For FMCG companies, packaging is new pain point, even as commodity prices continue to rise

The climb in prices, said industry stakeholders, is mostly on account of rise in fuel prices. Since most packaging materials are derived from crude oil, their prices too, have risen. However, supply chain challenges and unprecedented increase in demand are also contributing to surge in packaging costs.

“There are a number of reasons fuelling the increase in packaging costs ― severe shortage in the raw material for paper required for making packing material is a major issue. Huge increase in shipping container charges globally, inflation, disruption in logistics, and rise in overhead costs are some of the other major reasons leading to increase in packaging costs,” said Chauhan.

For FMCG companies, packaging accounts for about 10 percent, on average, of input costs, according to industry experts. The cost is even higher for low-unit packs or LUPs. Consumers across segments are downtrading and buying LUPs due to inflation, and subsequent price hikes by companies, which means additional costs for FMCG players as they raise the production of smaller packs.

Innovating to cut costs

The companies are looking at ways to optimise the rise in cost of packaging materials.

Parle Agro, for instance, is focusing on re-engineering certain packing materials.

“We are conducting trials to reduce certain technical specifications to be able to achieve the same quality and aesthetics of the material we are currently using. In areas where our business partners were importing material, we are exploring ways of developing and buying the same locally,” shared Chauhan.

“We are worried about securing adequate and steady supply of certain raw materials as there is an acute shortage of certain specialised materials,” said Shah of UFlex.

Other companies meanwhile have started reducing pack sizes or are trying to fit more in the pack to reduce costs. “We reduce the pack size, which in turn, reduces the corrugated box size and brings down transportation costs,” said a top executive at an FMCG company.

According to the industry, the prices of corrugated boxes, better known as cartons, have also jumped by 40 percent in the last one year. These boxes are used to pack and transport finished goods to distributors, retailers, etc.

FMCG companies have been struggling with the duel challenges of inflation and subdued demand for the last few quarters. While their inputs costs have risen considerably on account of inflation in key commodities, a tepid demand scenario has made it difficult to pass on the increase in costs to consumers, which in turn, is denting their margins. FMCG major Hindustan Unilever, for instance, saw its overall gross margin contract by 331 basis points (bps) year-on-year (YoY) in Q4. Dabur reported a 130-bps YoY contraction in gross margins to 47.4 percent due to inflation.

Most companies have projected that commodity pressures would ease off only in the second half of the year.