Will the 5% GST slab create a level playing field or prove to be a disadvantage for regional FMCG brands?

Will the reduction of GST rates to 5% of most FMCG categories actually make products, such as branded biscuits, snacks, detergents and shampoos, significantly cheaper? Not really. Over 70% of FMCG products in India operate in the ₹5, ₹10 or ₹15 price points and lowering price points on those packs may not make sense. What’s more likely is grammage enhancement on the lower price-point packs, while one can expect significant price cuts on larger pack sizes.

Ever since the new slabs have been announced the FMCG bosses have been busy figuring out the best possible way to transition into the new GST realm. “There’s no point taking a price cut on a ₹5 pack. We are not going to change the price from say ₹5 to ₹4.80, as they will still sell it at ₹5 because coinage is important. Therefore, it’s better to give more grammage,” explains Varun Berry, executive vice-chairman, managing director and chief executive officer, Britannia Industries . “But on the larger packs there will be a direct price cut. It will take time because adding biscuits is not easy, because you have to make sure that you get the pack right, get the packaging film as per the new artwork, that takes time. We will do it as quickly as possible,” he adds.

Berry says that grammage enhancement is more likely for 70% of its portfolio. “We will either increase grammage or decrease prices,” agrees Rishabh Jain, CFO, Bikaji Foods International .

While it will most likely be a grammage increase in the ₹5-₹10 price packs, if you are one of those consumers who sees more value in larger pack sizes, big is indeed going to be more beautiful. Bhagirath Jalan, director, of Varanasi-headquartered Jalan’s Retail, is hoping for higher price-cuts. “The customer will look for change in pricing. Very few customers notice grammage change, it is price cuts that matter more,” he says.

National versus Regional

Regional FMCG brands have been giving sleepless nights to their national peers. Be it the likes of Ghadi, Fena or Yaare in the detergent segment which are giving tough competition to stalwarts such as Surf Excel and Arial with their washing machine variants, in categories such as biscuits and snacks every State has a plethora of regional brands that are giving tough competition by offering products that appeal to local taste buds.

“We have not lost share, but we are on guard. There are lot of regional players coming in. We understand their strengths and weaknesses and act accordingly,” says Britannia’s Berry.

Regional brands, with a better understanding of local tastes and preferences of consumers have been gaining a loyal consumer base in the regions they operate in. Most of them don’t invest in expensive marketing campaign, nor do they hire expensive sales talent to sell their products. As a result, they are able to offer higher margins to the retailer, who is incentivized to sell their products.

With GST slabs for most FMCG categories being slashed to as low as 5%, could be a deterrent for these regional brands. For snack manufacturer, Bikaji Foods, for instance, the unorganised market, where brands have found ways of evading GST is huge competition. “When MRP gets reduced, our products will be more affordable and competition will be less as the very small players will go out of market,” points out CFO, Jain.

Berry expects a level playing field. He says that GST rates being reduced to 5%, could be a motivation for those regional brands who so far have been evading GST to become organised as the rates are not that high now.

 “The market certainly we will get more competitive. I do think organised players and large all-India players will have an advantage.”

But the question is with deep pockets (of pan-India brands) and the ability to spend on high decibel marketing campaigns, will there actually be a level playing field. Mohit Kumar Kundalia, COO, Tirupati Trading (a Jaipur-headquartered FMCG distributor for companies such as HUL and Parle Products ), expects the road ahead to be bumpy for regional brands. Kundalia himself owns a detergent brand, Yaare, which is a strong competitor to brands such as Wheel, Rin and Tide. “We will be able to compete, but it will be a big tussle. If the national brands reduce their prices we will have a tough time, but if they increase grammage we will be in a better place.”

Kundalia’s crib isn’t as much about the GST cuts impacting regional brands but it’s more to do with retailers such as Reliance Retail having the power to deep discount even national brands. “Reliance is buying national brands at regional prices. A 7 kg pack of ₹1,000 Surf Excel is sold by Reliance at ₹500-600. Regional brands no longer have a pricing upper hand due to the kind of deals Reliance Retail is doing.”

The jury as to who (national or regional brands) will win is yet to be out. One thing is clear, the coming days will see lot more organised play in the FMCG space. For the regional brands, the going may be difficult, but they have always been a resilient lot.