FMCG Brands Dangle Combo Deals To Shore Up Volumes
Most FCMG companies have indicated that price cuts are unlikely despite decline of select commodities.
Makers of fast-moving consumer goods have been ramping up promotions to augment dwindling volumes, even as sustained raw material inflation is making it difficult to avoid markdowns.
Volumes, or the number of units a company sells during a specific period, contracted in the quarter ended June for the third consecutive quarter. Rising retail inflation continued to exert pressure on demand as consumers restrained from spending on non-essential categories, while downtrading and downgrading in essential categories.
Companies such as Britannia Industries Ltd., Hindustan Unilever Ltd., Mondelez India Foods Pvt., Dabur India Ltd., and Procter & Gamble are building on tactical promotions to beat the current volume slowdown, including power packs or bundled offers, as well as buy-more-to-save-more offers on packaged goods to personal care and home care items.
To be sure, the potential last leg of price hikes to cover inflation in raw materials is still pending.
A trip to the supermarket shows that while Mondelez is offering up to 40% off on combo deals of two flavours of Oreo biscuits, Procter & Gamble is offering 3 kg free with a 7 kg pack of Tide detergent powder. Britannia has a Buy-4-Get-1-free offer on Good Day biscuits, while Dabur is offering free Odonil with a 200 ml Sanifresh Shine Toilet Cleaner.
There are plenty of deals across direct-to-consumer websites as well. HUL, for example, is offering 45% off on a combo pack of 1-litre Dove shampoo and 175 ml conditioner on its D2C platform: Ushop.
While most of these planned promotions are happening via modern trade and online channels, not much has trickled to the general trade distributors.
According to a distributor, who spoke to BQ Prime on condition of anonymity, while JioMart is offering a Buy-2-get-1 offer on a 100 gm Dabur Red toothpaste, they haven't been offered such schemes so far. And the distributor was unaware of whether it was Dabur that was offering the scheme or JioMart.
Companies regularly offer incentives to push higher volumes instead of new inventory with offers, said PM Ganeshraam, chief patron of the All India Consumer Products Distributors Federation.
He cited the "high stocking" witnessed at the retail store level in the last week of July as an instance of that.
These offers mainly revolve around products which are directly linked to commodities that have seen some cooling off. Prices of crude, a key input for detergents and packaging, have come off from a peak of $139 a barrel and is now oscillating around $89.60 a barrel. Palm oil, which is used in making noodles, soaps, cosmetics and biscuits, has retreated to $939.29 per metric tonne from peak levels of $1,800-1,900 per metric tonne.
However, Godrej Consumer Products Ltd. has chalked a different plan.
"Our strategy is to have more of media investment and reduce downtrade promotion spend," Sameer Shah, chief financial officer at Godrej Consumer Products, told investors recently.
"If we are going to invest, we will not shy away either, even if it does come at the cost of margins because the benefit of higher kind of media spends will result in sustainable volume growth in the medium to long term."
Why Prices Won't Fall
Most companies, during the post-earnings conference call, indicated that price tags are unlikely to be slashed as despite a decline of select commodities, most key input prices remain high.
Britannia Industries, for instance, said it will take a price hike of about 6-7% in the current quarter to cover inflation.
"Wheat has been the single largest inflation for us. The commodity has gone from 50% inflation to 80% between Q4 FY22 and Q1 FY23. We have taken some prices increases in the first quarter and we will complete that in Q2," said Varun Berry, managing director at Britannia.
Hindustan Unilever's Chief Executive Officer and Managing Director Sanjiv Mehta told investors recently that the prices of several commodities are at decadal highs, despite the recent cooling off of palm oil and tea from its peak.
"The near-term growth will be price-led as inflation continues to impact consumption. The net material inflation, after factoring in all savings, is expected to be lower only in the December quarter if the softening that we are lately seeing in commodities remains," he said.
Companies have also piled up higher-cost pipeline inventory that
was contracted earlier, which could delay any positive impact of the input cost moderation.
"With consumption of this inventory in the September quarter and many commodities like crude oil, caustic soda, and plastic remaining elevated year-on-year, the net material inflation in the September quarter will be higher than the June quarter," said Mehta.
According to Krishnarao Buddha, senior category head at Parle Products Pvt., "a direct price reduction will never happen as despite the recent cool-offs, prices are unlikely to go back to pre-pandemic levels".
Parle has not rolled out any promotions as of now, but intends to do so in September.
"We're in a wait and watch mode amid the current volatility, but customers can expect indirect benefits such as discounts on large packs and freebies next month, when we would be a little more confident of passing the benefits of softening prices that happened in the last couple of weeks in June."
Recovery Ahead?
The fast-moving consumer goods sector, however, is banking on the second half of the year for recovery.
"People are still downtrading where consumers are buying more smaller packs. Other than edible oil, there is no visible shift in consumption pattern as of yet, but we expect things to reverse in the peak of festive season beginning September," said Ganeshraam.
"In the near term, we expect volume growth to be in the positive zone from Q2 under current demand conditions," Saugata Gupta, managing director and chief executive officer at Marico Ltd., said. "We hope to accelerate volume growth to our medium-term target levels of 8-10% in the second half, provided inflation cools off and eases pressure on demand."
According to CLSA analysts, optical volume performance could improve from Q3 given a low base. "This, along with expected easing in raw materials would result in double-digit earnings growth," it wrote in its Aug. 11 note.