A consumer company reports revenue up 9%. In the notes to the results, a single line reads: underlying volume growth 1%. Everything else — eight points of it — came from charging more for the same soap, detergent and biscuits, and from customers buying slightly dearer variants. That can be a perfectly healthy year. It can also be the first year of a brand losing its hold. The headline cannot tell you which; the split can.
The shop down the road took in more money this month than last. Did more people buy from him? Or did the biscuit company raise its prices, so the same customers paid more for the same packets? Or did people switch from the plain biscuit to the cream one? All three put more money in his till. Only the first means his business is growing.
FMCG companies report exactly this blend as revenue growth. Volume is more customers or more packs; price is the same pack costing more; mix is people trading up. A company whose growth is all price during a period of inflation has not gained anything — it has passed on its costs, and once inflation stops, its growth stops with it.
Volume, price and mix
- Volume growth
- more quantity sold — tonnes, litres, packs
- Price growth
- the same product sold for more (including smaller packs at the same price)
- Mix effect
- customers or channels shifting towards dearer products
Example: Revenue +9% with price +7% and mix +1% leaves volume of about +1%. The approximation holds for small percentages; strictly the effects multiply, but the difference is a rounding error at these sizes.
Shrinking packs, and the price points people remember
A large share of Indian FMCG volume is sold in low-unit packs — ₹1, ₹5 and ₹10 — where the price itself is what the shopper recognises. Raising a ₹5 pack to ₹6 loses customers, so when costs rise companies cut the grammage instead: the same ₹5, fewer grams. That is a price increase that the pack count hides. When a company reports volume by packs rather than by weight, a year of grammage cuts can make volume look better than the tonnage sold. When costs fall, grammage is often restored — which helps the customer and can appear as “volume-led” growth without any new demand.
Margins move with inputs, and with a lag
The gross margin — revenue less the cost of materials — is set by a small number of commodities. Soaps and oils depend on palm oil and other vegetable oils; detergents and packaging on crude oil derivatives; dairy, biscuits and chocolates on milk, wheat, sugar and cocoa; tea companies on tea prices. When these rise, margins fall first, because the company is selling stock bought at the new cost while its price increases take months to roll through the trade. When inputs fall, the reverse happens: margins expand before prices are cut, if they are cut at all.
- Gross margin — the direct read on input costs and pricing power. Compare it with the same quarter last year.
- Advertising and promotion (A&P) as a share of sales — the lever companies pull to protect margins in a bad year. A falling A&P ratio with rising margins can mean profit borrowed from the brand’s future.
- Operating (EBITDA) margin — gross margin less A&P, staff and overheads. A rising operating margin with a falling gross margin means overheads or advertising were squeezed.
Distribution and the channels
The moat of an Indian consumer company is often less its brand than its reach — how many shops its products are in, especially in villages and small towns. Companies disclose direct reach, the number of outlets their own distribution serves, and talk about rural versus urban growth. Rural demand moves with the monsoon, crop prices and government transfers; urban demand with employment and inflation. Newer channels — modern trade, e-commerce and quick commerce — are growing, and they carry different margins and bargaining power than the traditional kirana network.
Running on suppliers’ money
The strongest FMCG companies collect from distributors within days — sometimes in advance — hold finished goods briefly, and pay their own suppliers on longer terms. Their cash conversion cycle is short or even negative, so the business is partly financed by its suppliers and growth releases cash instead of consuming it. Try it below with your own numbers: a negative cycle means customers pay before suppliers are paid.
Enter a consumer company’s revenue, cost of goods and year-end balances to see its cash cycle.
Twelve per cent growth in an inflation year
In a year of sharp commodity inflation, a food company reports revenue up 12%. It took price increases of about 11%, volume was flat, gross margin fell two points, and advertising spend was cut from 10% to 8% of sales so that operating margin held steady.
A company’s revenue grew 10% with 8% price increases and a 1% mix improvement. Its volume growth was about:
FMCG ka revenue growth = volume (zyada maal bika) + price (wahi maal mehenga) + mix (log mehenga variant lene lage). 9% growth mein agar 7% price aur 1% mix hai, toh asli volume sirf 1%. ₹5-₹10 ke pack ka daam nahi badhate — grammage kam kar dete hain, yeh chhupa price hike hai. Palm oil, doodh, crude mehenga hua toh margin pehle girta, price baad mein badhta. Aur achhi FMCG company suppliers ke paise pe chalti hai — customer se paisa pehle, supplier ko baad mein.
- Revenue growth ≈ volume + price + mix. Volume is the measure of whether the brands are gaining.
- Grammage cuts on ₹5 and ₹10 packs are price increases in disguise and can flatter pack-based volume.
- Gross margins follow palm oil, crude derivatives, milk and grains, with a lag in both directions.
- A falling advertising ratio behind a rising margin may be profit borrowed from the brand.
- Strong FMCG companies run on short or negative cash cycles; check royalty payments to a foreign parent.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- what is volume growth in FMCG companies
- Volume growth is the increase in the quantity of product sold — tonnes, litres or units — as distinct from the increase in revenue. FMCG revenue growth is roughly volume growth plus price increases plus mix (customers moving to dearer products), so a company can report strong revenue growth while selling no more than last year. Many companies disclose underlying volume growth in their results, and it is the best single measure of whether demand for their brands is actually rising.
- why do FMCG stocks trade at high PE ratios
- Because their earnings are unusually steady and need little capital to grow. People keep buying soap, toothpaste and biscuits in recessions, strong brands can pass on cost increases, and many of these companies run on negative working capital with high returns on capital, so most profit is free to be paid out. Investors pay a premium for that predictability — which also means the stocks can de-rate sharply when volume growth slows for a sustained period.
- grammage reduction meaning in FMCG
- Grammage reduction is cutting the quantity in a pack while keeping its price the same, used mostly on low-priced packs such as ₹5 and ₹10 sachets where the price point itself is what the customer recognises. When input costs rise, a company shrinks the pack instead of raising the price; when costs fall, it may add grammage back. For the analyst it matters because it is a price increase in disguise, and it affects how volume growth should be read.
- why do FMCG companies have negative working capital
- Because they collect from their distributors quickly, often in advance or within days, hold finished stock only briefly, and pay their own suppliers on longer credit terms. When customer cash arrives before supplier bills are due, the suppliers are effectively financing the business. Growth then releases cash rather than consuming it, which is one reason strong FMCG companies can pay out most of their profits.