How are inflation-hit FMCG players protecting their bottom lines?

How are inflation-hit FMCG players protecting their bottom lines?

Industry stakeholders share insights on the means being adopted to mitigate the inflationary winds


Mumbai: The domestic fast-moving consumer goods (FMCG) industry has been feeling the impact of unprecedented inflation for several quarters now. The unexpected rise in commodity prices, whether in food, chemicals, or packaging, combined with the spike in fuel prices, exacerbated by increased logistics and shipping costs, is putting pressure on FMCG companies, including packaged food companies, while also reducing the share of buyer income available for spending on consumer staples. As the market continues to witness an incremental increase in inflation, it's not only the consumers who are feeling the pinch, but also the manufacturers, leading to a downgrading of sales across urban and rural areas.

With no respite in near sight, how are the FMCG players dealing with the situation? How are brands resorting to innovative ways to mitigate the rise in input costs and deal with the soaring inflation?

Most of the FMCG companies have increased prices of the products, says Kantar South Asia Insights Division managing director Soumya Mohanty. “So, it’s actually the end consumer who is feeling the pinch most. As a result, they are rationalising spends.”

Findings from the latest Kantar Global Issues Barometer report indicates for 74 per cent of Indians, the increasing cost of living and other issues of concern are having an impact on their big life plans. “Customers are however unwilling to cut their spending on essentials, it’s the large ticket high value items which are most likely to bear the brunt most,” notes Mohanty. “We expect brands to optimise their portfolio to rationalise the cost of production and pass on the benefit to consumers.”

Inflation's impact can't be "dealt with," says White Rivers Media co-founder and CEO Shrenik Gandhi. This is why industry leaders are implementing changes that they hope will mitigate the said impact, he adds, pointing out some cost-saving initiatives that major FMCG players have begun implementing.

Can “shrinkflation” be a solution?

Among these methods is "shrinkflation," which has been adopted by several major manufacturers, including Hindustan Unilever, Nestle, Dabur, P&G, Coca-Cola, and Pepsico. According to news reports, Haldiram has cut down the size of its aloo bhujia packet to 42 gm from 55 gm.
HUL, Nestlé, Dabur, Marico, ITC, and Britannia have rolled out price increases of between 5 per cent and 20 per cent since October last year. Dabur India has introduced a mix of pricing actions and cost-control measures, even as companies across the board are using recycled aluminium for cans, cutting costs on advertising and marketing spends, and postponing new launches.

According to Gandhi, some innovative ways FMCG brands are mitigating the rise in input costs and dealing with the soaring inflation are by investing in technology and digital initiatives to increase efficiency, introducing "bridge packs" as a strategy that gives slightly more grammage than the lower-priced pack while charging the customer higher, and by resorting to economical packaging and recycled products.

"The Edelweiss report points out that FMCG companies are integrating systems across suppliers, inventory management, and distributor management, which were previously distinct systems in silos," he noted. "Digital initiatives are being implemented across the board, from supplier onboarding and management to inventory management, distributor management to sales. Even if technology does not directly impact the end product, it will certainly play an increasingly important role in ensuring that it reaches customers faster and generates greater cost savings for these companies."

Increasing the price is not always an answer

For FMCG and packaged food products, India has always been a very price-sensitive market, and the market volumes were at the lower end of the market, catering to the masses. In the Indian FMCG industry, smaller, single-use SKUs at price points of one rupee, two rupees, five rupees, and ten rupees are important.
Hence, consumer companies are finding ways to increase prices without disturbing the grammage in the sensitive segments, priced less than Rs 10, and also protect margins at the same time. For fear of undermining demand in this category, they are considering launching 'bridge packs' at a higher price.

Some manufacturers are using thinner packaging to counter runaway costs in commodities, packaging, and freight. Parle Products is looking at savings from carton configuration—meaning, it is looking at ways to add more packets of biscuits or snacks per carton. Britannia has said the company is bringing in process automation to raise productivity, reducing the distance to market to reduce cost and provide fresh products to consumers, reducing wastage at the factory and in the marketplace, and moving to a target of using up to 60 per cent of renewable energy.

Avalon Consulting partner Santosh Sreedhar agrees that increasing prices is easier said than done in India, which is "a highly price-sensitive" market. However, he adds that beyond a point, this becomes inevitable as commodity pressures increase. “For brands that are operating at these price points, it’s a challenge since the product is sold on price. "In the case of one fruit juice company we are in touch with, the sales dropped as much as 40 per cent when the price of their highest-selling SKU was increased from Rs 10 to Rs 12," he mentioned.

“In my view, in most products, the opportunity to further reduce pack size is low as the companies have maxed out the potential. So, we may see companies now trying to move up the price point. We have already seen this happen in confectionery and shampoos more than a decade ago when 50p products moved to rupee one. There was a temporary dip in sales for many brands, but eventually, the market settled down at the higher price point," he added.

