One by one, cos making you pay more for less

Pay more for less. The trend in food items seems to have touched other products of everyday necessity too.

Mumbai-based techie Mehul Shroff for one is miffed at having to pay more for fast moving consumer goods (FMCG) such as detergents and toilet soaps even as the content of various pack sizes keeps reducing.

“A bar of soap that earlier sufficed for 15 days now lasts only 12 days. In recent months, I have noticed the size of biscuits, chocolates and instant noodles reduce dramatically while I continue to pay more for these products every few months. As a consumer, I sometimes feel cheated.”

With the cost of inputs ever on the rise, companies are struggling to protect their margins. Yet, a direct price hike to pass on the cost is ruled out as it could impact consumer sentiment. So, they are taking recourse to indirect price hike, through grammage cuts.

The trend seems set to continue, even as most FMCG players have announced price hikes in recent times.

Hindustan Unilever has already indicated it will further increase prices of skin care products, toilet soaps and detergents, through a mix of grammage reduction and price hikes.

ITC, too, has decided to take a direct and indirect price increase of 8% on packaged foods where it has brands like Bingo and Sunfeast.  
Marico, Dabur India and Godrej Consumer Products are also all ready to hike product prices further.

“With inflation going up and raw material prices rising, price hikes are inevitable. Grammage reduction will also continue,” said Gautam Duggad, equity research analyst, Prabhudas Lilladher.

In the last 2 months, Frito-lay India, which makes Lay’s potato chips and Kurkure snacks, has reduced grammage per pack by 10-20%, because it is wary of gambling with its popular price points of RS5, Rs10 and Rs20.

Similarly, biscuit giants Parle Products and Britannia Industries have tried everything from reducing the number of biscuits per pack to reducing the size per biscuit to taking a direct price hike. Parle has been relatively stronger in terms of maintaining prices, unlike Britannia, which has been hiking prices since 2008 —- when prices of key raw materials wheat, sugar, milk and cocoa reached an all-time high.

Consumers continue to pay more for less, often unawares.

“Consumers never count the number of chips or biscuits in a packet. They are hardly aware. Grammage reduction is a phenomenon companies take aid of globally. It is usually done on stock-keeping units (SKUs) where the companies cannot take price hikes. In some cases, like shampoo sachets where companies can neither take a price hike nor a grammage reduction, they use inferior ingredients to save costs,” said an analysts who did not wish to be named.

Cadbury India, the maker of Dairy Milk, Bournvita, 5 Star and Bournville, has continued to employ a combination of grammage reduction and direct price hike. Over a year ago, hit by surging costs of raw materials like cocoa, sugar and milk, it started reducing the grammage per pack while maintaining the price. Over time, most of the company’s products across brands have started to cost double. In fact, just this month, Cadbury has taken an indirect price hike on Bournville chocolates by reducing the chocolate content of pack by 17-18%.

“There is no slowdown in consumer demand yet, but high food inflation and rising input costs are a concern, and could be a dampener to the party we are seeing now,” Anand Kirpalu, managing director, Cadbury India, said on the sidelines of CII National Retail Summit on Wednesday, adding that further price hikes cannot be ruled out. The company will leverage aggressive marketing to grow sales, Kirpalu said.

Nestle India, which makes Maggi noodles, and KitKat chocolates, has also sought a mix of grammage reduction and price hike in last one year.
For FMCG companies, it is a double-whammy where raw material costs have doubled in the last two years, but the entire burden of these increased costs cannot be passed on to consumers.

For consumers too, high food inflation coupled with branded goods becoming dearer has become an everyday tussle.

Industry analysts believe the difficult environment may result in consumer downtrading (tendency to move to cheaper brands) and a cut in discretionary spend. The urban middle class and rural poor will be particularly impacted.
Worsening matters for players in the space is increased competition, which has been pushing up their advertising spends.

“While increasing raw material and competition will lead to margin pressure on companies, food inflation will impact the purchasing power of consumers, causing low volumes in some categories. Increase in raw material prices will be passed on to consumers but with some time lag during which margins will be under pressure,” Chanchal Biyani, research analyst, FMCG, GEPL Capital Pvt Ltd wrote in a report last month.