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Consumer firms turn to ‘bridge packs’ to sustain margins

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But the companies are unable to take direct price hikes in lower-priced packs for the fear of hurting demand in this category, which is why they are looking at launching ‘bridge packs’ that would be priced higher.

The consumer companies have found a way to increase prices without disturbing the grammage in the sensitive segments, priced between Rs 5 and Rs 10, and also protect margins at the same time. Volume growth of the leading consumer companies has taken a hit in the last few quarters, as they opted to lower grammage instead of hiking prices of smaller packs. But the companies are unable to take direct price hikes in lower-priced packs for the fear of hurting demand in this category, which is why they are looking at launching ‘bridge packs’ that would be priced higher.

While playing around with volumes in the price-pointed packs is an accepted practice, during times of runaway inflation like these, this strategy has got its limitations and companies can reduce grammage only to an extent in the smaller packs. Beyond that, it creates dissatisfaction among the customers about their needs not being met for the price they are paying.

The consumer goods companies are looking to launch products in packages which are at a price point between the low-priced packs of Rs 5-Rs 10 and the high price points of Rs 20 and above. These ‘bridge packs’ will be priced somewhere around Rs 12 and below Rs 20. The market leader Hindustan Unilever (HUL) told FE that it is launching this new price-point and has introduced a Lifebuoy pack in Rs 16, which is a bridge pack between the Rs 10 and Rs 36 price point packs.

An HUL spokesperson said: “We have approximately 30% of our business in price-point packs. The high levels of input cost inflation have had an impact on the offerings we have in some parts of this portfolio. We are, therefore, creating bridge packs to provide the right price-value equation to our consumers, while making sure our products remain affordable and accessible. This will ensure that we protect and grow our consumer franchise in these times of unprecedented inflation.”

Mohit Malhotra, CEO of Dabur India, says that the company has responded to the dramatic rise in input costs with a mix of pricing actions and cost control measures. “Bridge packs is another option that is being evaluated,” he said. Bridge packs as a strategy could come to the rescue of companies to an extent as the company can give slightly more grammage than the lower-priced pack while charging the customer higher. According to analysts, this strategy will be fraught with challenges as convincing customers to pay more is difficult.

Manoj Menon, head of research at ICICI Securities, told FE that in high inflationary times like now, bridge packs are necessary for companies, but the transition is very difficult. “One understands that after the `10 price point the price directly goes to Rs 30 for say 100 gram (g) of soap, so there is an opportunity to have a price point in between. But it is difficult to get the customer to pay Rs 5, or Rs 2 for that,” he said.

In the past, this strategy has likely faced consumer acceptance challenges, Menon said. A case in point is that of Maggi Hungroo which Nestle had introduced in about Rs 15, but it was difficult to get the customer to pay that extra Rs 5 and this was the time when Nestle was fairly dominant with over 70% market share in instant noodles.

According to analysts, bridge packs are a way for companies to protect margins rather than increase volumes. The thought process behind bridge packs is that if 100 g of noodles is needed to fill the stomach and it has been reduced to 70 g or 80 g for the price of Rs 10, the company will charge Rs 15 now – 50% higher. But that does not mean that the grammage will be increased by 50% and made 120 g because the requirement is only 100 g. So, the company may offer 110 g for Rs 15, leading to higher profitability as the price per unit that the company makes will be more.

“From a company’s perspective, this is more from the view of increasing per unit realisation. It is for margin management and not a selling tool to get the consumer to consume more,” Menon said.

Some analysts look at it as a tool to arrest downtrading by customers as well as protect margins. “The lower the price point pack the consumers go, the lower are the margins for the companies. So, if firms can stop consumers at somewhere between low price and high price levels, the margin fall would be lower,” a senior analyst at a domestic brokerage said on the condition of anonymity.

A lot of competitive activity is also expected to play out in bridge packs because not every company will action it at the same time, and the price points they decide on will depend on their margin threshold. For instance, HUL may launch a soap at Rs 15, while a Godrej or Wipro may keep it at Rs 12.

“A lot of competitive activity will play out in bridge packs. We will have to wait and see how this plays out as once more action is seen on the ground. Equilibriums are not formed overnight, so it will work eventually,” Menon said.

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