Problem Of Plenty For Distributors As FMCG Companies Inundate Market

Makers of soaps to staples have rolled out a number of product variations over the last two years to retain all types of consumers amid rising inflation. But, according to distributors, the strategy is proving costly and is simply not working.

Consumer goods companies typically stock thousands of variations of sizes and flavours of different products, which are known as “stock-keeping units” or SKUs. In the last two years, amid an inflationary setting, the companies launched ‘bridge’ packs. These are priced between low-unit and large packs to offer a better value to consumers and scale for companies. The idea was also to arrest consumers with tight budgets from downtrading to the low-cost SKUs of Rs 5 or Rs 10.

These bridge packs are now gaining pace with a higher sales push. However, the approach is choking the supply chain, putting an extra burden on the existing distribution infrastructure, according to Dhairyashil Patil, national president of the All India Consumer Products Distributors’ Federation.

The mom-and-pop retailers are reluctant to keep an added number of SKUs due to increased complexity and potential confusion among consumers, said Patil. "Managing inventory effectively has become a difficult task as there is limited storage space. Shoppers are also confused with so many packs with different grammages and sticker prices displayed on retail shelves."

The cost of transportation has also gone up, as a result of which retailers are keener on storing the high-margin Rs 10–20 packs, Patil said. On the other hand, consumers are finding better value in Rs 10–20 packs as the shrinkage of grammage in the popular Rs 5 packs has been acute.

"Indirectly, the consumers are shifting to the bridge packs," Patil said. "While this initiative holds potential for market expansion, it is challenging the viability and efficiency of the retail distribution network."

Earlier this month, the AICPDF members held talks with the Ministry of Public Distribution regarding standardising packaging and categorising products into four classes: entry pack, small pack, medium pack, and large pack, to simplify inventory management and reduce complexity for retail.

"By categorising products into these standardised packaging sizes, it is expected to simplify inventory management, increase efficiency, reduce complexity for retailers, and eliminate consumer confusion arising from multiple SKUs within the same price range under a single brand," said Patil.

AICPDF represents over four lakh distributors and stockists across India.

Acknowledging the proliferation of SKUs, Krishna Buddha Rao, senior category head at Parle Products Pvt. said that it has become extremely critical to be present across price points amid high competition from the local players and as the industry looks to get back to volume-led growth.

"The Rs 5 pack may not be relevant across all retail points, but one can't also vacate the space because of growing competition," he told BQ Prime.

Another reason why companies are extending the number of SKUs is the prevailing strategy to be everywhere a potential consumer may shop. Simply put, a package made for e-commerce is different from that of a brick-and-mortar retailer.

FMCG companies also started setting aside certain SKUs exclusively for business-to-business e-commerce players after the general trade distributors, unhappy about being undercut by the likes of Reliance’s JioMart and Udaan, had threatened to boycott some of their products in the past.

Analysts, too, are cognizant of the SKU shift.

"FMCG companies are aggressively pushing the bridge packs via trade schemes as they chase profitability," Nitin Gupta, senior research analyst tracking the consumer sector at Emkay Global Financial Services Ltd., said.

• In the case of hair oils, the companies, including Marico Ltd., are focusing on a Rs 20 SKU over Rs 10, the brokerage said, citing channel checks.

• In instant noodles, Nestle India offers a better margin for the Rs 14 SKU over the Rs 7 SKU. The company may continue to focus on margin-accretive packs—those higher than Rs 10—to counter wheat inflation.

• In detergents, Hindustan Unilever Ltd. is now pushing the Rs 20 SKU over the Rs 10 SKU for the Surf Excel brand.

• Similarly, in biscuits, the category leaders—Parle Products Pvt. and Britannia Industries Ltd.—have improved the availability of the Rs 10 SKU, as the Rs 5 SKU is margin-dilutive, according to the brokerage.

Hindustan Unilever refused to comment on BQ Prime's emailed query, citing the "closed period", following the release of its second quarter financials.