A Rs 2 Horlicks sachet gives a consumer one cup, while a Re 1 Clinic Plus shampoo offers a lady a full hair wash. As inflation bites, it’s becoming a challenge for FMCG makers to maintain these price points by reducing the quantity per pack — called grammage. “You cannot go down beyond a point. If a Re 1 Clinic Plus shampoo volume falls below a certain threshold, it will not allow for a full hair wash. There are certain thresholds that we operate within, and we can’t drop volume beyond that,” said Hindustan Unilever CFO Ritesh Tiwari.
Inflation is hurting unit economics, a measure of the profitability of selling one unit of a product, of FMCG companies. Low unit price points (LUPs) are sacrosanct, but due to grammage reduction, these mass packs are said to be close to the threshold below which they would fail to deliver value for money to consumers.
“LUPs such as Re 1, Rs 2 or Rs 5 serve a key purpose across different categories. Each of these price points has been established over a period of time to drive penetration. There are boundaries within which you can titrate these volumes when inflation goes up and the cost of product in a price point becomes challenging,” Tiwari said.
Parle Products senior category head Mayank Shah said, since one cannot change the price point on small packs, the only option to manage costs in this high inflation period is to take grammage reduction. “What used to be 100 grams at one point is available today at nearly half the volume for the Rs 5 price point. But the quantum available after grammage reduction is not enough to satiate one’s appetite,” said Shah, who added that Parle Products is determined to continue with its Rs 5 pack of Parle-G biscuit, even if it gives them low margins.
Shah said the company would never discontinue the price point because of its stated objective that it does not want to make money on the Rs 5 stock keeping unit (SKU) so that it’s affordable for the masses. “We barely break even on the Rs 5 SKU of Parle-G, with margins in lower single-digits. But we will continue to ensure it is present in the market because biscuits happen to be the lowest cost food for consumers and thus affordability is important,” said Shah.
In biscuits, Shah of Parle Products said consumers are likely to move to a Rs 10 pack to get a better volume. “We are seeing early trends of consumers moving towards Rs 10 packs from Rs 5 in tier-1/tier-2 towns,” he said. The Rs 5 and Rs 10 packs together contribute 40-45% of Parle-G’s sales.
According to data collated by Bizom over the last year, Rs 10 is fast emerging as a value price-point for biscuits. Bizom, a platform that automates retail execution at 7.5 million kirana stores, is seeing a drop of 2.4% revenue share over the last year at the Rs 5 price point, while there’s increased traction happening in the Rs 10 price point with revenue share going up by 3.8% on account of shift from both Rs 5 as well as higher prices towards Rs 10.
Bizom’s chief of growth & insights, Akshay D’Souza, said, “Reduced grammage across lower price points driven by high food inflation is making consumers look for packs that offer value (that is, more grams of biscuit per rupee) and that seems to be driving this shift towards Rs 10, which is fast emerging as a value price point. This could also indicate that more consumers are upgrading to multi-use packs from the earlier single-use packs that they were purchasing to manage their spending proportionally.”
HUL, on the other hand, is creating bridge packs (between two price points) to provide the right price-value equation to its consumers, ensuring that products remain affordable and accessible. The company plans to introduce more bridge packs across categories. Over the next few quarters, it will start activating these. The move will also help in the market development of these categories, said Tiwari.
Tiwari said, when unit economics gets strained because of inflation, consumers can be moved to bridge packs by giving them more value at a new price point ahead of the one that they usually buy. HUL has introduced a Lifebuoy pack at Rs 16, which is a bridge pack between the Rs 10 and Rs 36 price point packs. “When consumers find value in these price points, we get good unit economics. That’s the sweet spot that we are now trying to work upon,” said Tiwari.
On whether HUL has reached or is closer to reaching that threshold — say, on a Re 1 shampoo sachet — Tiwari said, with commodity inflation and volatility being where it is, it is probably not the right time to make long-term plans on a Re 1 sachet, one way or the other. “One should wait for a quarter or two to see how commodity inflation pans out compared to where it is now. As things stand, we see the June and September quarters having sequentially more inflation. Hopefully, in the next one or two quarters, we should see the peak of this inflation. As people are seeing the impact on their purse, they are titrating consumption, which ultimately has an impact on volumes. In times of such high inflation, our priority is to provide value to consumers, invest in our brands and protect our financial business model. Our first port of call always is to drive savings harder. We then take calibrated pricing actions while protecting and growing our consumer franchise,” said Tiwari.
For HUL, almost 30% of its business comes from packs that operate at these ‘magic price points’. Also, roughly 30% of its portfolio is price-locked.