Commodities

FMCG players rejig sachet strategy as margin pressure mounts

| | | Updated on: Nov 13, 2021
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FMCG majors seek to retain margins while protecting price points

Grammage reduction, price hikes and a mix of both seem to be the way forward for Indian FMCG companies who continue to grapple with a hit on gross margins; while inflationary trends in key raw materials and commodities refuse to let-up.

Large packs generally see a mix of price hikes and grammage reduction. But at the small value pack or recruiter pack levels (also called low unit priced offerings), things are tricky as they witness a subtle revamp.

Hyper-localisation and cross-subsidisation

Market sources, including distributors BusinessLine spoke to, say companies are repositioning LUPs depending on coinage, convenience price points, demand trends and a possible down-trading fear, to the extent of hyper-localising supplies.

In some cases, packaged food and snacking companies are pushing some premium offerings in packs of ₹5 and ₹10 at the cost of their bottom-of-the-pyramid or value offerings as they look to play on volumes as well as protect margins.

Nearly, 70 per cent of shampoo sales in the country are dependent on packs priced between ₹2 and ₹5. At one point, a ₹1 sachet was an ubiquitous disruptor. But considering the “cost of manufacturing of such low cost sachets” and the corresponding “cross subsidisation probability with larger packs”, such offerings are now restricted to select neighbourhoods or rural hinterlands rather than their previous easy availability.

Also see: FMCG sector: Rural India growth slows down in Sept quarter, says Kantar

Some distributors say ₹2 shampoos or value packs — where three small sachets of ₹2 are clubbed at ₹5 (a ₹1 discount) — are also not uncommon in select markets.

“Let’s be clear, not all ₹1 or even ₹2 sachets are always profitable individually for companies. But, they would rather push these offerings as recruiter or trial packs to ensure that a consumer use their product first before graduating to the more profitable larger packs,” an official of an FMCG major said requesting anonymity.

Market testing

Market sources point out to ITC’s recent offering — a ₹1 pack of Nimyle floor cleaner. Nimyle is a leader in West Bengal and Odisha. ITC is looking at expanding it by geography and there will be a stream of innovations to grow and develop the market. So, it is test marketing the ₹1 sachet in West Bengal to expand further and gain market share from unorganised and local brands.

Grammage reduction

Pointing out to the pain of grammage reduction and its implementation, Varun Berry, MD, Britannia Industries — the country’s largest food company — said during a post earnings call, “When you bring the price of ₹26 to ₹28, you just have to print the price. It can happen. When you’re doing grammage reduction, you have to do trials. Sometimes you have to reduce the size of the biscuit, sometimes you have to reduce the size of the package. So all of that takes a lot of trials and takes a lot of time. And especially for products like cake, it takes a very long time because shelf life and bread has to be tested.”

Cog in the brand wheel

According to Abneesh Roy, ED, Edelweiss Securities, it is very difficult to consider LUPs or value packs as profitable or loss-making propositions, in isolation.

He explained, such smaller packs or sachets are volume generators during slowdown or black swan events. They are a cog in the overall success story of the brand. From formulation change or dilution in case of such smaller packs, to cross subsidizing any loss with family packs to grammage reduction in these smaller packs, FMCG majors, including food companies pull all stops.

Also see: Logistics stocks on a roll as demand perks up

“Would you know if a ₹5 biscuit pack has 10 biscuits or 12 pieces or if cakes of ₹5 offering or ₹20 pack are of the same size? Will you notice if the ₹5 bar of soap is 5 gm or 7.5 gm? Let’s take another example, say, shampoos. If the company gives 3 ml instead of 5 ml what difference do you notice? So there are a variety of levers available to FMCG majors in India. And in most cases consumers do not notice. In case, just saying, there is a loss on ₹2 pack, the company will try to make it up through a price increase in the larger pack of the brand or in its premium segment across brands that it has under its umbrella. Yet again, the top-end buyers won’t notice or bother,” he told BusinessLine .

Market leadership

Explaining pricing strategy, Sanjiv Mehta, CMD, HUL – the country’s largest FMCG player – said when it comes to price point packs (₹5/₹10 or satchets), the price increase happens as one reduces the quantity of product in a pack while protecting the price point.

“While you protect the price point, because of the reduction in quantity, this has an impact on your volume growth coming down even though the number of units may remain same,” he explained during an analyst concall.

“So I think what you need to look at is, when there is a hyperinflation, first, are we competitive? Second, are we able to protect the business model? We look at competitiveness versus other players in the market. We also look at the fundamental metric of penetration. So for us, keeping the consumer franchise intact and protecting the business model when the environment is volatile is very critical,” Mehta added.

Fixed price points

Britannia management said upcoming price hikes will be a mixture of one-third of price rise at consumer-end, and two-thirds of grammage reduction. “So we have to be first movers on pricing. But despite that, we have seen no pressures on market share,” Berry said.

Also see: Global packaged food majors call out India as a key growth engine

According to him, the price of ₹5 or ₹10 offering is fixed (because of the coinage). Consumers shy away if the price is ₹6 and ₹11.

“So you have to do grammage reduction to get a price increase. Things have always been like this. A large part of the portfolio has been on fixed price points,” he said.

Published on November 13, 2021

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