Published in Jul-Aug 2022
Hyperinflation, stagflation, high inflation or any other term you can think of have become the order of the day. Add to that “aaj dollar ka kya rate hai?”, the food and commodity price increases, petrol and utilities price hikes and the fallout from the federal budget, and you have our very own version of the ‘perfect storm’.
When suddenly out of nowhere the Covid-19 lockdowns hit, the big research firms came out with snap polls and surveys telling us how consumers are reacting or would react to the ‘new normal’. Consumption levels would go up for some categories and others would not fare so well. Time spent online would increase dramatically and so would ordering groceries and food online, and so on and so forth. Just as we were getting back to normal, we are now hit with the next crisis and must learn to wade through this one as well. This time the big research firms are slower with their poll results, which could be because the size of the economic problem seems unprecedented.
How should brand custodians react in such times? Questions of downsizing, increasing sticker prices, cutting costs by tinkering with product formulations or service delivery processes, or optimising the packaging are dominating discussions all around. According to brand consultant Mark Ritson, brand custodians fundamentally have four levers to play with in order to maintain/increase profitability at any given time. These remain true in times of crisis, stability or profit. They are: sales volume (revenue), price, fixed costs and variable costs.
In general terms, according to a study quoted by Ritson, increasing prices have the most impact on profitability, showing a +10% swing in the bottom line for every one percent increase in the sticker price. Next in line is variable cost, which results in a +6.5% swing for every one percent reduction in costs, followed by sales with a plus three percent swing for every one percent increase in sales, and finally, fixed costs with a +2.5% swing for every one percent reduction in costs.
This suggests that although it is all very well to chase after and aspire to higher sales to increase the bottom line, it really does not help much, and that even setting up cost chase committees does not result in the highest uplift. However, a one percent swing in price does result in the maximum possible return on the bottom line. This then should be the area of focus.
However, although it is easy to increase the price, it comes with a condition – you cannot under any circumstances lose volume proportionate to the price increase. Here is where it starts to get tricky because price elasticity comes into play and one has to judge at what point consumers will decide to turn away and downsize or downgrade.
To guard against this, there are a couple of ways to handle a price increase. Should it be purely a bump-up of the sticker price, or should it be by reducing the gram quantity of the product – you essentially keep everything else the same but reduce the quantity. Both approaches have inherent pros and cons. The former is the least complex to execute and simply involves updating the company’s master data file and Enterprise Resource Planning (ERP) system and managing old as well as new price stock inventories. Most products have their prices ink-jetted on the packaging, rather than being a part of the artwork, so that eliminates the complexity of managing the packaging material. The latter involves a change in the product specifications, which may or may not involve changes in the packaging due to fill-level checks and a change in the machinery in order to manage filling and wastage. If the weight is printed on the packaging artwork, this could entail packaging material inventory management as an added complexity.
Apart from the above, the fundamental question for brand managers is what is right for the consumer and hence, the business. Is the consumer willing to pay the higher price or willing to compromise on the quantity, as long as the cash outlay remains constant? There is only one way to do this. By talking to the consumer.
As a rule of thumb, in times of high inflation, it is prudent to opt for sticker price increases and in times of low inflation, to reduce the number of grams – although this may vary from category to category. Staples and branded commodities may have to reduce the weight proportionately to minimise the impact on the cash outlay. However, depending on who is manufacturing the branded commodities and how diversified those businesses are, they may be forced to do a bit of both in order to hit the target profitability levels. In the case of staples, governments usually step in with subsidies to avoid potential starvation.
The food and beverage sector would respond as per the specifics of their category (there are multiple categories; for example, carbonated soft drinks would respond differently to tea or to biscuits). Confectionary, snacks and daily consumable items would want to hold on to popular mass price points and favour reducing the weight – which is why you get mostly air in the smallest packs of Lays and Cocomo and why today’s version of Prince chocolate biscuits or Sooper biscuits resemble bite-size snacks. Other products are considered to be mini luxuries – for example, a Cadbury chocolate bar – and in this case consumers prefer to save elsewhere; it is a well-known fact that in troubled times, small luxuries act like an escape from worry while remaining an affordable act of rebellion against financial stress.
Laundry and home care products usually revert to consumer promotions such as Buy One Get One Frees. Floor cleaners, dishwashing liquids, detergents and specialised cleaning agents follow the same route. Personal care categories, such as shampoos, soaps and creams, will try to hang on to low price points by reducing the weight, which is not always easy as it may involve changing bottles and container moulds. Another approach in the home and personal care categories is to tinker with the formulations and here performance cues come into play. The formulations of these products are always tweaked by the manufacturers by playing with performance cues (for example, stain removal properties, fragrance or brightness) and brands can dial up those aspects so that the cost of the product can be managed without compromising the perceived performance. (This becomes difficult with food and beverage because quality is subjective.)
High involvement categories, such as automobiles, cosmetics or pet food behave differently. Consumers will not compromise with expense outlays such as cars or on the quality of the food they feed their pets or put on their skin. They are willing to pay the price and these categories will keep increasing prices to keep up margins.
It is not going to be easy. Creating new moments of consumption for a brand while playing continuously with the value equation of the offering is the way forward. All the four Ps come into play and constant tweaking with prices (sticker price or reducing the weight), packaging (SKUs), promotions (bundles, price offs, extra product) and product (formulations) will demand equally constant vigilance by brand managers. They will also need to think of creative ways to lock in revenue models, for example via subscription models on e-commerce based on bundle offers that keep repeating, referred to as “Rundles” by Scott Galloway.
In the end, it boils down to one action. Staying in touch with consumers. Marketers who can find a way to stay close to their consumers and generate constant insights will be able to stay a step ahead of the competition and add value in these unprecedented times.
Sheikh Adil Hussain is CMO, Tapal Tea and a member of the PAS’ Executive Council. email@example.com