Downsizing on the Value

The goal of every organisation is to create value for its shareholders and customers alike. For most companies, value is a combination of sustainable sales volume and profit. The year 2023 serves as a case study for what can happen when value creation becomes synonymous with increased profits and declining sales. This was evident when most companies reported their financial results for that year, showing a double-digit increase in profits but a decline in volume.

As we approach the end of the first quarter of 2024, some key trends that began in 2023 are taking shape. These trends indicate changes in consumer behaviour in response to macroeconomic changes, forcing manufacturers to address big questions such as: how will they control their input costs if the value of the dollar continues to appreciate in 2024? Have consumers lost confidence in big brands? Is local procurement and a lean organisational structure the way forward? Should multinationals leverage their local legacy rather than their foreign credentials? It is these easy-to-ask but difficult-to-answer questions that will decide the course of Pakistan’s FMCG companies.

Last year, for the first time, Pakistan hit an all-time inflation rate of 37%, a rate that was not only a problem for manufacturers; it also changed how consumers view companies and impacted their purchasing habits. Consumers have become wary of companies that are decreasing product size unbeknownst to the consumer (shrinkflation) and their perceived tendency to use inflation to increase prices and improve profitability (greedflation). As a result, consumer trust has been shaken.

Let us now look at some of the trends that are shaping Pakistan’s FMCGs and how astute brand managers can learn from them and avoid the pitfalls of the value trap.

For most FMCG companies, 2023 was a difficult year. Depleting foreign reserves in a dollar-strapped economy and the government’s approach to imports kept companies jittery about their pricing strategies. In fact, we came very close to economic default – or, as some economic experts would have it, we actually defaulted. To put matters into perspective, Pakistan became the 17th most expensive economy to live in on a list of 190 countries, causing a major shift in how companies could operate, especially those that sourced their raw materials outside Pakistan. Their issues veered from sharp price increases to potentially more threatening matters, the one at the top of the list was maintaining production at a time when Letters of Credit were put on hold by the State Bank of Pakistan.

In a normal year, a 10% price increase along with some reduction in the weight per gram of low-priced SKUs would require a great deal of research and running different pricing scenarios. But not in 2023. The chaos, for the most part, was managed through bulk buying at the beginning of the year, followed by a rupee depreciation domino effect that caused prices to soar in the first and second quarters. As a result, FMCGs experienced a 36% increase in prices in both the food and non-food sectors, compared to a normal price increase of 10 to five percent.

These relatively massive price increases came with multiple reductions in the weight per gram across products to maintain profitability, and the result was that major manufacturers in categories such as tea, personal care and home care experienced significant declines in their sales volume. Bottom lines, however, were an entirely different matter, with these companies posting 25 to 30% increases; although, this value increase came at the cost of lost sales, a trend that seemed to apply across the FMCG industry, regardless of the nature of the business.

In response, companies deployed different strategies to mitigate the effects of these price increases, in the form of discounts and special promotions. Two categories badly hit by the situation were packaged masala and frozen foods; both increased their advertising airtime to either promote value-for-money propositions or launch new price-sensitive SKUs. Which of these two approaches works best has yet to be seen. However, what is clear is that understanding consumer behaviour and quick responses are the keys to success in trying times.

In terms of the impact of these price increases on consumer behaviour, households that did their grocery shopping monthly now did so weekly, and households that bought weekly now made their purchases daily. In fact, consumers are in a constant state of war to manage their budgets while trying to make the best choices for their families. According to research (and contrary to common belief), rather than switch brands, consumers look for value for money and settle for brands with a slightly lower price, rather than opting for the cheapest one.

A further complication to enter the equation was the boycott of foreign brands, which particularly affected the carbonated beverage market and fast-food chains. The fact is, Pakistani food and beverage and beauty brands have come a long way in terms of improving their quality, and although they do not have the massive budgets of multinationals, inflation along with the war in Gaza has placed them in a good spot. Due to their lean structures and local procurement models, they were able to keep their price points significantly below those of the MNCs. All these factors encouraged consumers to try these local brands (perhaps for the first time), with many finding the experience to be a good one and one they were willing to talk about online, thus creating an organic pull for the brands through word of mouth. This shift in consumer behaviour could play out well, especially if these brands continue to improve their quality, manage their pricing strategy and be effective in their communication.

The future of both multinational and local companies will depend on how well they can manage the current fiscal year, especially because an increase in the dollar rate is inevitable in Q2, which will lead to another round of price increases. However, this year’s price increases may not yield as much growth in value as last year, leaving brands unable to move the dial on either volume or profit. This situation will require companies to step up and look for new approaches to ensure sustainable growth. This may involve sharing risks, partnering with local suppliers, looking for leaner processes to absorb costs rather than passing them onto the consumer, investing in communities and championing causes close to their hearts. Such measures may help foster positive feelings about the brand and help companies survive even in the most difficult of inflationary times.

Omar Farooq is a marketer by profession.He tweets @OmarFarookui.omar.farooq@packages.com.pk