Makers of fast-moving consumer goods, which have seen the biggest benefit with GST on items of daily use coming down from 12-18% to 5%, said they’ll lower the prices of large pack sizes or offer promotions. However, prices of products priced in the ₹5 to ₹20 range will be retained, while adding extra grammage in them.
Manufacturers of home appliances such as television sets and air-conditioners are more likely to spruce up promotions later in the month and pass on the benefit of lower GST to consumers.
For makers of soaps, biscuits and shampoos, transitioning to new packs with revised prices could be a challenge in the short run.
“That’s the biggest challenge ahead of almost all companies,” Mayank Shah, vice president of Parle Products, said in an interview with Mint. “In India, a large part of FMCG goods sell in smaller packs, making it difficult for companies to change popular price points such as ₹5, ₹10, ₹15 and ₹20. We cannot bring a ₹5 pack to ₹4.50. Typically, you change the weight of the packet and give probably 10% extra to consumers.”
For categories such as biscuits and bhujia, price points from ₹5 to ₹20 account for 50-70% of sales.
Shah said Parle expects a full rollout of revised prices to hit the market by November-December. A decision on price changes of larger packs will depend on the bandwidth of the company and the sales volume of the product.
“If the volume of the product is not high, we can do it quickly, but if the volumes are very high, then it may take some time because we need to get into new printing of their wrappers and revised prices,” he explained.
Return of demand
Shah called the GST reduction a game-changer, especially since urban demand is coming back. The rural markets have been doing well.
“We will see growth coming in across categories. Monthly grocery bills could come down by 5-10%,” he said.
On Wednesday night, the GST Council announced sweeping reforms that will bring down the tax burden on items of daily use for the common people. The 12% and 28% slabs have been abolished, with most categories of 12% going to 5%, and most categories of 28% going to 18%. The new GST rate will be effective 22 September.
The BSE FMCG index was up 0.86% at 21,107.37 on Thursday morning. Hindustan Unilever Ltd had gained 0.46% and ITC advanced 1.36%.
Companies are reviewing the overall impact of the GST rationalisation, which affects their existing stock in the market with retailers and finished goods in their manufacturing units.
“We generally maintain a limited finished goods inventory of 2-4 days,” Rishabh Jain, CFO of packaged snacking company Bikaji Foods International Ltd, said in an interview with Mint Thursday. “From our perspective, price points of ₹5- ₹20 will remain the same, but we will put more grammage in those packs. However, on family packs we are evaluating an MRP reduction.”
Family packs are those priced from ₹60 to ₹300. Bikaji’s portfolio of bhujia and namkeen earlier attracted a GST of 12%, which will now come down to 5%.
“We will pass on the benefit to consumers in the large pack sizes,” he added.
However, Jain expressed concern over inventory levels, given the proximity to the festive season, which is critical for the namkeen and sweet maker.
“All distributors keep 2-3 weeks of stock. We see some slowdown in inventory loading for the coming week, but it will be temporary,” he added.
Indirect benefits
For smaller pack sizes, companies may offer indirect benefits such as greater grammage instead of direct price cuts.
“At the lower unit packs of ₹2, ₹5, ₹10, we expect double-digit grammage addition which will boost volume growth. In bigger packs, we expect price cuts and promotions, which will again aid consumption,” said Abneesh Roy, executive director of Nuvama Institutional Equities.
However, the absence of a clear anti-profiteering clause may result in the benefit of lower tax not being passed on to consumers. Profiteering refers to the practice of increasing the prices of products when taxes are reduced to offset the relief meant for consumers.
“There is a chance of some retention of prices, depending on the overall competitive intensity. In some categories, it will be a full passthrough, while in others, companies may partially benefit,” said Roy.
Irrespective, consumers could see options such as lower prices along with higher grammage, as well as promotions and discounts on store shelves in the coming weeks, said those in the business of managing in-store promotions.
“However, we expect some companies to increase prices – most likely starting January – to push their own profit margins. Immediate benefits will be passed on not just for a growth spurt but for fighting competition,” said Aditya Goel, co-founder of Love in Store, an in-store promotion company.
The GST rate rationalization comes amid weak demand across categories and will benefit both consumers (lower product prices) and companies (higher sales volumes). The relief is not limited to daily goods.
Large-ticket items such as air-conditioners, televisions larger than 32 inches (including LED & LCD TVs), monitors and projectors, and dishwashing machines have all seen a cut from 28% to 18%. Retailers expect consumers to delay purchases of appliances till 22 September, when the revised rates will be rolled out.
Consumer savings
“Consumers might delay purchases, especially for large items, but the market is expected to grow post-10% reduction. The festive season is anticipated to be beneficial, with significant savings for consumers,” said Nilesh Gupta, chairman and founder of Vijay Sales. “There is also an expectation of increased competitive intensity, particularly in non-TV, non-AC categories like smartphones.”
Vijay Sales plans to implement revised prices on 22 September along with greater promotions to boost in-store sales.
Others said sales will hit a pause till 22 September, leading to a working capital challenge for dealers of appliances.
“It will be a working capital burden for dealers of home appliances for a period of two to three months. It’s not a profitability issue – it is a working capital burden because they have a higher input tax credit than what they will sell at,” said B Thiagarajan, managing director of Blue Star Ltd.
Companies expect some changes in demand for air-conditioners, before their energy consumption ratings are revised next year.
“Those wanting to buy a three-star air-conditioner may end up buying a five-star, where the price has come down, and somebody wanting to buy one AC can end up buying two. Demand forecasting will undergo a significant change between now and December. In January, there is an energy label change incoming. So there is work to be done,” Thiagarajan said.
#FMCG #appliance #makers #plan #pass #GST #benefits #consumers
