What can brand custodians expect in the next fiscal year?

Hyperinflation, Stagflation, High inflation and any other terms you can think of are the order of the day these days. Add to that “aaj dollar ka kya rate hai?”, the food and commodity price increases, petrol and utilities price hikes and the fallout from the federal budget, and you’ve got yourself our very own version of the “perfect storm”.

When the covid lock downs hit, suddenly, out of nowhere, you had big research firms coming out with snap polls and survey results telling us how consumers are reacting or will react to the “new normal”. Consumption levels will go up for some categories, other categories won’t fare so well. Time spent online will increase dramatically, as will ordering online groceries and food and so on and so forth. Just as we were getting used to getting back to normal, we’ve now been hit with the next crisis, and must now learn to wade through this one as well. The big research firms are slower with their poll results this time round, which could be because the size of the economic problem seems unprecedented.

So how should brand custodians react in such times? Questions of downsizing, increasing sticker prices, cutting costs by tinkering with product formulations/service delivery process, or optimizing the packaging are dominating discussions all round. According to Mark Ritson, a marketer or brand custodian fundamentally has the following 4 levers to play with in order to maintain/increase profitability at any given time. These remain true in times of crisis, stability or in times of making hay:

1.??????Sales volume and therefore revenue

2.??????Price

3.??????Fixed Costs

4.??????Variable costs

In general terms, according to a study quoted by Mark Ritson in his mini-MBA Marketing course, increasing price has the most impact on profitability showing a +10% swing in bottom line for every 1% increase in sticker price. Next in line is variable cost which results in +6.5% swing for every 1% reduction in costs, followed by sales with +3% swing for every 1% increase in sales and finally, fixed costs with a +2.5% swing for every 1% reduction in costs. This suggests that while its all very grand to chase after and aspire to higher sales to increase bottom line, it really doesn’t help much and even setting up cost chase committees doesn’t result in the highest uplift. However, just a 1% swing in price, does result in the maximum possible return on the bottom line, so this should be the area of focus.

Now the challenge is quite apparent. Its very easy to say, increase price, but that comes with a condition, and that condition is that you cannot, under any circumstances, lose volume proportionate to the price increase, as a result of that price increase. Here is where it starts to get interesting. Concepts of price elasticity start to come into play and now one has to judge at what point would my consumers turn away and either down size or downgrade.

In order to guard against this, there are a couple of ways to consider on how to take a price increase. Should it be purely a bump in the sticker price, or should it be via de-grammage of the product, where you essentially keep everything the same but reduce the quantity. Both approaches have their inherent pros and cons. The former approach is the least complex to execute and involves an update in the company’s master data file and ERP system as well as managing old price stock and new price stock inventories and that’s that. Most products have prices that are ink jetted instead of being part of the artwork so that even eliminates the complexity of managing packaging material. The latter involves a change in actual product specifications, which may or may not involve change in packaging material due to fill level checks and change in machinery in the factories to manage to filling and wastage etc. If grammages are part of the artwork then that can lead to packaging material inventory management as an added complexity as well.

Apart from all of the above, the fundamental question a brand custodian has to answer is what is right for the consumer and hence the business. At any given time, is the consumer willing to pay the higher price or willing to compromise on the quantity as long as the cash outlay remains constant?

There is only one way to do this. By talking to the consumer.

As a rule of thumb, in times of high inflation, it is prudent to take sticker price increases and in times of low inflation, it is prudent to de-gram. However, this may vary category to category. Staples and branded commodities may have to de-gram over proportionately in order to minimize impact on cash outlay but depending on who is manufacturing the branded commodities and how diversified those businesses are, they may be forced to do a bit of both in order to hit targeted profitability levels. In the case of staples, governments usually step in with subsidies in order to avoid potential starvation.

The food and beverage sector would respond as per the specific category. Confectionary, snacks and daily consumable items will want to hold on to popular mass price points and therefore favor the de-grammage approach. Which is why you get mostly air in the smallest Lays and Cocomo packs or the fact that today’s version of Prince chocolate biscuit or Sooper biscuit resembles bite size snacks already. Some of these products are considered mini luxuries like a Cadbury chocolate bar, or your favorite ice cream by the consumers so they try and not compromise on their purchase by saving elsewhere. In troubled times, a small luxury acts like an escape from all the worries and a still affordable act of rebellion against the powers that be.

Laundry and home care products usually revert to quantity consumer promotions to load pantries. A lot of BOGOFs or extra quantity packs start hitting shelves. Floor cleaners, dish wash liquids and bars, detergents and specialized cleaners etc. follow this route. Everyday personal care categories like shampoos, soaps, creams etc. will fight to hang on to low price points by de-grammage, which is not always easy as it may involve changing bottle/container molds and that gets cumbersome. ?Another route available to Home and personal care categories is tinkering with formulations as here the science of performance cues comes into play. Perceived performance increases in the eyes of the consumer if performance cues are high, meaning if fragrance in laundry and floor cleaning are a cue of the product actually cleaning or disinfection, then that can be used to impact perceived performance. Marketers can dial that aspect up, while decreasing the active ingredient for cleaning and disinfecting, the cost of the product can be managed while no compromise is made on perceived performance. This becomes difficult in food and beverage categories as quality is subjective.

More high involvement categories like the auto industry, cosmetics or pet food would behave differently. Knowing that consumers would not mess with such high expense outlays such as with cars, quality for their pets or caring for their skin, consumers will be willing to pay more for the desired quality. These categories will mercilessly keep increasing prices to keep up margins.

Rest assured, its not going to be easy. Creating new moments of consumption for your products while playing continuously with the value equation of the offering will be the way forward. All 4 Ps will come into play and continuous tinkering with price (sticker price or de-grammage), packaging (relevant SKUs), promotions (bundles, price offs, Extra product etc.) and product (formulations) will demand constant vigilance from the marketers. Marketers will also need to be creative in thinking of ways to lock in recurring revenue models, for example via subscription models on e-commerce based on bundle offers that keep repeating, referred to as “Rundles” by Scott Galloway.

For all of the above, it will boil down to one main action on part of the marketers. Staying in touch with their consumers. Marketers who can crack a way to stay close to their consumers and generate constant insights will be able to stay a step ahead of competition and add value in these unprecedented times.?