Ghost of shrinkflation is back to haunt your snack pack

Your next pack of cookies could be lighter than the one you got for the same price last time. Welcome back to shrinkflation, where manufacturers reduce pack sizes to make up for costlier ingredients. Alongside, direct price hikes are taking effect too.

Packaged consumer goods makers Britannia Industries Ltd, Parle Products Pvt. Ltd, ITC Ltd and Godrej Industries Ltd are working on reducing pack sizes -- grammage in industry parlance -- or nudging up prices. As key raw materials such as wheat and oil cost more, prices of biscuits, cakes, soaps and packaged staples are expected to rise as much as 7% in the coming quarters, industry executives said.

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"Commodity prices are on the boil," said Rajneet Singh Kohli,chief executive officer of BritanniaIndustries, referring to costlier flour and cocoa. Palm oil is now 40% costlier from a year ago, Kohli said, thanks in part to the recent 20% import duty on edible oils. Britannia, which sells bread, biscuits and cheese products, will raise prices by 3-5% across the next two quarters, Kohli said.

"It will not cover the entire inflation, but we'll take cost efficiency measures at our end to ensure that we don't pass on the entire thing to consumers," Kohli said on the sidelines of an industry event last week. He said the company will most likely cut grammage than make direct price hikes.

Edible oil price surge

A Care Ratings report noted a 13% annual increase in global edible oil prices over the past six months. To top it, India on 14 September imposed a basic customs duty of 20% on crude soybean oil, palm oil and sunflower oil, resulting in an effective duty rate of 27.5% on imported crude oils, prompting local edible oil sellers to raise prices. Meanwhile, wheat flour and cocoa too have seen significant inflation.

Biscuit maker Parle has begun raising the prices of some products and pack sizes.

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“Across foods, we will see companies take between 5% to 7% price hikes; some have already started doing that. However, with the kind of increase we have seen (in commodities), this price increase will not be sufficient to mitigate inflation fully.The reason behind this is that edible oil is up 40-45% versus last year, while wheat flour is up 20-25% compared to last year. Sugar prices are up too," saidMayankShah, vice-president, Parle. Price hikes will roll out over the next two to three months, Shah said.

Companies will likely balance direct price increases with grammage reductions to mitigate the full impact of rising costs on consumers, Shah added.

India's last episode of shrinkflation was in 2022 when commodity prices were similarly high. The phase came to an end in the middle of 2023 as input prices fell.

In tough operating environment

In the September quarter, India's fast-moving consumer goods industry grew by 5.7% in value. According to market researcher NielsenIQ, this was due to a 4.1% volume growth and 1.5% price growth. The FMCG sector faced a tough operating environment in the quarter due to subdued macroeconomic conditions, inventory corrections, adverse weather, and high inflation.

Volume growth for most companies remained under pressure, analysts at Motilal Oswal said in a report released earlier this month. However, companies are expected to take calibrated price hikes to offset rising raw material costs. This will boost revenue growth in the second half of fiscal 2025, they said.

“Edible oil and wheat prices have gone up significantly.This does create pressure on margins in short term because price change cannot be effected immediately," said Hemant Malik, executive director of ITC, which sells a wide portfolio of staples and snacks including Bingo chips and Sunfeast cookies.

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“Pricing is expected to correct to account for inflation. There is a limit to how long current pressures can be sustained and to how much value you can get from cost and efficiency measures. We closely monitor industry trends across segments and typically align with the market leader, and lead pricing where we have leadership," he said in an interview last week.

Select price hikes

Last week, Godrej Consumer Products Ltd, which sells Cinthol and Godrej No.1 soaps, said it has made select price hikes in its soaps portfolio.

“The surge in palm oil and derivatives prices to the extent of a year-on-year increase of 20-30% has impacted the soaps category, which represents a 1/3rd of our standalone business revenue. To partly offset the cost increases we have taken price increases, reduced grammage of key packs and reduced various trade schemes," the company said in a quarterly update.

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“Such pricing actions typically have minimal impact on category consumption but do result in reduced inventory across wholesale and household pantry. Historical patterns indicate a normalization in volume growth following price stabilization," which we anticipate occurring in the next few months, it said.