With focus on volume growth, FMCGs to put price hike in cold storage

For 2019, industry pegs contribution of volume rise at 75% for top line and 25% in case of price-led growth

Pricing power in the domestic fast moving consumer goods (FMCG) market is unlikely to stage a comeback anytime soon.

A forecast by market research agency Nielsen, on the trends in FMCG for 2019, points out that volume growth continues to be higher than price-led growth. 

This comes as organised players continue to benefit from the goods and services tax (GST) regime, in addition to a broader distribution push into rural areas, said Sameer Shukla, Nielsen’s executive director, retail measurement services, South Asia. “The rural consumption story will be intact in 2019,” he added.

“Various farm-level initiatives by the government, including agri-credit and direct subsidy transfer, along with orientation on minimum support prices for crops, are expected to boost farm income further. Also, sustained government focus on rural infrastructure and surging non-farm income in rural areas will boost demand, aiding volume growth,” he said.

Industry estimates put the contribution of volume growth to an FMCG firm’s top line at 75 per cent in 2019 and price-led growth at 25 per cent. Shukla endorsed this view, adding that consumer price inflation (CPI) is likely to be under 5 per cent in the coming quarters as agri-product prices remains soft. 

According to experts, crude oil, too, is unlikely to pose a significant challenge for companies despite some volatility. From $86 a barrel on October 3, crude is now down to around $60, data from Bloomberg shows.

Chief executive officers (CEOs) of FMCG firms say price hikes, if any, will be undertaken cautiously. “But don’t expect much pricing action this year,” said Sumit Malh­otra, managing director, Bajaj Corp. “The trend in 2019 will be to keep price hikes down as companies will not want volume growth to be impacted significantly,” he added.

Typically, price hikes by FMCGs are undertaken when the commodity costs inch up. This is aimed mainly at protecting margins. However, experts are of the opinion that aggressive cost savings programmes implemented by companies in recent years have ensured that using price hikes as a lever to protect margins is no longer needed. 

Plus, volume growth itself is becoming an important tool, they said, to gauge the level of demand and penetration of a company’s product in the marketplace as the sector is increasingly becoming competitive. This point was noted by Sanjiv Mehta, chairman and managing director, Hindustan Unilever, in an interview with Business Standard last week. 

He said, “Volume growth has a number of benefits. It helps you get more consumers, if you are driving penetration. If you are driving consumption, existing consumers are using more. Price growth alone is not sustainable.”

In the last two years, volume growth as a contributor to the top line has jumped 13 percentage points, touching 77 per cent in 2018 against 64 per cent in 2017, data from Nielsen shows. Price-led growth, on the other hand, is down to 23 per cent in 2018 from 36 per cent in the year-ago period.

Sunil Duggal, CEO, Dabur India, said companies are also pushing low-unit and affordable packs aggressively across brands in a bid to drive growth. For instance, Dabur has been pushing smaller packs of its Dabur Honey, juices and value-added hair oils in its quest for growth. ITC, on the other hand, has rolled out Rs 10 price-point packs of its premium cookies and refill packs of its handwash products.