When Niche Gets a Mass-Market Push

FMCG Companies Adapt Pricing and Packaging Strategies to Retain Consumers During High Inflation in India

Source and Citation: Excerpts from “When Niche Gets a Mass-Market Push” published in The Economic Times on January 27, 2024.

Table of Contents

Analysis of this News for a Layman

The article delves into how Fast Moving Consumer Goods (FMCG) companies in India are grappling with the challenges posed by high inflation. With a surge in prices for raw materials and other operational costs, these companies have responded by increasing the prices of their products to safeguard profits. However, this move renders their products less affordable for low-income consumers. To counter the risk of consumers shifting to cheaper alternatives, known as “downtrading,” FMCG companies are strategically employing pricing and packaging techniques to retain their customer base. For instance, they are augmenting the quantity per package for price-sensitive packs, ensuring consumers receive more product for the same cost. Simultaneously, they are introducing smaller “bridge” packs at lower price points, offering budget-conscious shoppers more economical options. These strategies enable the companies to sustain sales volumes even in periods of high inflation. Nevertheless, the article underscores the limitations of these strategies if broader economic and wage growth remains stagnant.

Impact on Retail Investors

For retail investors in the Indian stock market, evaluating FMCG stocks in this scenario involves considering both risks and opportunities. While FMCG companies are adapting effectively at present, they face potential challenges if inflation persists and consumer spending power remains constrained. This could adversely impact long-term revenue and profit growth.

The pricing power and brand loyalty demonstrated by leading FMCG companies, however, position them relatively well compared to other sectors during economic uncertainty. Investors are advised to scrutinize individual company strategies in adjusting packaging and product sizes to bridge various price points. Companies executing these adjustments adeptly stand to gain market share even in challenging times.

Publicly listed FMCG stocks that warrant analysis include Hindustan Unilever, ITC, Dabur India, Britannia Industries, Marico, Godrej Consumer Products, and Emami. While the ability to pass on costs through flexible pricing safeguards short-term profits, long-term stock valuations will align with consumer income growth, necessitating vigilant monitoring of consumer spending patterns during economic recovery.

Impact on Industries

The FMCG industry confronts the challenge of precisely calibrating pricing strategies amid fluctuating input costs. Maintaining profit margins while ensuring affordability for consumers across income segments is a delicate balancing act. Prolonged inflation could lead to permanent shifts in consumer preferences, impacting the industry’s growth.

Consumer durable and retail industries must assess the demand implications as higher food and FMCG prices squeeze wallet shares for non-essential spending. The impact on downstream sectors necessitates careful monitoring by raw material supplier industries, such as agriculture and edible oils packaging. Reduced consumer spending power could result in a decline in FMCG industry growth rates, affecting supply chains.

The transport and logistics sectors, integral to nationwide distribution of packaged consumer goods, are also affected by input material and fuel pricing. Their profitability hinges on accurately passing on costs to FMCG manufacturers.

Long Term Benefits & Negatives

In the long run, FMCG companies implementing adaptive packaging and product pricing strategies have the opportunity to solidify brand loyalty during economic instability. This instills confidence in their ability to manage fluctuations in input costs over time. Established brands, endowed with pricing power and resources, gain a competitive edge over smaller competitors during inflationary periods.

However, prolonged high inflation without income growth poses a risk, eventually diminishing discretionary spending power and compelling consumers to downgrade to “value” segments. The ability to cushion this impact has limits, emphasizing the need for improved fundamental demand drivers.

Smaller regional players may gain short-term pricing advantages due to lower overheads, potentially consolidating gains unless national brands revitalize rural distribution and marketing in the face of prolonged economic slowdown.

Short Term Benefits & Negatives

In the current high inflation environment, FMCG firms’ agility in executing pricing decisions swiftly constitutes a short-term positive. Their stock valuations and margins are safeguarded by focusing on premium segment demand to cross-subsidize mass categories. Leading firms, such as HUL, with pricing power, are better positioned compared to regional players.

However, this advantage has limitations if downtrading accelerates in the next 2-3 quarters. Rural sales may decline, and urban volumes may face pressure as households tighten budgets, potentially impacting revenue growth. Dependence on pricing hikes alone to protect profits could increase.

Investors are advised to closely monitor quarterly management commentaries for signs of continuing or reversing trends. Key aspects to track include premium versus mass category growth trends, market share changes, input cost commentary, and insights into rural growth and urban demand.

The risk of a reversal in commodity price rise cycles must also be considered. If input costs decline, competitors may regain pricing flexibility lost during inflationary periods, necessitating vigilant monitoring to preempt adverse impacts.

Analysis of Companies Impacted by FMCG Market Shift:

Indian Companies:

Gaining:

Hindustan Unilever Limited (HUL): Strong brand portfolio across essential and premium segments allows cross-subsidization and grammage adjustments. Price power at the top end protects market share.
Nestlé India: Premium offerings like Maggi noodles and KitKat benefit from aspirational demand. Bridge packs cater to value-conscious consumers while maintaining margins.
Dabur India Ltd.: Ayurvedic and herbal products resonate with health-conscious consumers driving volume growth. Rural market focus benefits from credit flow towards small enterprises.
Marico Ltd.: Value-added hair care and edible oils offer both essentials and aspirational options. Strong supply chain and distribution network aid adaptation to changing demand.
Emami Ltd.: Diversified portfolio with strong regional presence caters to diverse price points. Focus on rural markets aligns with improving credit flow to small businesses.

Losing:

Godrej Consumer Products Ltd.: Limited presence in premium segment restricts cross-subsidization options. Rural dependence makes them vulnerable to consumption slowdown.
ITC Ltd.: Cigarettes face headwinds due to health concerns and rising taxes. Hotel and packaged food businesses impacted by discretionary spending decline.
Britannia Industries Ltd.: Focus on biscuits exposes them to value-conscious consumers. Inflationary pressures squeeze margins, limiting ability to adjust grammage.
Parle Products Ltd.: Price-sensitive biscuits and confectionery segment vulnerable to downtrading. Rural market reliance exposes them to slower credit flow and consumption revival.
Baidyanath Ayurved Bhawan Ltd.: Generic ayurvedic products face competition from smaller players during commodity downcycles. Rural dependence limits growth potential.

Global Companies: