New Delhi: The government’s 7 June decision to defer implementation of rules clamping down on irregular packsizes of consumer products and exempt packs priced lower than Rs 10 altogether will only delay the inevitable—a price hike—for most companies and, consequently, customers, say analysts.
In a move aimed at preventing companies from coping with an increase in the price of raw materials by reducing pack sizes (or the weight) of their products marginally instead of raising retail prices—a popular trend over the past two years —the ministry of consumer affairs had set a 1 July deadline for phasing out such irregular pack sizes. After companies lobbied against the move, it extended the deadline to 1 November and exempted low-priced packs from the rule.
Cost factor: Shelves stacked with packaged products at a store in Delhi. Photo: Pradeep Gaur/Mint
That will only delay the coming hit to the profit of consumer product companies, said an 8 June report by Kotak Institutional Equities that said the move “may just be going back to the pre-2004 period (when only standard pack sizes were allowed, non-standard packs were not possible): effectively forcing companies to invest more in innovation”.
In a similar note issued on 11 June, brokerage Prabhudas Lilladher Pvt. Ltd said: “We view this as a short term positive, especially, the removal of grammage restrictions on sub-Rs 10 SKUs. However the government’s increased involvement in the packaging/grammage function underlines the continued risk.” SKUs is short for stock keeping units (each pack size of each product is an SKU).
While companies have, on occasion used irregular pack sizes to make their products accessible to more people, they usually use them to protect their margins in the face of rising costs. The new rule could mean an eventual increase in prices, unless companies find another way out, said an analyst. “Most companies in this case will incur a price hike and will not let profit margins be impacted. So either there will be a innovation or some sort of margin squeeze to tackle rising commodity prices,” Manoj Menon equity research analyst, consumer discretionary and staples, Kotak Institutional Equities, said in a phone interview. The companies themselves deny that they will increase prices.
“We will look at maintaining efficiencies in the back end to sustain margins and maintain popular price points, but will not consider passing on the price to the consumers because of this,” said Chitranjan Dar, divisional chief executive, ITC foods division, maker of Sunfeast biscuits. Most of ITC’s biscuit packs are priced below Rs 10.
That holds for almost 60% of Parle Products’ portfolio too. “Since consumers are used to certain price points we cannot increase the prices immediately. So for some products, if we have decent margins we will have to take the hit. If a certain pack is a sizeable amount of our business then we might take the hit and not disturb the price point. Alternatively companies could also reduce the grammage to align with the standard sizes while maintaining the existing price point,” said Mayank Shah, group product head at Parle Products.
The Prabhudas Lilladher report singles out Britannia Industries Ltd as the biggest beneficiary of the move to exempt packs priced under Rs 10 from the rule. It also added that Hindustan Unilever Ltd (HUL) may have to juggle offerings in its toilet soaps and detergents portfolio to comply with the new rules.
“We wish to reaffirm that we are committed to ensure full compliance within the given deadline”, HUL said in an email response.