Indian consumer packaged goods firms balanced volumes with price hikes in 2023: Bain & Co report

New Delhi: Consumer packaged goods (CPG) companies in India balanced volume and price-led growth in 2023, making the country one of the few markets globally where companies didn’t hike price hikes excessively despite rising commodity inflation, according to a global study released by Bain & Company.

Globally, retail sales value (RSV) for the CPG industry rose nearly 10% in 2023. Three-quarters of the year’s growth is likely to have come from price hikes rather than volume gains as companies passed on rising input costs to consumers, the report said. However, emerging markets accounted for the vast majority of global volume gains, it added.

"India was a standout example of balanced growth, with retail sales value advancing by nearly 15% since 2022, aided by consumers switching from local or unbranded products to bigger, international brands. Volume and pricing were both under pressure in China, amid low consumer confidence,” Bain & Co said in its Consumer Products Report, released on Thursday. India's CPG market is worth an estimated $25 billion.

In the US and Europe, price increases of daily household goods accounted for 95% of sales growth by value for CPG companies, while in Latin America this figure was over 80%. "That imbalance isn’t sustainable, and emerging markets will be key to driving profitable, volume-driven growth for CPG firms in the years ahead," it said. In India, nearly 60% of retail sales value growth came from price hikes.

India’s deeply value-conscious market makes it hard for companies to raise prices frequently. Instead, companies typically resort to shrinking pack sizes. That’s because in India, substantial revenues for FMCG companies across biscuits, beverages, and shampoo sachets come from ‘magic’ price points of ₹1, 2, 5, 10, and 20. For some companies, such price packs account for 30-50% of revenue.

“Companies have effectively controlled costs and managed product innovation in order to continue delivering products with attractive value to consumers at these price points. However, there still remains further potential for organised players to continue innovating and managing the price-value equation for consumers, to drive category growth and gain market share from unorganised players,” said Ravi Swarup, partner and a leading member of Bain & Company’s consumer products practice.

However, Bain estimates that across a subset of top CPG companies, average growth was closer to 4%, a reversal after several years of outperformance.

In recent a earnings call, India's largest CPG maker Hindustan Unilever Ltd reported underlying volume growth of 2% in the December quarter. The company initiated price cuts in categories such as skin cleansing and laundry. “If commodity prices remain where they are, we expect our price growth to be marginally negative in the March quarter,” the company said during its December-quarter earnings call. Others said benign food inflation would allow companies to focus on volume growth in the next fiscal.

Meanwhile, rising prices have spooked shoppers. CPG companies analysed by Bain & Company increased prices by more than 20% on average since the third quarter of 2021.

Consumers, asked to pay more without getting an extra benefit in return — are switching to more affordable private-label brands or more premium insurgent brands that offer greater value. They are also waiting for promotions or just buying less. Slightly more than half the executives (54%) polled by Bain & Company said their companies had been affected significantly by consumers reining in spending in 2023. On the other hand, prices haven’t risen enough, they said.

The report added, “To ease the pressure, half of top CPG companies reduced their headcount significantly last year or froze hiring, following ongoing SG&A (selling, general and administrative) expenses cost-reduction measures. But there are only so many cost levers that can be pulled. With no room left on price, a return to volume growth will be critical. For many CPG firms, part of the answer will involve flexing their muscles in emerging markets, which offer the greatest room for volume growth (but which often demand different capabilities, too). CPGs will also need to identify critical places in which they can become simpler and cope with the additional complexity that’s on the horizon.”

The report included a survey of more than 120 senior CPG company executives around the world and highlighted the impact rising input costs have contributed to the widespread decoupling of price and volume growth. Some 82% of respondents said inflation had a major impact on their business in 2023, making it the biggest issue of all for executive teams.