InvestorQ : How are the FMCG companies like Hindustan Unilever, Britannia and Nestle handling the combination of higher input costs and lower sales?
Archita Jajjoo made post

How are the FMCG companies like Hindustan Unilever, Britannia and Nestle handling the combination of higher input costs and lower sales?

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Rashi Mehra answered.
8 months ago
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As you rightly pointed, FMCG companies are having to contend with a number of serious problems. On the one hand, rural demand has slowed down and on the other hand the input costs have gone up. This has put operating margins of FMCG companies under a lot of strain. Most of the large FMCG companies with the bargaining power in the market are consistently raising prices, but that is only helping them to grow sales value amidst falling volumes. However, the problem of diminishing margins is still there.

A new trend is now emerging in the FMCG space. As products gets costlier due to price hikes, consumers are preferring lower priced products, even if it means smaller sizes. The condition is that it should be easier on the pocket. For example, a 90 gram soap cake is not very different from a 100 gram soap cake, the but price difference does make a big difference to the customer. This was revealed in a study done by market research firm, Kantar, on the trends in the FMCG space.

There are some interesting findings made by Kantar. For instance, one find was that every kilogram of packaged consumer goods sold in India via FMCG outlets between February and April 2022 were 10.1% costlier on a yoy basis. FMCG companies with the pricing power hiked prices of products in sync with the rise in raw material prices. But more interestingly, during this same period, the average pack size shrank by nearly 15%. In a nutshell, the packaging is getting leaner and meaner and is offering a smaller product at lower price.

Essentially, the companies are cutting down on product grammage to save on costs. This concept of grammage cuts is very apparent in the case of product categories like malted food drinks, salty snacks, soft drinks and hair oils. The Kantar study also shows that FMCG packs purchased increased by 15%, indicating that consumers purchased smaller packs, to reduce the impact of inflation on household budgets. Slowdown in volumes was visible in the case of product categories like wheat flour and edible oils.

The Kantar study has also focused on the fact that 37% of the categories actually lost volumes in April 2022. This was most pronounced in the product categories like atta, edible oils, hand wash, floor cleaners, hair oils and detergent bars. The reasons are not far to seek and the consumers are adopting the pragmatic approach of reducing their buying sizes in sync with the pressure on their household budgets. This is called down packaging and has been rampant in the FMCG space for the last few months.

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