FMCG Giants Turn To Pocket-Sized Premium Packs To Tackle Urban Blues — Profit Insights

This trend, typically pronounced in mass categories, has now permeated premium products that are meant for cities, prompting companies to scale up launch of the tiny portions of their premium offerings to boost demand.

Companies such as Hindustan Unilever Ltd., Colgate-Palmolive (India) Ltd, Britannia Industries Ltd., Godrej Consumer Products, Britannia Industries Ltd., ITC Ltd. and even Radico Khaitan Ltd. have rolled out mini packs across a range of categories from food, home and personal care items to alcoholic beverages, in a bid to attract price-sensitive consumers who are feeling the pinch from rising costs.

This strategy, however, is proving to be a double-edged sword in an inflationary environment. While a shift towards smaller packs may aid volume growth in the near term — particularly in discretionary categories — it complicates companies' premiumisation efforts. As demand for small premium packs outpaces that for larger ones, the disparity in sales between low-margin and high-margin products could negatively impact the profit margins of packaged goods makers, according to experts. However, in the long run, when consumption revives, these companies may benefit by retaining consumers and not losing them to competitors.

"Companies are launching more small packs to retain stressed urban consumers who may have otherwise switched to cheaper brands," said Devangshu Dutta, chief executive officer of retail consultancy, Third Eyesight. "From a consumer stickiness perspective, these brands are willing to sacrifice some profit margins now for greater long-term growth. Afterall, the cost of losing a customer extends far beyond the immediate hit on profitability."

HUL CEO Rohit Jawa called out the growth of small packs in urban markets during the December quarter as a "trend breaker", negating the typical boost the company experiences when premium portfolio outpace the rest of the business. The more discretionary the category, the more titration to small packs is seen, resulting in a negative mix for the quarter, he said. However, he expects this trend to "self-correct" in a quarter or two.

"Premium formats have been impacted by the urban consumption slowdown," said Sudhir Sitapati, managing director and CEO of Godrej Consumer Products. He expects margin pressure to remain for the next few months amid urban slowdown and higher inputs costs.

HUL and Godrej Consumer Products, both of which have reported their third-quarter earnings this week, recorded a flat volume growth.

Parle Products Pvt. is also seeing higher demand for small packs compared to large packs in cities. "Small packs are growing by 8-9% compared to 3% for large packs," the company's vice-president Mayank Shah told NDTV Profit. "Given that our salience to large packs is 30%, we expect our revenues to grow slower until urban consumption picks up."

Companies have started large-scale sampling of premium products.

For instance, Surf Excel sampling this year shall be almost three times of 2024, according to Abneesh Roy, vice-president, Nuvama Institutional Equities.

Typically, these mini packs, or lower-cost alternatives, allow brands to engage customers who might be trying a product for the first time. It's more to nudge some of those purchasing minis to full-sized costlier packs.

While proliferation of mini packs has been a long-standing trend, the real challenge lies in the saturation of urban markets, explained K Ramakrishnan, managing director of Kantar Worldpanel. "Over the years, we have seen that small packs have consistently grown ahead of the overall category. For instance, while the tea category grew by 3% last year, small packs in that segment saw a growth of 11%. Similarly, although the milk food category shrunk, the small packs within that grew 14%."

This trend, he said, was evident across various segments, including hair wash, washing powder and even salty snacks. "So, these mini packs potentially offer immense opportunity for long-term growth, even though in the near-term urban-demand slowdown can play a spoilsport."

Ramakrishnan does not foresee any immediate triggers to boost urban consumption until September.

"Most FMCG companies have lured urban consumers to buy large packs, offering discounts and buy one get one schemes as this strategy not only boosts volume but are margin-accretive," said Sachin Bobade, vice-president research at Dolat Capital. "So, if large packs don't sell, it could affect margins, especially considering all other factors are unfavourable, be it the rising costs of commodities or increasing advertising spends to remain competitive."

"In the December quarter, which also coincides with the festive season, most companies have either moderated spending or lowered ad spends to cushion margins," Bobade said.

