Consumer Goods - Packing off the value-for-money deal :: Edelweiss

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The government has issued a notification, Packaged Commodities Rules 2011, which stipulates 20 consumer products to be sold in specific pack sizes. This will not only make the popular price point concept difficult to implement, but also curtail the grammage reduction lever that companies use to tackle inflation, leaving them with no option but to raise prices. However, the industry is lobbying against this new Legal Metrology Act, which is likely to come into force from March 2012. We expect the norm to impact consumer goods companies as the Indian consumer is far more sensitive to price points than to grammage, thereby impacting not only revenues but also profitability of companies. However the company can likely circumvent this rule by declaration 'non standard size under the Legal Metrology (packaged Commodities) Rules, 2011' made prominently on the label of such package.

20 packaged products to be retailed in stipulated pack size

Baby food, weaning food, biscuits, butter, cereals, bread, tea, coffee, edible oil, beverages, milk powder, rice, atta, salt, aerated drinks, mineral water, soap, detergents, cement and paint fall in the list to be retailed only in stipulated pack sizes. Notable exceptions are shampoos, hair oils, chocolates and confectionaries. Certain categories such as detergents and milk powder have no restriction below 50 gm.

Frequently used grammage reduction  strategy to go for a toss

Consumer companies have been reducing pack sizes while keeping prices constant for the past few years to counter raw material inflation, effectively charging the consumer the same for less to protect their profitability. So, while coffee brands (170 gm and 175 gm packs), detergents (713 gm and 400 gm), tea (490 gm), toilet soap (70 gm, 90 gm and 115 gm) and biscuits (67 gm, 78 gm and 82.5 gm) were retailed to make it more attractive to consumers, it is likely to be disallowed once the new rule is implemented. Also, promotional strategies such as offering extra on a pack will be difficult.

Price hike unavoidable; affordability to take a hit

Rising inflation, coupled with the new packaging legislation, makes a perfect recipe for price hikes of packaged foods. Also, popular price points such as INR1, INR2, INR5, and INR10 used to woo lower-income groups and new consumers will likely be impacted. This will impact affordability and thereby sales of companies. Promotional strategies such as offering extra on a pack will not be possible now, which may further dent sales of new products. We expect the new norm to impact consumer goods companies. As per the news article, violations will invite fines however as per “The Legal Metrology (Packaged Commodities) Rules, 2011” notification, the company can likely circumvent this rule by declaration 'non standard size under the Legal Metrology (packaged Commodities) Rules, 2011' made prominently on the label of such package.