Inflation: Hidden positives for FMCG

Feeling the heat of inflation

Today, expenses are rising faster than the income. Increasing fuel prices and a slow economy are weighing heavily on consumers. More than half say their expenses have increased by 40 per cent or more and six out of ten strongly agree that they are saving less than they did last year. As expected, lower income consumers are feeling the inflationary pressure the most. To survive, they are cutting down on non-essentials and some are even curbing on the essentials too. Surprisingly, upper income households are impacted more strongly than the middle class. They are feeling the pinch on their lifestyle as they try to sustain a status they’ve become accustomed to. As middle income consumers have always needed to balance budgets, they are adapting better than other income segments. They carefully consider essentials versus luxuries, which is a practice typical for these households.


Curbing extra expenses

To offset the pressure of inflation, consumers generally tend to minimise the spending on luxury products, but they can’t cut into day-to-day necessities of living. The rise in inflation has shown people buying in bulk, shopping once in a month. During inflationary times, consumers generally buy larger packs for consumer products, which is a once-in-a-month purchase rather than seasonal sales in order to economise. Indian consumers have always been value conscious, and the inflationary environment increases this tendency among Indian consumers. Consumers are more inclined towards deals and better value and switch stores and brands accordingly.

As per the survey done by Nielsen, “compared to those who preferred larger pack sizes for better value, less than a quarter (23 per cent) of respondents think that purchasing smaller packs with lower unit price would help them save their household expenses. Indian consumers also see an advantage in shopping at value retailers (41 per cent) and at locations closer to their homes and offices (40 per cent).”


FMCG sector not affected 

Speaking over the rising inflation and consumers’ reaction, Raj Hosahalli, Executive Director, Nielsen, says, “During inflation, most consumers are cutting down spending on non-essentials such as eating out, holidays and entertainment. The good news for the FMCG sector is that grocery sales are not impacted.”

Adding further, he said, “The FMCG sector is banking on ‘impulse’ buying, which continued to show an uptrend. Indian consumers have always been value conscious, so the FMCG sector will have to redraw marketing and pricing strategies in both rural and urban areas to sustain consumer interest.”

As consumers cut back on spending, reducing food expenditures is not the first imperative. Rather, spending on clothing, utility expenses, eating out and out-of-home entertainment and vacations/holidays are the areas that get slashed first when budgets are impacted. In fact, fast-moving consumer goods (FMCG) sales may actually benefit in inflationary times. As budgets get reallocated, consumption on day-to-day grocery products actually increases.


Right strategy: Down size or price increase?

With high inflation making consumers think twice before spending, food and beverages majors are turning to measures such as reducing pack sizes and introducing very low priced items in order to keep sales counter busy in India. But the price rise or downsizing on products should be carefully managed so that volumes do not get impacted. Speaking over PepsiCo’s strategy, Samudra Bhattacharya, Sales Head, PepsiCo India, says, “Despite hiking prices, the company is confident that steps like launching products specifically for bottom of pyramid consumers as well as for the premium-end segment will help us strike a balance between volumes and value.”

Explaining the strategy further, he said that there are revenue drivers and there are volume drivers, but deciding with tactic works best is dependent on the price sensitivity of the category. Three strategies should be considered:

Passing the Buck – consistently cut costs by either downsizing or else increasing price to drive revenue.

Making Money – introduce premium packs or small packs with a higher cost per serving to drive revenue.

Share Play – offer appealing value packs and promotions to drive volume. “PepsiCo has taken a set of measures to combat inflationary pressure both on cost site and consumers while looking to manage volume,” says Bhattacharya. In the recent past, the company has taken price rise both in beverages and food portfolio and at the same time downsized some of the packets. The company has introduced a host of products at ` 10 price point in the beverages category and launched 350 ml PET bottles at ` 20 across India. It also introduced value packs like the 1.2 litre family pack for consumers seeking good bargains.

Friedbert Klefenz, President, Bosh Packaging Technology, says, “The trend or demand for small packaging is coming from not only Indian manufacturers but it is the trend in the international market as well. In most of the metro and sub-metro cities, the family size is shrinking; youngsters have started living out of their family for study or job, so brands need small portions or small packs to cater to the needs of these consumers.” Due to food inflation, all the manufacturers in the food and beverages category are looking to cut down their packaging cost. “Cost cutting on packaging can be of two types – first is cost cutting on packaging material and the second is on packaging equipment installation. Traditionally, a large number of brands are cutting down costs over packaging materials as it is directly pulling out money from their pockets. But, nowadays, we see a rising tendency where brands are focusing over spending one-time money in installation of good and energy efficient packaging equipments,” Klefenz adds. In an inflationary environment, brand needs to ensure that revenues keep flowing. Launching more products targeted at the bottom of pyramid (BOP) consumers and adding the focus on distribution and availability of these products can help increase the reach to consumers. But, at the same time, brands need to equally focus on premium products to drive value sales.


The winning way!

At the end, the fact is that current inflation levels has not impacted grocery spend, so a right strategy towards reaching consumers would help brands create consumption.

Know your brand – where it is on the price deal response grid. Implement right strategy for right product category; if it’s non-essential or impulse product category, then downsizing or price increase or premiumisation would work. Essential product categories depend more on value pack and promotions, so the promotional offers and better deals will lead to the winning way.     

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