Mini packs, major dilemmas: FMCGs tackle shrinking margins, pricing woes

Fast-moving consumer goods (FMCG) firms are currently evaluating their entry price points of Rs 5 and Rs 10, burdened by escalating input costs and food inflation. Those unwilling to abandon the low-priced segment are contemplating a reduction in grammage due to significant increases in the prices of commodity inputs such as palm oil, coffee, and cocoa, which have risen by 50-60 per cent over the past year.

 

“Rs 20 is becoming the new Rs 10,” Krishnarao Buddha, Senior Category Head at Parle Products told The Financial Express. He noted that the Rs 20 price point currently contributes approximately 12-14 per cent to food companies’ revenues, a figure expected to rise to about 25 per cent within the next three-to-four years as firms aim to expand this segment. However, he added that the Rs 5 and Rs 10 price points are considered “sacrosanct.” “We may reduce grammage, but we will not abandon these price points,” he stated.

   

According to data from Kantar Worldpanel, the Rs 5 price point presently accounts for around 32 per cent of volumes for FMCG companies, while Rs 10 packs contribute about 23 per cent, and those priced at Rs 20 represent roughly 12-14 per cent.

 

Industry executives have observed a decline in the share of the Rs 5 segment within the FMCG market, which was 35 per cent two years ago and is expected to decrease further. Predictions indicate that the Rs 10 price point will grow and reach 25 per cent in terms of FMCG volumes, though it may plateau as focus shifts to the Rs 20 price bracket.

 

Shifting price points and market dynamics

 

In October, Suresh Narayanan, Chairman and Managing Director of Nestlé India, said that the company “never wanted” to exit the Rs 5 segment. “But the situation became untenable,” he added. “Sustaining it at such substantial losses would have permanently eroded the company’s margins.” Narayanan explained that the company transitioned from Rs 5 to Rs 7, and subsequently to Rs 10, which now comprises 16-20 per cent of their business.

 

Some firms are also contemplating price increases. “We view this as a short-term challenge and believe we can recover margins through careful price adjustments and cost stabilisation,” said Sudhir Sitapati, Managing Director and CEO of Godrej Consumer Products, in a Q2 earnings statement. Other executives have expressed concerns about the squeezing of urban consumption, which constitutes 65-68 per cent of total FMCG sales.

 

A partner at a leading consultancy told The Financial Express that companies are unlikely to abandon these price points and may opt to reduce product size to maintain margins. “I believe these price points are here to stay, but input costs are currently very high,” he said, requesting anonymity.