Consumers in India are feeling the inflationary heat. Expenses are rising faster than income and wallets are being squeezed. At the Nielsen India Consumer 360 Conference in New Delhi, Raj Hosahalli, Executive Director of Advanced Analytic Consulting and Surekha Poddar, Executive Director of Client Service, discussed how consumers are adapting to inflationary pressures and outlined the strategies manufacturers and retailers can deploy to continue growing.
Consumers are Adapting
Increasing fuel prices and a slow economy are weighing heavily on consumers. More than half say their expenses have increased by 40 percent or more and six-in-10 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 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.
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.
Downsize or Price Increase, Which Strategy is Right?
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 down-sizing or taking a price increase 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.
To decide which strategy is the best fit for the category, manufacturers need to take a portfolio approach across brands by identifying where the brands fall in the sensitivity grid. Brands that have a high sensitivity to price and low sensitivity to deals, benefit from a low shelf price without promotions. Products like butter and cheese fall in this quadrant. Products like juices, carbonated soft drinks and salty snacks, however, while sensitive to price, also respond well to deals. These brands will benefit most when low prices are coupled with promotions.
For pure profit-play categories like shampoos, fragrances, chocolates and skin care, manufacturers can retain or even increase the shelf price and offer no promotions. And the products that do not benefit from a low shelf price, but gain the most from promotions include detergents, confectionary products and soap/body wash.
Five Tips for Success Pricing:
- Down-sizing (grammage reduction) minimizes the volume loss for impulse and non-essential products versus increasing price.
- The premium segment is the strongest revenue growth driver.
- Small packs are less sensitive to pricing changes and can gain higher revenue during price increases.
- Larger packs tend to be highly sensitive to pricing changes. Price increase will result in both volume and value losses.
- Distribution is critical in mitigating inflation risks and direct distribution channels are significantly better in driving volume share for your brands.
During tough economic times, manufacturers and retailers need to continue to focus on penetration and consumption strategies. Deciding the best approach, however, takes careful consideration to protect revenues. Taking a portfolio approach to pricing will mitigate future inflation impact.