Consumer Discretionary Growth Faces Margin Pressures Amid Rising Costs

While value apparel retailers and premium brands are driving strong growth, the brokerage said margin pressures are emerging due to higher discounting and rising input costs. The jewellery sector is expected to see exceptional growth led by gold price inflation, wedding demand, and festive purchases, though margins may soften due to product mix shifts.

"Retail expansion remained aggressive across sectors, supporting strong topline growth but weighing on near-term profitability due to higher operating costs," said Systematix in its report.

The sector is witnessing a shift in consumer behaviour, with one-stop shops offering wide assortments at competitive prices gaining popularity in Tier 2 and Tier 3 towns. However, the ongoing Middle East conflict poses risks to consumption and remains a key monitorable for the sustainability of the current demand recovery, according to the brokerage.

The consumer discretionary sector likely witnessed a growth uptick in the March quarter of the financial year 2025-26, driven by strong performance in value apparel retail, premium fashion, and jewellery. Value apparel retailers drove strong growth through store expansion and improved same-store sales, while premium brands continued their steady momentum.

The jewellery sector saw exceptional growth led by gold price inflation, wedding demand, and festive purchases. "The jewellery industry in 4QFY26 has demonstrated remarkable resilience and strong growth momentum, characterised by robust consumer demand despite significant gold price volatility," said Systematix.

The alco-beverages segment saw a divergent performance, with IMFL players leading growth while the beer segment remained relatively weak. The Prestige & Above segment continues to see strong double-digit volume growth, driven by new product launches.

The Quick Service Restaurant (QSR) sector showed early signs of recovery, but demand volatility and LPG-related disruptions kept margins under pressure. Gross margins remained healthy due to stable raw material prices, but restaurant margins remained under pressure due to discounting and negative operating leverage.

The sector is facing several challenges, including rising input costs, particularly in polyester and packaging materials, regulatory challenges in the alco-beverages segment, and demand volatility in the QSR sector.

"Apparel companies are facing potential margin pressure due to a steep increase in polyester prices, which may impact results from 1QFY27 onwards unless these costs are passed to consumers," said Systematix.

Despite these challenges, the sector is expected to continue its growth momentum, driven by increasing penetration into Tier 2 and Tier 3 towns, where one-stop shops offering a wide range of products at competitive prices are increasingly preferred.

- ANI