He lists out the following options for FMCG companies if they have to retain margins, apart from increasing prices: reduce pack sizes; change product formulation; reduce packaging/packaging reengineering. Changing product formulation is very much a possibility, but may not be applicable in many product categories, says Sreedhar. "We are not expecting at least the top brands to change the composition, but companies can come up with lower priced variants that help them continue to serve customers at lower price points. Many of the shampoo and chocolate brands have done this in the past where the product in the larger SKUs is different from the ones in the smaller SKUs."
According to Pescafresh founder Sangram Sawant, the quality and freshness of the product, remaining non-negotiable factors, do pose a double challenge for the brand to ensure cost optimisation across functions and efficiency. He said, “Just-in-time inventory, reducing shrinkage, maintaining cold chain across the supply chain links, and introducing technology stacks to reduce the supply chain hurdles have helped us offset a few cost increases.” The brand has currently not decided to hike prices. However, if its procurement costs continue to rise, it will "take a call accordingly."

The Impact on AdEx?

Will the current scenario warrant a decrease in Advertising spends by brands, as marketing costs are known to one of the first to take a hit in uncertain times?

Sawant says that with the introduction of Pescalive, the seafood e-supplier is innovating across the supply chain and marketing functions to control costs. With regards to ad spends, the brand is in the process of building Pescafresh as an overall foodtech brand and will continue to focus on the same for the fiscal, he adds.

Whenever there is uncertainty, consumers need reassurance, and they fall back to familiar and known options, observes Kantar’s Mohanty. So, it will be key for the brands to stay true to their core purpose and talk to consumers about it. For this to happen, communication is going to be important. So, visibility on different medias- TV, Social media will be important and Ad expenditure is unlikely to get reduced, he believes.

Bombay Shaving Company COO Deepak Gupta is optimistic on the impact on Adex as well. Marketing spends is a function of number of units sold, contribution margin and marketing effectiveness, he notes. “For premium brands on a growth trajectory, current situation provides a unique opportunity as reduced ad expenditure from incumbent brands is leading to higher SOV (Share of voice), and lower CPMs (cost per mille) without increasing absolute ad spends.”

“We are increasing our ad spends on key categories with a channel focus to improve TOMA (top-of-mind awareness) and enter into consideration set of prospective buyers. Overall, we expect higher marketing investment from FMCG brands in second half of the year, considering the onset of festive season and easing of inflationary pressures,” he adds.

While mass FMCG brands are resorting to price increase, volume reduction (or both) and cut in marketing and other discretionary spends, for premium brands the effects have been less pronounced as target consumers for premium grooming products are less price sensitive.

According to Deepak Gupta, the brand has been able to grow by investing in strengthening brand equity and maintain gross margin by reducing discounts, promotions and other discretionary spends. 

He takes a more optimistic outlook on the long-term impact of the inflationary trend. “In our view, July-August-September quarter bodes well for FMCG sector as inflation has peaked and festive season is expected to lead to demand revival. Count and intensity of Covid cases have also reduced considerably compared to previous quarters which will lead to incremental growth.” We do not expect any price hike or volume reduction as brands will invest to gain higher share of wallet, Gupta adds.

New-age integrated sales and distribution SaaS platform FieldAssist CEO Paramdeep Singh Anand that connects CPG businesses to the broader value chain too holds on to a positive stance. “According to a recent report, the inflation rate in India is expected to reach five per cent by March 2023, that is a dip of two percentage points. Recently the government has asked FMCG companies to reduce cooking oil prices. Amidst these developments, it is difficult to say if inflation will rise further.”

This is to give some respite to the CPG companies who have been dealing with the trilemma of raising prices, cutting margins or cutting corners, he adds. “It is clear that we have reached the saturation point where companies that have been reducing grams without impacting prices cannot do so anymore for having reached the threshold. A similar statement could be said of companies increasing prices. That leaves many with the option of adopting strategic moves to stay in the race.”

Strategies such as using technology to identify “golden stores”, or the twenty percent stores that sell eighty percent of your products would help in optimising assortment, price, promotions and share of shelf, says Anand. “Another strategy could be optimising advertising costs by targeting new-age platforms to tap audience, for instance gaming sites, or utilising influencer marketing in untraditional ways. This will reduce expenditures and help utilize funds optimally,” he adds.

Apart from reducing price and volume, FMCG brands are looking at each line of P&L to optimise cost. Reducing advertising spends, increased focus on hero SKUs to get scale advantages, premium product innovation, reducing consumer promos and discount, improving sales mix to deliver higher gross margins, allocating higher spends for more capital efficient channels and top customers etc are some of the additional ways that industry stakeholders cite to mitigate input cost pressures, other than supply side measures.