Introduction:
The article discusses how FMCG companies in India are shifting focus back to more affordable Rs. 10 price points and moving away from ‘bridge’ packs priced at Rs. 7 and 15. This indicates moderation in commodity price inflation, allowing companies to offer better value propositions to increasingly price-sensitive consumers.
Analysis of this news for a layman:
FMCG refers to Fast Moving Consumer Goods – products that sell quickly such as packaged foods, beverages, personal care items. Bridge packs were introduced by FMCG companies over the past year priced at unusual points like Rs. 7 and 15 instead of more familiar Rs. 5 and 10 price points. This helped FMCG companies maintain margins despite high inflation earlier.
But with commodity inflation cooling off now, companies are finding Rs. 10 packs more viable as they offer better grammage (product quantity) and avoid issues with consumers having to fish for Rs. 3 & 5 coins. Consumers also feel Rs. 10 offers better price-value. So most FMCG cos across biscuits, noodles, snacks etc. are reintroducing Rs. 10 packs while slowing production of Rs. 7 & 15 packs. This should also help fight off local/unbranded competition.
Original Analysis:
The shift back to more familiar price points, especially Rs. 10, indicates the inflationary pressures faced by both consumers and FMCG firms are stabilizing. Companies can now offer better value without compromising too much on margins. This will expand the target consumer base, drive volumes, and fight off alternate cheap products. It also shows the pricing power held by national brands – they recognize that consumers have become more price-sensitive but haven’t had to resort to deep discounting. Instead they are offering virtually the same products repackaged into better value offerings, without any major changes to brand positioning. This reflects pricing elasticity and product portfolio flexibility allowing brands to cater to various consumer segments.
Impact on Retail Investors:
For retail investors, this indicates the operating environment for the FMCG sector is improving. Volumes and revenues should see an uptick across major listed FMCG players like HUL, Dabur, Nestle if they follow suit in offering Rs. 10 price points. This volume growth rather than price hikes will drive topline expansion and support stock valuations.
FMCG stocks are considered defensive given steady demand and the pivot back to value offerings further reduces risks of down-trading. Margins may remain stable if companies balance grammage offered at Rs. 10 and cost control measures. So FMCG stocks present safety and growth opportunity for retail investors. Focus should remain on market leaders as second-rung regional players will face pressure.
Impact on Industries:
The pivot toward Rs. 10 price point will boost demand across FMCG categories like packaged foods, personal care and home care. Manufacturing, packaging will see higher capacity utilization. Demand for commodities like wheat, edible oils will also rise as more affordable packs hit shelves.
Modern retail like Big Bazaar, Star Bazaar may gain footfalls. But Kirana stores in heartland India will benefit more given their personalized service and convenience. Rural demand could outpace urban given bridge packs cater more to lower income consumers.
E-commerce may also see a fillip as discounted packs offered on apps like BigBasket, Grofers, JioMart become more appealing and drive online penetration of daily essentials.
Overall sentiment across the consumption sector will improve as national brands extend reach affordably.
Long Term Benefits & Negatives:
The renewed focus on lower price points can change consumer habits and loyalty long-term. If new Rs. 10 consumers see no discernible change in quality vis-a-vis earlier higher priced packs, it may permanently alter their outlook and trust toward brands and deter them from up-trading later.
This can compel brands to sustain variants at multiple price points instead of temporary ‘bridge’ packs, adding to portfolio complexity. Offering too many SKUs can also strain supply chains and inventory management.
National brands lowering prices also further crowds an already competitive space, leaving little headroom for regional players to operate unless they niche down. This may force consolidation among smaller companies.
But the long-term volume gains for big brands once new customers enter the fold could offset margin pressure. There is also potential for premiumisation once income levels rise.
Short Term Benefits & Negatives:
The obvious short-term gain is increased affordability driving higher consumption, revenues and capacity utilization as more price-sensitive segments open up.
Stocks of FMCG majors may see a re-rating thanks to volume growth, better revenue visibility.
But this demand spike could strain supply chains in the near-term. Manufacturing capacities may need to be ramped up, distribution infrastructure widened, working capital needs may rise.
Marketing spends may also have to increase to ensure adequate brand communication on lower priced variants. But lower individual pack prices can allow for higher volume off-take compared to costlier packs – an advantage in the short-term.
Companies Will Gain from This:
Listed Companies That Can Gain Include:
HUL (Hindustan Unilever Limited)
- As a market leader across various categories like soaps and detergents, HUL has strong pricing power, brand strength, and an extensive distribution network. This puts HUL in a prime position to capitalize on the shift to Rs. 10 price points, maximizing their gains in volume and revenue.
Dabur
- With its mass market positioning, Dabur is well-suited for the affordability push. Its strong presence in rural markets is likely to aid in boosting volumes, particularly in these areas where the demand for affordable products is high.
Britannia
- Biscuits, being highly price-elastic, present a significant opportunity for Britannia. The company has previously managed inflation effectively, and the move to Rs. 10 price points could further enhance its market position by attracting price-sensitive consumers.
Nestle
- The staple status of products like Maggi noodles offers Nestle a considerable scope to expand its household penetration, particularly beyond urban areas. The affordability of Rs. 10 packs could drive volume growth in newer markets.
Marico
- For Marico, the focus on affordability could lead to an expansion in the small packet sizes segment, especially in value hair oils and other similar products. This could result in driving significant growth in these categories.
Godrej Consumer
- In segments like soaps and home care, Godrej Consumer can leverage its distribution network effectively. The focus on value segment volumes may result in these outpacing their premium products, tapping into a more price-sensitive consumer base.
Varun Beverages
- As a PepsiCo franchise bottler, Varun Beverages could see an increased off-take of its products. The lower price points are likely to appeal to a broader customer base, driving sales volume.
These companies have the brand equity, innovation pipelines, and balance sheet strength to rapidly roll out lower-priced packs without significantly diluting operating margins. Market leaders are best positioned to drive category development in this new pricing environment.
Companies Which Will Lose from This:
Public Traded Companies Which May Face Challenges Include:
Emami
- Highly dependent on discretionary categories like skin creams, Emami lacks the pricing power of the market leaders. This might limit its ability to compete effectively in the newly evolving price-sensitive market.
Jyothy Labs
- With a focus on fabric care, Jyothy Labs’ gains from the shift in food pricing may be limited. Earlier high inflation had impacted its products like Ujala fabric whitener, indicating potential vulnerability to market shifts.
Bajaj Consumer Care
- As a dominant player in the hair oil segment with its Bajaj Almond Drops brand, Bajaj Consumer Care operates in a highly price-sensitive market. However, its limited diversification in product categories might pose challenges in adapting to the new pricing trends.
Tata Consumer Products
- With a significant exposure to beverages and away-from-home consumption, Tata Consumer Products might not fully benefit from the affordability push in food products. The company might need to innovate in product and marketing strategies to keep up with market leaders.
Colgate Palmolive
- In the essential category of oral care, Colgate Palmolive faces high competitive intensity. This could necessitate additional investments in branding and marketing to protect its market share in a more price-sensitive environment.
GSK Consumer
- Specializing in malted drinks and health supplements, GSK Consumer currently has limited penetration in the market segments that are being targeted by the Rs. 10 pricing strategy. This could limit its ability to tap into the emerging demand among price-sensitive consumers.
Gillette
- The affordability trend might lead consumers to prolong their shaving cycles, which could impact sales of Gillette’s blades and other shaving products. Adapting to these changing consumer behaviors could be a challenge for the company.
These players have a greater reliance on discretionary and high-priced categories compared to daily consumable staples. Their rural distribution is also weaker in some cases. They may have to consider product innovations and channel incentives to protect market share if leaders intensify affordable offerings.
Additional Insights:
Bridge packs indicate the ability of brands to innovate, be nimble to external shocks, and not remain rigidly wedded to specific price points or pack sizes. This pricing and packaging flexibility focused on consumer needs is the hallmark of resilient brands with longevity and trusted by investors.
Conclusion:
In summary, the renewed focus by FMCG majors on lower price points reflects easing input cost pressures and an affordability agenda targeted at price-sensitive consumers. This should drive higher consumption and volumes – a positive sign for listed FMCG stocks. Industry leaders with trusted brands, innovation capabilities, and extensive distribution networks stand to gain the most even if some margin dilution occurs. However, smaller regional players may face intensified competition. At the same time, consumers may also stand to gain from a wider choice of value offerings for daily essentials and staples.
Citation: By Viveat Susan Pinto, “Low-unit FMCG ‘bridge’ packs go under water”, December 5, 2023, Financial Express, https://www.financialexpress.com/industry/low-unit-fmcg-bridge-packs-go-under-water/2956652/