FMCGs brave it out on small packs

As input costs rise, the dilemma for fast-moving consumer goods (FMCG) companies is, should they guard margins by fresh grammage reductions or offer value till things turn around?

For now, they are preferring to brave it out, even as their eyes keep darting skywards for assurance.

Unlike last fiscal, which became tough for FMCGs due to a very weak monsoon, there is hope crops are likely to be better this time round because of the forecast of a normal monsoon. A good monsoon improves farm productivity and brings down raw material prices.

The prices of wheat, sugar, cocoa and milk had darted up last fiscal, forcing FMCGs to hike retail prices of everything from biscuits to chocolates and beverages.

A majority of the hikes was in bigger stock-keeping units (SKUs), which is retailese for packages.

On the other hand, prices of smaller SKUs weren’t changed; instead, the packs just got smaller in terms of grammage, to offset the cost increase.

Structurally, small SKUs are not very profitable, but since they are bought frequently, they drive volumes of FMCGs, and cater to the needs of a larger base of consumers — the so-called mass-segment.

Samir Jain, head, mass detergents, Hindustan Unilever, said last week at the launch of Ernst & Young’s report ‘The New Market Shehers’ that even as small SKUs are not profitable and are witnessing pressure, there is a need to make products available at affordable rates for consumers, especially in small towns.

“Coinage is a critical issue. It is very important for companies to sell at popular price points because any hike there can result in volumes dipping. But the pressure on FMCG players is likely to ease this fiscal with better monsoon, crop production and food inflation coming down,” said an analyst from Religare Capital Markets Ltd.

He did not wish to be named because he’s not authorised to speak to the media.

Coinage is a neologism, and refers to price points such as Re 1, 2 and 5, where a consumer pays for purchases using coins.
Not surprisingly, for Anand Kripalu, Cadbury India’s managing director, the focus area is a big presence in the popular Rs 2, Rs 3 and Rs 5 price segments.

The company has already launched Cadbury Bytes, Dairy Milk Shots, Perk Poppers, and Perk with Glucose, to reasonable success.

Despite margin pressure, thus, companies are chary of fiddlingwith the tab because of high demand elasticity.   

“Small SKUs are very price-driven. Hikes are not advised due to the price sensitivity of the market. Even as there has been pressure on margins across SKUs, the pressure is more on smaller packs,” said Shalin Desai, senior product manager, Parle Products.

Parle hiked the prices of its large biscuit packs, leaving the smaller SKUs alone.

But Nestle India did not: it upped prices on its small packs of KitKat chocolate a year back, from Rs 5 to Rs 6 and from Rs 10 to Rs 12. The result? Volumes dipped, and the company rolled back the hikes, said a sector analyst.

That’s why most companies preferred to react more through grammage reductions. But it’s unlikely they will go for another round because of volume-share sensitivity.

“Players don’t have the pricing power now,” said Anand Shah, analyst with Angel Broking. “It is likely to return in the second half of the current fiscal.”

Exactly why companies are looking skywards.