The surge in raw material costs following the war in Ukraine pushed several FMCG companies to adopt shrinkflation to ensure there is no impact on the fragile recovery in demand
New Delhi: Shrinkflation or reducing the size or quantity of a product while keeping the price unchanged was a little-known term in India but a surge in raw material costs following the war in Ukraine pushed several FMCG companies to resort to such a practice to ensure there is no impact on the fragile recovery in demand.
And when they exhausted all options, FMCG (Fast Moving Consumer Goods) companies raised prices. Now, they are hoping to recover the lost ground in 2023, with a recovery in margins and volumes, especially from the distressed rural areas amid softening commodity prices.
FMCG companies are “cautiously optimistic” and expect the rural market, which accounts for more than one-third of the overall sales, to bounce back in 2023 riding on a good harvest season, government impetus, and improvement in farm income. Besides, they expect the tailwinds of emerging channels like modern trade and e-commerce driving urban demand, and from a rise in premium discretionary categories.
Besides, the FMCG industry, which witnessed a seismic shift in omnichannel growth with sales significantly outpacing in-store growth across metro cities, expects the trend to continue and the strategy will be to focus on product and consumer experience innovation, prioritising profitable channels.
Just when demand seemed to be recovering, a war in Ukraine sent commodity prices shooting up early this year. To tackle high raw material costs, several FMCG companies downsized product packets while keeping the price unchanged. Dubbed ‘shrinkflation’, this effectively means consumers are paying the same for less of the product.
But with Covid infections receding and the economy opening up, the demand started to recover in the last quarter of 2022. And FMCG companies, who were severely hit during the previous two years because of the pandemic, are hoping things will improve in 2023.
“We are cautiously optimistic about the year 2023 and hope to see a revival in rural demand in 2023. The urban demand growth will continue to be driven by emerging channels like modern trade and e-commerce,” Dabur India CEO Mohit Malhotra told PTI.
The industry has seen a double-digit price hike in 2022. A recent report by data analytics firm NielsenIQ said the FMCG industry witnessed an overall volume decline of 0.9 percent in the September quarter compared to the preceding three months.
Emami Vice Chairman Mohan Goenka said high inflation and rural slowdown continue to be the areas of concern but commodity prices have started easing.
“Though from October onwards, we are witnessing easing of commodity prices, however, its benefits can only be realised by the next financial year. We expect a rural bounce back by 2023 riding on a good season, government impetus and improvement in farm incomes,” he said.
Britannia Industries Executive Vice-Chairman & Managing Director Varun Berry said post-pandemic demand has stabilised quite well. However, on the cost and profitability front, commodity inflation remained on the boil on the back of rising inflation in flour and milk products, he added.
“In general, commodity prices are not softening right now. However, we do hope that they should come under control going forward. The only commodity which is softening right now is palm oil while wheat prices are on the rise and sugar has been stable. Hopefully, as we move forward, things should come under control soon,” he said.
In 2022, the FMCG industry had the higher contribution of new launches across key categories as companies introduced new pack sizes amid inflationary pressures.
PepsiCo India President Ahmed ElSheikh said, “as we move forward, the strategy will be to focus on product and consumer experience innovation, prioritising profitable channels, diligently managing SKUs, and driving execution and productivity across the system.”
This decade is a decade of India and PepsiCo is focused on building capabilities, availability and expanding penetration while driving category innovation, he said.
According to Tata Consumer Products Ltd MD and CEO Sunil D’Souza, two key trends that gathered pace during the pandemic were increased focus on health and wellness, and digital adoption and those will continue in the FMCG sector.
“We think these trends are here for the long term and this will continue to influence our innovation agenda as well as our marketing and sales and distribution,” he said.
However, D’Souza also said that inflation, costs and macroeconomic volatility are areas of concern. So, it will be important to balance margins while remaining focused on driving growth momentum, he noted.
In a report earlier this month, Crisil Ratings projected FMCG companies’ revenues to grow between 7 to 9 per cent next fiscal.
Marico MD & CEO Saugata Gupta said, “we expect to see a gradual improvement in the margin pressure and cost pressure and are hopeful of a recovery in rural sentiment. As of now, the urban consumption and premium segment is much better placed especially because the premium discretionary FMCG segment had a far lower base last year, especially in categories that were related to outdoor consumption.”
Marico aims to deliver “at least mid-single digit volume growth in H2” and “expects digital portfolio to keep growing every quarter till it reaches Rs 450-500 crore mark in FY24,” he said.
Nestle India will continue to strengthen its RURBAN strategy and there will be a key focus supported by distribution expansion and portfolio tweaking.
“In addition, technology and data will also form the core of Nestl India’s future growth story,” a Nestle India spokesperson said.
Besides, the FMCG companies would also invest in the expansion of production capacity and expand sales network in the rural markets.
“In FY 2023-24, we are adding another greenfield factory in Bihar at an investment of about Rs 275 crore. We are also looking at higher investments to support our innovations, which will be critical for the next phase of growth,” Britannia’s Berry said.
Sluggish rural demand along with higher inflation is set to mute revenue growth of the fast-moving consumer goods (FMCG) sector at 7-9 percent this fiscal and the next compared to 8.5 percent in the previous fiscal, a recent report said. The report attributes the tepid revenue growth to the many price hikes the FMCG companies effected during the year to cushion the impact of surging input costs. Read more about it here.
