The goods and services tax on unbranded pre-packaged food will bring parity between private labels and established brands, intensifying competition and accelerating the pace of formalisation.
Branded packaged items attracted GST, while the non-branded store-owned packaged food packs—also referred to as private labels—did not. Effective July 18, pre-packaged and labeled meat (except frozen), fish, curd, paneer, honey, dried leguminous vegetables, dried makhana, wheat and other cereals, organic food, jaggery and puffed rice will attract a 5% GST.
The move to bring them in the tax net nullifies the advantage private labels had over established, costlier brands. More so when rising fuel and food prices, coupled with prolonged economic uncertainty, prompted consumers to downtrade or look for cheaper alternatives.
Branded players will gain with the latest move as the price gap with non-branded packaged food items will fall, according to Abneesh Roy, executive director (institutional equities), Edelweiss Securities. “Consumers would prefer to pay a little more to get a better brand.”
According to Shammi Aggarwal, managing director of Pansari Group, the maker of packaged wheat flour, rice, the latest move will formalise the sector further leading to "healthy competition". “There were many prominent FMCG firms which started claiming 0% [GST] by saying their products across multiple categories are unbranded while keeping their prices slightly lower than or even same as branded, but now they can't.”.
The Confederation of All-India Traders' Association, however, opposed 5% GST on pre-packed and unbranded food items, saying it will hurt small businesses across the country and increase prices of everyday essentials.
"The decision will empower big brands to capture the market at the cost of small manufacturers and traders… it will cause huge damage to the business of food grains traders in more than 6,500 grain markets across the country," said Praveen Khandelwal, general secretary of the association. The country's largest traders' body, representing 40,000 associations, said it would appeal to the union as well as state finance ministers to re-consider the decision.
Private labels share supermarket shelves with products of large consumer goods makers such as Hindustan Unilever Ltd. or Nestle India Ltd., and compete online.
“Taking advantage of nil GST, the retailers were able to charge a price higher than the unpackaged/loose staples and lower than the branded products,” said Rajat Wahi, partner at Deloitte India. Levying GST on pre-packaged products will bring them on a par with large consumer goods companies, said Wahi.
From large chains including Metro Cash & Carry India Pvt., Spencer’s Retail and Reliance Retail Ltd. to online platforms like BigBasket, all churned out private labels aiming to tap the booming grocery market—that, according to Forrester Research, is pegged at $608 billion (about Rs 48 lakh crore) and is set to grow more than 20% by 2024.
According to a joint report by Retailers Association of India and KPMG, private labels offer margins of 10-14% when compared with 7-10% for multinational brands. That’s also why introducing private label remains a critical strategy for retailers to drive sales in the usually low-margin staple business.
Wahi told BQ Prime that pre-packaged unbranded goods will still have some advantage. “Lower cost of production and packaging expenses, as they produce in small scale with generally lower quality packaging, as well as lower cost of advertising will help save costs and hence, these labels could still be priced lower than regular brands.”
A higher GST in a high inflation era, however, is expected to hit demand in the short term, said retailers.
“Pre-packaged atta or food grain offers wafer-thin margins and there is no scope to absorb costs, so price will have to passed to the consumers,” Arvind Mediratta, managing director and chief executive officer at Metro Cash & Carry India, told BQ Prime. In the short-term, he expects demand to take a hit as the “price advantage goes away” at a time budgets are quite stretched in the face of inflation.
ICICI Securities said in a note, “Considering the rising milk procurement prices and new levy of 5%, dairy companies need to pass on additional costs to end consumers via price hikes.” Most dairy companies will be able to avail input tax credit on the costs incurred such as packaging material, freight and transportation and ad-spend, the brokerage said in a note. “As a result of this, the net impact of GST levy would be in the range of 2-3%.”
Companies already have planned price hikes to counter the pressure of higher commodity costs on margins, resulting in dwindling demand. The latest move, Deloitte’s Wahi said, could push consumers who were downtrading to private labels to shift to loose or smaller pack sizes.