Inflation and continued price hikes by the consumers weighed on the sales of the FMCG companies in the quarter-gone-by as most players in the segment reported a dip in the volumes. Owing to the trend, the consumers have also started moving to low unit packs (LUPs), indicated Mohit Malhotra, CEO, Dabur India.
“Downtrading is happening across the board. Even in urban India, we are finding downtrading across our portfolio – be it shampoo, hair oil, or oral care. Our price points of Rs 1, Rs 5, Rs 10, and even Rs 20 are faring significantly better than larger packs with an exception of modern trade and e-commerce,” said Malhotra in a post-earning call on May 5.
Malhotra shared that the trend is more visible in its brands such as Babool, which have a significant share of rural sales. The downtrading across segments is a result of price hikes introduced by FMCG companies as they battle inflation on several fronts. Dabur, for instance, took price hikes in the range of five-six percent in the fourth quarter to offset the impact of inflation. However, the move has impacted the buying behaviour of consumers, whose daily purchase basket has swelled by several times due to inflation.
Shrinking package sizes in FMCG
Packaged consumer goods categories such as beverages, confectionaries, commodities, homecare, personal care, and packaged food have seen higher sales of LUPs as compared to medium and high unit packs in rural and urban areas in recent months, data from retail intelligence platform Bizom revealed.
Beverages, for example, witnessed a 3.1 percent growth in the sales of low unit packs in the urban areas in the fourth quarter as compared to the first quarter of FY22, the data showed. Medium packs similarly, witnessed 3.1 percent growth while large packs saw a decline of 6.2 percent, as per Bizom data. In rural areas, LUPs in the beverage category grew by 5.5 percent, while large packs declined by 14.7 percent, during the above-mentioned period, said Bizom.
Home care witnessed a 5.8 percent and 3.5 percent jump in the sales of LUPs, in urban and rural areas, respectively, while large pack sales declined by 1.9 percent in the rural areas, showed Bizom data.
The downtrading has also impacted FMCG sales volumes. According to Nielsen data cited by industry sources, shampoo as a category has seen a decline of 2 percent in sales volumes, while oral care by 2 percent. The FMCG industry overall has seen a value growth of about 1 percent in Q4 and a volume growth of -0.8 percent.
Rural concerns remain
Even as FMCG companies grapple with inflation, rural demand has taken a hit.
“For Dabur, the past couple of quarters, rural was firing ahead of urban. But this quarter we saw a liquidity crunch and demand compression in rural India,” said Malhotra of Dabur.
The impact on demand has made it challenging for companies to pass on the price increase due to inflation in key commodities to consumers and dented their margins. Dabur saw a gross margin contraction of 130 basis points in Q4.
“The biggest impact of inflation is on the oil basket so commodities like sunflower oil, rice bran oil, palm oil...all of these categories are still up anywhere between 35-50 percent year-on-year. Most impacted are companies who have oils in their portfolio,” said Malhotra.
Dabur tried to offset the impact by increasing prices in the food, business, and healthcare business where it is a market leader in several categories and has a competitive advantage. However, Malhotra indicated that the company has not been able to increase prices in the hair oil segment due to competitive pressures.
Going ahead, the company expects inflation to climb unabated for at least the second half of the year. “We expect inflation to be in the range of 7-8 percent in the next quarter,” said Dabur CEO.
The company also expects an impact on its margin for the next two quarters due to inflation and the tepid demand scenario.
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