Price pyrotechnics: Be good in difficult times

One of the sectors that has been affected in the past one year is FMCG, which is the fourth-largest sector in the Indian economy. Overall, the FMCG sector is witnessing a slowdown, going from double-digit growth 12 quarters ago to single-digit growth.

The depreciating rupee has escalated raw material prices.

This, in turn, has led the FMCG companies to increase the prices of some of their essential products like soaps and detergents. The prices have been raised on an average by 2-5 per cent.

Increase in input costs, amid the slowdown, has led to companies taking price hikes in large categories.

But, is this the right way to go about managing price and consumer demand?

Research indicates that the past year, in particular, has been difficult for Indian consumers; in 2013, there was no sign of a reduction in food inflation, while job prospects and the overall state of the economy were weak. There would be 25 per cent less jobs in the next seven years, compared to what we generated in the last seven years. Economic growth and inflation management have not been particularly good in India. In September, 2013, consumer inflation reached 9.8 per cent, while the economy grew by just 4.8 per cent over the previous year. GDP growth has been at the lowest. Early in 2014, amid these unfavourable trends, India faced a higher fiscal deficit, sluggish industrial growth and a larger current account deficit.

Economic slowdown is expected to further drag down consumer demand. Stress has manifested across sectors. Passenger car sales have been at an 11-year-low and consumer durables production is at a seven-year low.

If FMCG players' cost-increases are transferred to shoppers, consumer confidence will erode further. So, what is it that the companies should do in their efforts to balance both?

Players have to resort to best practices in bad times to win back consumers. Come what may players control their own destiny.

There are revenue drivers and there are volume drivers, but deciding which tactic works best is dependent on the price-sensitivity of the category.

Some companies had decided not to pass on the burden to the consumer and reduced grammage (weight of the product) than increase the price. Down-sizing (grammage reduction) minimises the volume loss in impulse and non-essential product categories compared to increasing price. Reduction often results in consumers purchasing a product only by looking at the price. In many cases, they are not aware that the quantity has also been reduced.

Having said this, what's important for companies is to understand the threshold point of how much to reduce?

Recent guidelines have now been set for various categories and it is best to move to the nearest standard weight in a bid to keep prices unchanged. Companies should focus on cost absorption so that volumes do not suffer.

The second important strategy to maintain would be to evaluate the pricing at an item level and not at the product level. And, this should be done at the point of sale. At the end, it is all about choices and trade-offs. The companies should be offering such choices as the consumers are looking at trade-offs.

Finally, this slowdown will not be forever. When good times return, that's the time to relook at pricing as the consumer will be more willing to take a price hike.

The author is President, Nielsen India