When inflation is high, you either you pay more, or you pay the same but get less. Either way, you get lesser for your buck than before.
FMCG companies globally are under immense pressure as:
Inflation has been rising for all consumer baskets - including paying for fuel to get from one place to another
Purchasing power significantly reduces, and it’s not easy to start charging higher and expecting buyers to continue buying
Cost pressures rise as prices of key commodities are up 30-50%: crude oil, edible oil, wheat, plastic packaging, corn, etc.
Welcome to the world of @flation - the innovative means of (trying to) maintain revenues and profits, even when prices are rising!
@flation can take many forms:
1. Inflation
Vanilla stuff, just increase prices in an attempt to pass prices on to consumers. The risk usually is that consumers will just buy lesser, or buy smaller packets, or even switch to other cheaper brands
Over the last 6 months several brands have resorted to this - Sundrop Superlite, Parle G, Britannia Tiger, Rin Advance and Surf Excel among others
This can be commonly seen in cases where there is a strong brand loyalty, the product can't be easily substituted, or the product is essential in nature.
2. Shrinkflation
This one just tricks the consumer! Put lesser chips in that already almost empty pack, lesser number of biscuits in a pack, thinner chocolates.
You must remember how a Rs. 5 pack of chewing gum earlier had 6 gums in it, which then reduced to 5, and now you just get 4. With the chewing gums, that’s a 33% reduction in the product you’re buying (assuming the size of the individual gum in unchanged). Essentially, the company can pass at least a 33% cost increase to you, or make 33% more profit using this strategy.
For Britannia, grammage reduction accounted for 65% of the price hikes it undertook during FY22. Let that sink in! Who else has done this? Parle G, Vim bar, Wheel detergent, Rin bar, and many more.
And then there are some like Maggi - where over the years, the price per packet has increased from Rs. 10 to 12, and the size has reduced from 100 grammes to 70.
3. Swapflation
Swapping quality stuff for lesser-quality stuff. This can be done in two ways - either swap premium features for basic ones, or swap premium ingredients for more basic ones.
In 2012, coffee prices were going off the roof. Several brands started using lesser arabica and more robusta beans to make their raw material cost lesser.
With edible consumer products, there are several tactics one can use. For example, in ice creams, switching from milk solids to vegetable oil is pretty common. In fact, regulation came down hard on this and insisted that the products below a certain level of milk in them start calling themselves frozen dessert and not ice cream. Notice those ice cream ads next time to see what they call themselves!
4. Payflation
The baap of Shrinkflation. The idea is to first reduce what you were giving earlier for the same price, and then charge extra for additional layers!
Hotels often ditch standard services, and start charging for services that were earlier considered basic.
If you’re a not-so-light traveller, you would’ve noticed that the Indigo check-in staff has suddenly started trying very hard to gauge how much weight you’re carrying (check-in baggage plus hand baggage). If you exceed their weight limits, they will insist on you paying for extra baggage, versus the ‘thoda sa chal jayega’ earlier!
FMCG stocks may not be a strong sell after all. There are several pockets where companies won’t perform all that bad courtesy:
Strong brands
Premium positioning
Product options across the pyramid, so if customers have to go for a ‘lower’ brand, the same group has a product there
Lack of alternatives or substitutes
Or even safeguarding through one of the @flation techniques!
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