Food companies are likely to increase grammage of small packs, rather than take straight price cuts on such items, as the FMCG universe gears up to implement the new GST rates.
Why grammage increase is the preferred strategy
Packaged food and beverages such as namkeens, noodles, chocolates, biscuits, instant coffee and juices will now attract 5% GST. No GST will be levied on Indian breads, paneer, and ultra-high temperature processed milk.
“Reducing prices on Rs 5 and Rs 10 packs is simply not feasible because it creates coinage issues. It, therefore, makes sense to increase grammage on low-unit packs,” Mayank Shah, vice president, Parle Products, said.
Food and FMCG firms typically derive at least 40-50% of sales from low-unit packs priced at Rs 5, Rs 10, Rs 15 and Rs 20. Categories such as confectionary operate at lower price points of between Rs 2 and Rs 5, putting more pressure on them to increase grammage, experts said.
Companies also remain wary of anti-profiteering measures that could be triggered if rate cuts are not quickly passed on to consumers.
“We are at the planning stage in terms of passing on the GST tax benefits to consumers. But, we will likely increase grammage on smaller packs and cut prices on larger packs,” Rishabh Jain, chief financial officer at Bikaji Foods International, said.
Impact on brands and consumer welfare
The increase in grammage, Jain said, would be around 6-8% on smaller packs, while larger packs may see price cuts to the tune of 5%, with offers also being introduced to boost sales.
“While we are exploring ways to pass on tax benefits, consumers can expect price reductions in categories that have seen a large decline in tax rates. This includes ice creams, which have moved from 18% to 5%, and ghee, from 12% to 5%. This will boost consumption in a big way,” Manish Bandlish, MD, Mother Dairy, said.
Akshay Bector, MD of Cremica Food Industries, which makes ketchups, bakery products and mayonnaise, says the company will work on adjusting weight, mainly in small packs. “Grammage, which had to be taken off in recent quarters due to inflationary concerns, will come back. This will be done very quickly, notably in low-unit packs.”