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As FMCG fights inflation..

Posted on: August 5, 2008

There’s a lot of hullabaloo regarding the inflation and how it beckons doomsday for the Indian industry. Well, the FMCG industry seems to have tackled it pretty well till date. So here’s a review into their strategies.

Inflation hits the FMCG industry in multiple ways. While the price of raw materials keeps spiralling upwards, the end consumer does not have the ability to take the burden of this price increase completely. To add to this is the pressing need to pay higher salaries, which forms a large part of the fixed cost in this industry. With the increasing clutter and reducing wallet strength of customers, inflation brings an era of high spends on advertising too. It’s not a happy scene everywhere. An Assocham report shows that net profit margins of Marico and Dabur India ltd. recorded a decline of –11.1 per cent and –5.55 per cent on sequential quarter basis owing to the rise in their wage costs by 18.29 per cent and 48.71 per cent respectively.

The good news, however, is that the FMCG industry is growing by 18.8%, partly due to increased prices and by more than 8% volume growth. The strategies have been manifold, tapping opportunities at every part of the value chain. For example, to prevent down trading, the companies have introduced packs with lower SKUs so that the per unit purchase does not pinch the consumer’s wallet. For example, Henkel has introduced a new 400 gm pack of Henko washing powder at Rs 40 and withdrawn the 500 gm pack that used to sell for Rs 46. Some companies with huge war chest have been able to maintain the prices which they are identified with. For example, Parle Agro has not changed the price of Frooti in spite of upward pressure on prices. Soap companies have shifted to cheaper options of raw materials to source their products at a competitive price. Companies are also reworking on their packaging, product line while aggressively pursuing branding exercises to be differentiated in the market.

While the examples show how the smartness with which the industry faces inflation, the question remains if this buoyancy will continue if the effects of inflation are passed on to the consumer in priority sectors like oil and LPG. Will the consumer still buy without any worry?

-Nemo

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3 Responses to "As FMCG fights inflation.."

While the fmcg companies have responded to the infaltion levels prevailing, the effectiveness of these moves are still not clear. While the numbers do suggest that there has been volume growths seen by companies, we have to keep in mind that they are for a quarter in which the effects of inflation had not spiraled down to the consumer. Another interesting aspect to look at would be to see how inflation had affected different categories. Like say packaged and instant food products compared to the soaps and toothpastes.

Typically economic growth is closely linked with FMCG growth. But this time around there is an anamoly. FMCG sector is growing though there is an economic slowdown.

Could one of the reasons be – increased advertising spends by FMCG companies.. forcing consumers to shell more money out.

I would not totally agree with Arpit
Inflation typically hits product categories as a whole and not particular brands. Advertisements help in maintaining the mind share of the product/brand in the consumers mind. So, as nemo has pointed out, innovative product and pricing strategies are required to tackle inflation. Advertisement acts more as a vehicle to communicate these innovations. Advertisement as such cannot act as an enabler in inflationary times.

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