FMCG companies experiment with price to combat inflation

Consumer goods companies are defending their freedom to experiment with price elasticity of their products, while distributors are seeking some method in the madness.

FMCG companies derive a big chunk of incremental - and, sometimes, overall - sales in rural markets where offering less for the same price is their defence against inflation. This involves altering production processes at extra cost and absorbing some of the raw material price inflation.

At the other end of the spectrum, it is relatively easier to print higher prices on bigger packs. But that segment of the market grows at a far more sedate pace. FMCG companies use buyers of large packs to cross-subsidise the entry-level buyer. However, their attempt is to push her up the grammage ladder. That is where bridge packs, offering better price-weight value, come in. These packs have mushroomed since the pandemic and are clogging up distribution networks.

Three factors are driving this trend.

First, hyperinflation in commodity prices during the pandemic forced companies to redraw their stock keeping unit (SKU) plans.

Second, loss of purchasing power led to rural consumers to down-trade among brands as well as unit size.

Third, retailing formats are broadening, creating demand for multiple pack sizes.

Beyond these, there is a marketing imperative in offering multiple price points to introduce products to newer buyers and then scale up their demand for personal goods. Defending price points has its limits, though, with its effects showing up in volume growth, a number closely followed by investors in FMCG companies.

Distributors are seeking a four-tier structure of SKUs that address key aspects of FMCG pricing strategy - growing the market and retaining market share. Producers, on their part, need to focus on competitiveness and business model. The sector has weathered the worst of cyclical factors driving miniaturisation, but are yet to overcome the structural changes. Penetration is a key FMCG metric that suffers when the distribution pipeline is overwhelmed.