Whalesbook
Facing high inflation, Indian consumers are increasingly choosing smaller, affordable product packs. FMCG companies are responding by ramping up production of Rs 5 to Rs 20 items and reducing pack sizes—a practice known as shrinkflation—to maintain sales volumes while managing rising production and logistics costs.
What Happened
Fast-moving consumer goods (FMCG) companies in India are significantly adjusting their product strategies to meet changing consumer buying habits. As living costs rise and income growth remains slow, households are shifting their preference toward smaller, lower-priced packs. Data indicates that demand for packs priced between Rs 5 and Rs 20 is growing at nearly double the rate of larger product sizes. To keep customers engaged, major manufacturers, including companies like Britannia, Dabur, and Adani Wilmar (AWL Agri Business), are accelerating the production of these smaller formats. This trend is visible across various categories, including food, soaps, shampoos, and detergents, in both rural and urban areas.
Why This Matters For Investors
For investors, this shift highlights the delicate balance FMCG companies must maintain between keeping customers and protecting profit margins. Small packs often come with higher packaging and distribution costs per unit of product sold compared to large, economy-size packs. When companies lean heavily into these small formats, it can create margin pressure. The focus right now is on sustaining volume growth—a key metric for FMCG health—even if it comes at the expense of profitability per unit. Companies that can manage this supply chain efficiently while controlling costs may better navigate the current inflationary environment.
The Shrinkflation Strategy
Companies are using a strategy called "shrinkflation" to deal with high material and operational expenses. Since price points like Rs 5 or Rs 10 are psychologically important to consumers, companies often find it difficult to raise the sticker price. Instead, they reduce the grammage—the actual weight or quantity of the product inside the pack—while keeping the retail price the same. Brands like Hindustan Unilever, Colgate, and Marico have been active in adjusting these variables to avoid passing the full weight of cost inflation to the buyer. This approach effectively masks price increases, but it relies on the hope that consumers will prioritize affordability over quantity.
The Cost and Sector Pressure
External factors, such as persistent high raw material costs and increased freight charges linked to geopolitical tensions in West Asia, are weighing on company balance sheets. These expenses directly hit operating margins. Manufacturers are essentially acting as a buffer, absorbing some of these costs to ensure their products remain within the budget of the average household. However, this is a short-term solution. Continued inflation in crude oil and edible oils forces companies to either keep adjusting grammage or eventually increase prices, which risks a drop in demand.
Risks and Concerns
The reliance on small packs is not without risk. If packaging costs for these small units continue to rise, the profitability of the business could suffer further. Additionally, constant grammage reduction can eventually be noticed by consumers, potentially affecting brand loyalty if the value proposition feels too low. There is also the risk that if demand for small packs reaches a saturation point or if manufacturing capacity for these specific units is constrained, companies may face operational bottlenecks.
What Investors Should Track
Investors should closely monitor quarterly management commentary regarding volume growth versus value growth. It is important to watch whether companies are able to pass on price increases eventually or if they are forced to keep reducing grammage to sustain sales. Key monitorables include raw material price trends, particularly for edible oils and packaging materials, as well as the ability of companies to maintain profit margins despite the shift toward lower-margin small packs.