Standard pack size execution to ease pricing flexibility

Motilal Oswal has come out with its report on FMCG sector. According to the research firm Britannia, Hindustan Unilever and Nestle India would feel the maximum impact of the new packaging regulations in the medium-term.

• FMCG companies will lose flexibility to adjust grammage for increasing realization across 19 product categories including biscuit, soaps, detergents, edible oils, coffee, tea and milk powder.
• Companies need to move to nearest standard unit; will impact volumes and margins in packs priced at INR2, INR3 and INR5.
• Incremental price increases would be difficult in small unit pack, margin management would become difficult.
• Biscuit, toilet soaps and coffee to see maximum impact; BRIT, HUVR and NEST to see maximum impact

Standard pack sizes likely from 1 July 2012: The Ministry of Consumer Affairs has issued a notification to enforce uniform packaging for 19 product categories. The new regulations will come into effect from July 1, 2012. The industry is in discussion with the government for relaxing norms for small packs due to affordability issue. The current guidelines, which gave consumer companies the flexibility to pack and price their products on certain popular denominations, were started in 2004. Companies typically adjust grammage instead of hiking prices, especially at lower price points (INR2, INR5, INR10 and INR20). However, over the years, companies have used this flexibility to boost realizations by reducing pack sizes at popular price points (INR2, INR5 and INR10). As a result, the consumer often ended getting lower quantity than assumed. Unconventional pack sizes also make price comparison difficult as both prices and grammage are tinkered. Brands in the same segment have different grammage, making it difficult for the consumer to arrive at actual product price.

Biscuits, soaps and detergents, edible oils and tea to come under the regulation: The new regulation would initially cover 19 product categories with major ones being biscuits, toilet soaps and detergents. It would also cover paints, baby food, milk powder, tea, coffee and edible oils. There would be still flexibility for detergent powder and milk powder as pack sizes below 50gm have been allowed. The smallest permissible pack sizes in tea and coffee is 25gm, which will impact sale of small sachets, more so in coffee. Baby food packs would have to be multiples of 100gm and biscuits in multiples of 25gm up to 100gm. We expect the new norms to include virtually the entire gamut of consumer products in due course.

New norms may impact volumes, packaging costs: We believe the new norms would impact volume growth in the medium term as companies modify pack sizes. In cases where the pack size has to be increased, there is also a high probability of prices rising. This could impact volume growth, especially for products driven by low price points. Companies would incur a one-time cost for modifying the pack size. They would also need to phase out existing inventories which could lead to an interim period of product availability issues. As consumers take time to get accustomed to new pack sizes and adapt their shopping behavior accordingly, volume growth would also suffer.

Margin management to become difficult: Certain packs are driven by popular price points and are used by consumer companies for margin management to pass on input cost increases. While the initial adjustment might not be much of a problem, barring a few SKUs, changing prices post that would be a hassle. Changing prices will become increasingly difficult as coinage issues arise (coins less than INR0.5 would be phased out from June 2012). Increasing prices by 10- 20% at one go would be very tricky for SKUs having price points of INR2 and INR5. This would result in delayed price increases and companies would try to compensate by hiking prices in larger SKUs. This could have margin implications till prices are rationalized. Britannia , Hindustan Unilever and Nestle India would feel the maximum impact of the new packaging regulations in the medium-term.

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