FMCG cos panic over rules that mandate standard pack sizes

Come July, sales of several FMCG giants including Hindustan Unilever, ITC, Britannia, Parle and others could take a hit while consumers shell out more for biscuits, tea, coffee, soaps, detergents, cereals and packaged water. This is because Packaged Commodities Rules, 2011, make it mandatory for FMCG firms to follow standard pack sizes from July, which is currently not the case.

The new norms bar sale of FMCG products in sachets and smaller packs with irregular pack sizes.

For FMCG majors, smaller pack sizes generate 35-60% of the revenues across categories due to less content and rounded price points of Rs 1, 5, 10, and 20. For consumers, such sizes means access to affordable products. A shift to standard packaging will mean higher retail cost of products which may dent sales.

As per the new law, FMCG companies cannot sell 19 product categories in current unconventional arbitrary pack sizes like 65, 73, 85, 92, 175, 425 (grams/milliliter, whichever is applicable). Instead, all such products will have to be sold in standard pack sizes like 25, 50, 100 and multiple of 100 units (g/ml). Tea or coffee can only be retailed in 25g, 50g, 100g, 500g, 1 kg and thereafter in multiples of 1 kg pack sizes as opposed to 425s or 712g currently sold. In categories like detergents, milk powder and baby food among others, weight above 50g must be be in multiples of 100 gms and below it will need to be multiples of 10g. Categories like detergents, tea, coffee, soaps are expected to face the brunt of the new rules as they are sold in varied weights.

FMCG majors say they are not ready for the shift, but food ministry is in no mood to extend the deadline. Food minister KV Thomas maintains these measures are being taken to stop companies from misleading consumers. |?The rules will help consumers make informed choices,? Thomas had told FE recently. When asked if the ministry will yield to industry demands for an extension of the deadline, a senior official said: ?The food ministry is not supporting any further extension. July 1 deadline holds.?

FMCG companies rely on grammage reduction to avoid taking price increases and exit the strategic stock keeping units (SKUs). Therefore, several FMCG firms anticipate slippage in revenue, profit and market share in the short term as a direct impact of adhering to the new rules.

Ramesh Chauhan, chairman of Parle International said the move will create chaos in the industry. ?Many companies will close down. This is impractical for the water industry where 80% of the market belongs to low-priced economy packs.?

?I cannot understand this new notification because it seems to be depriving the lower income group consumers from buying many things. I do not know where in the world the government restricts the size of packages,? Chauhan told FE.

ITC Foods CEO Chitranjan Dhar said: ?Generally, consumers prefer coinage-friendly price points. With the implementation of the new rule, the situation will become more difficult for FMCG marketeers?. According to a top executive of a leading FMCG company making biscuits, the new rule will impact sales and profits. ?With the launch of economy packs, we are now reaching out to more consumers. The new rule will impact us for sure.?

Pravin Kulkarni, GM, Parle Products said the new rule will not be good for consumers. ?This will significantly increase the maximum retail price (MRP) per kilo. The new rule will impact all biscuit companies in India,? Kulkarni told FE. Agrees MC Appaiah, the COO of Duncans Tea: ?There will be a series of price increases and dip in profits for companies who have gone about very aggressively promoting non-standard packs.?

Even analysts and sectoral experts agree. Said Nitin Mathur, FMCG analyst with Esprito Santas Securities: ?Lower SKUs are the key growth drivers for most of the consumer products, especially in rural India. Around 60% of shampoo sales comes from sale of sachets. FMCG companies rely on grammage reduction to avoid price increases. Companies will have to take selective price increases and will have to turn to improvements in operational efficiencies for profitable growth going forward.?

However, not all FMCG firms are averse to switching to standard packaging. Appaiah of Duncans Tea said: ?We feel this is in the right direction as the consumers are benefited and not misguided. We are prepared for the change since there was sufficient time given by the government.?

The rule was notified in October 2011 and had to come into effect from April 1, this year. However, after representations from the industry, the food ministry gave an extension till June 30. However, food processing associations have asked for yet another one year extension till July 1, 2013 which is not being considered, sources told FE.

Other measures for standardised packaging include prohibiting use of a rubber stamp for indicating month and year of manufacture of the product. Besides, packages containing more than 10g or 10 ml will require all the statutory declarations. Under the new measures, the MRP inclusive of all taxes would not mention price in paisa but will be rounded off in rupees.