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Volume IconHow is 'shrinkflation' helping FMCG companies tide over rising input costs?

FMCG companies are struggling. They have now resorted to 'shrinkflation' to cope with the increased input cost, without passing on the price burden to consumers. Our next report tells more about it

retail, inflation, goods, FMCG

Just as consumers are trying to manage their budgets in the current high inflationary environment, FMCG companies too are resorting to both time-tested and innovative ways to mitigate unprecedented input cost rise.  Companies are going for a mix of both direct price hikes and grammage cuts.

Raw materials like edible oils, wheat, crude oil derivatives, laminates and corrugated boxes that go into making biscuits, soaps, cosmetics and detergents have been on an upswing since the second half of FY21, with geopolitical factors aggravating the inflation. 

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The wholesale food price index inched up to 8.88% in April from 8.71% in March. And Hindustan Unilever’s CFO Ritesh Tiwari recently said that reducing the volume in certain price-point packs is “the only way for us to take price increases”.

The 10 rupee bar of the company’s Vim soap weighs 135 grams now, compared with 155 grams about three months ago, Bloomberg reported. At the same price point, a pack of the crunchy aaloo bhujia made by Haldiram’s is 42 grams now, down from 55 grams. Making the products smaller while still maintaining the same price is termed ‘shrinkflation’.

Akshay D-Souza of retail intelligence platform Bizom also says that when a company is very heavily exposed in terms of revenue to certain price points, tinkering with them is a competitive risk that could result in loss of market share. He said that for many in India, a tea and a small biscuit pack double up as their meal. 

Dabur India CEO Mohit Malhotra has called Rs 1, 5 and 10 as “sacred price points” whereas HUL’s Ritesh Tiwari referred to these as “magic price points”.

Taking a look at how much Low Unit Packs contribute to the sales of some of the top FMCG companies will give a sense of how important these price points are for them in India.

HUL gets almost 30% of its business from Rs 1, 5 and 10 packs, for Brittania this moves up to 50-55% and Parle Products, which makes Parle-G and Hide and Seek biscuits, derives a massive 70% of its revenue and volumes from 10 rupee packs and below.

Speaking to Business Standard, Krishnarao Buddha, Sr Category Head - Marketing, Parle Products said theirfirst step during high inflation is to try and absorb the costs. Price points are extremely critical in biscuits and snacks industry, he says adding that for Rs 10 packs and below, companies always go for weight reduction. Consumers are fine with price increases for packs beyond Rs 20, he says. In the past 12-14 months, Parle hiked prices by 7 to 8% by weight cuts and direct hikes. "I believe that in 2025 Rs 10 will the new Rs 5," he says. 

 Brittania Industries MD Varun Berry recently said that low unit price points in a country like India are impossible to vacate given it has a lot of bottom of the pyramid consumers. It is for this reason that companies go to lengths to protect lower price points, even at the cost of profitability. 

According to Varun Berry, Managing Director, Britannia Industries, the compay is not in any position to vacate Rs 5 segment at this point. He says contributions from Rs 2 and Rs 3 packs has migrated to Rs 5 and above. In the words of Berry, India has a lot of bottom of the pyramid consumers. "Time will tell when to press the pedal on Rs 10 and move on from Rs 5," he says.

Another strategy that has started to come up is ‘bridge packs’. Giving an example, HUL said it introduced a new size between its Rs 10 and Rs 35 Lifebuoy soap which gives better value for consumers while ensuring affordability and at the same time gives scale to the manufacturer. HUL is trying to introduce bridge packs across all categories impacted by commodity prices.

Although companies incorporate a range of tactics to overcome inflationary pressures, they have no option but to go for grammage cuts for smaller packs so they do not lose out on market share in a competitive segment where significant volumes are dependent on price-sensitive consumers.

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First Published: May 18 2022 | 7:00 AM IST

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