Consumer goods companies are desperately looking for the right price-value equation as buyers have started looking at cheaper options across categories following a series of price hikes by firms.
The impact on demand can be more pronounced in future due to the unabated rise in prices of commodities. Consumer companies are aware of this and say the price hikes have been calibrated to prevent a sharp slowdown in volume sales. Some of them have also cut pack sizes.
Other than down-trading, consumers are also opting for smaller pack sizes in shampoos, detergents and hair oils. Analysts have already started downgrading consumer stocks as earnings are expected to come under pressure. Shares of Hindustan Unilever (HUL) fell by 2.8% and Nestle by 2.5% on Tuesday.
Observers say the consumer companies are now skating on thin ice as they need to raise prices without a big impact on demand. Ankush Jain, chief financial officer, Dabur India, told FE: “The inflationary pressures and resultant price increases have led to consumers tightening their purse strings. They are also reviewing discretionary purchases while also down-trading to smaller packs.” He said the situation is extremely volatile due to the ongoing geopolitical environment and the pressure on margins remain. “We are closely watching the situation and will undertake calibrated price increases, besides rolling out cost optimisation initiatives, to mitigate the inflationary pressures,” Jain added.
Companies also say cutting pack sizes any further could impact demand. In the biscuits category, companies are understood to have stopped packs priced at Rs 2 in some regions, while the grammage for Rs 5 packs has shrunk significantly. Shop shelves are flooded with cheaper options in the instant noodles category priced at Rs 10, while Nestle’s Maggi retails at Rs 12. Similarly, among detergents too, unbranded detergent packets are available in shops alongside branded ones. Even within the branded segment, Wheel is preferred as it comes at 115 g for Rs 10, while 80 g of Surf Excel sells at the same price.
An HUL spokesperson said inflation has increased further in the March quarter versus December quarter. “Commodities continue to remain elevated and volatile. We are witnessing consumer volume titration due to the impact of high inflation. We have been able to provide the right price-value equation to the consumer, thereby helping protect our business model in a highly inflationary scenario,” the spokesperson said.
There is near consensus, however, that inflation is affecting consumption. “Cumulative growth, for categories in which HUL is present, was flat with a high single-digit volume decline in January-February. Down-trading is being witnessed towards lower unit packs but not yet towards lower-end brands. The mix is deteriorating both year-on-year and quarter-on-quarter in a quarter where relatively higher mobility should have brought back demand of high margin beauty products. Instead, the customer is tightening their purse strings on premium purchases,” a Motilal Oswal report said.
A Marico spokesperson said the company is taking calibrated price increases in some categories to partially offset the rising costs, but protecting volumes and market share will be its priority over short-term profitability pressure. “As inflation, especially in food, affects overall consumer demand, we continue to focus on relative outperformance through focus on execution and competitive growth,” the spokesperson said.
Marico is faced with some pressure on volumes due to higher price of Saffola in the edible oils segment as some consumers are opting for lower-priced alternatives, according to a recent BNP Paribas report. Meanwhile, the edible oil market has been consistently shifting towards cheaper alternatives, and over the years it has moved from groundnut oil to rice bran oil and now soyabean oil.
According to analysts, the continuous reduction in grammage and price increases could cost FMCG companies some customers. Though both rural and urban consumers prefer buying branded products, they are down-trading as incomes have not kept pace with rising costs.