared with 5.2% in the three months to June 30, according to data from Worldpanel by Numerator.

"We are seeing a kind of short-term stress on the budget," Manoj Menon, the Mumbai-based director for commercial at the market research firm, said in an interview.

The signals on consumption are mixed. Tax collections and digital spending in India remain strong, suggesting consumers are still spending for now, even as surveys point to growing strain beneath the surface. HSBC Holdings Plc's gauge of 100 growth indicators showed the breadth of economic expansion narrowing in September.

Domestic activity is likely to soften after December as elevated costs erode consumers' purchasing power, according to a note by HSBC economist Aayushi Chaudhary. She expects growth to moderate in the second half of fiscal 2027, amid weaker demand from the informal sector, rising costs and tighter financial conditions.

To avoid hurting demand, consumer-goods maker Devyani is offering more products at entry-level price points, Manish Dawar, its group chief executive officer, told analysts in a post-earnings call on November 2. "With food inflation firming and interest rates beginning to rise, we expect discretionary spending to stay under pressure," he said. 

Instead of raising prices across the board, Nestle India is focusing on "operational efficiencies" to cushion its bottom line from higher costs, the company said last month when it reported second-quarter results. The caution follows price increases by Nestle and other big consumer companies earlier in the year after commodity costs surged amid the Middle East conflict.

For now, the annual festival season may provide a buffer, with demand for staples expected to remain resilient as spending builds toward Diwali in November. This period usually sees strong spending patterns and historically has accounted for nearly a third of annual sales for many consumer companies. 

Still, the disconnect between headline growth of around 7% and "what households and businesses are experiencing on the ground raises concerns about the strength of the consumption outlook," Shumita Deveshwar, an economist at TS Lombard, said in an interview. "The big question is how much of the cost burden companies can absorb before it starts weighing on demand."

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)