This trend, typically pronounced in mass categories, has now permeated premium products that are meant for cities, prompting companies to scale up launch of the tiny portions of their premium offerings to boost demand.

Companies such as Hindustan Unilever Ltd., Colgate-Palmolive (India) Ltd, Britannia Industries Ltd., Godrej Consumer Products, Britannia Industries Ltd., ITC Ltd. and even Radico Khaitan Ltd. have rolled out mini packs across a range of categories from food, home and personal care items to alcoholic beverages, in a bid to attract price-sensitive consumers who are feeling the pinch from rising costs.

This strategy, however, is proving to be a double-edged sword in an inflationary environment. While a shift towards smaller packs may aid volume growth in the near term — particularly in discretionary categories — it complicates companies' premiumisation efforts. As demand for small premium packs outpaces that for larger ones, the disparity in sales between low-margin and high-margin products could negatively impact the profit margins of packaged goods makers, according to experts. However, in the long run, when consumption revives, these companies may benefit by retaining consumers and not losing them to competitors.

"Companies are launching more small packs to retain stressed urban consumers who may have otherwise switched to cheaper brands," said Devangshu Dutta, chief executive officer of retail consultancy, Third Eyesight. "From a consumer stickiness perspective, these brands are willing to sacrifice some profit margins now for greater long-term growth. Afterall, the cost of losing a customer extends far beyond the immediate hit on profitability."

HUL CEO Rohit Jawa called out the growth of small packs in urban markets during the December quarter as a "trend breaker", negating the typical boost the company experiences when premium portfolio outpace the rest of the business. The more discretionary the category, the more titration to small packs is seen, resulting in a negative mix for the quarter, he said. However, he expects this trend to "self-correct" in a quarter or two.

"Premium formats have been impacted by the urban consumption slowdown," said Sudhir Sitapati, managing director and CEO of Godrej Consumer Products. He expects margin pressure to remain for the next few months amid urban slowdown and higher inputs costs.

HUL and Godrej Consumer Products, both of which have reported their third-quarter earnings this week, recorded a flat volume growth.

Parle Products Pvt. is also seeing higher demand for small packs compared to large packs in cities. "Small packs are growing by 8-9% compared to 3% for large packs," the company's vice-president Mayank Shah told NDTV Profit. "Given that our salience to large packs is 30%, we expect our revenues to grow slower until urban consumption picks up."

Companies have started large-scale sampling of premium products.

For instance, Surf Excel sampling this year shall be almost three times of 2024, according to Abneesh Roy, vice-president, Nuvama Institutional Equities.

Typically, these mini packs, or lower-cost alternatives, allow brands to engage customers who might be trying a product for the first time. It's more to nudge some of those purchasing minis to full-sized costlier packs.

While proliferation of mini packs has been a long-standing trend, the real challenge lies in the saturation of urban markets, explained K Ramakrishnan, managing director of Kantar Worldpanel. "Over the years, we have seen that small packs have consistently grown ahead of the overall category. For instance, while the tea category grew by 3% last year, small packs in that segment saw a growth of 11%. Similarly, although the milk food category shrunk, the small packs within that grew 14%."

This trend, he said, was evident across various segments, including hair wash, washing powder and even salty snacks. "So, these mini packs potentially offer immense opportunity for long-term growth, even though in the near-term urban-demand slowdown can play a spoilsport."

Ramakrishnan does not foresee any immediate triggers to boost urban consumption until September.

"Most FMCG companies have lured urban consumers to buy large packs, offering discounts and buy one get one schemes as this strategy not only boosts volume but are margin-accretive," said Sachin Bobade, vice-president research at Dolat Capital. "So, if large packs don't sell, it could affect margins, especially considering all other factors are unfavourable, be it the rising costs of commodities or increasing advertising spends to remain competitive."

"In the December quarter, which also coincides with the festive season, most companies have either moderated spending or lowered ad spends to cushion margins," Bobade said.