Packaged Food Makers Play Robin Hood
Indians’ hunger for smaller helpings has tripped traditional business wisdom.
Family-sized packs are usually considered cheaper than buying multiple tiny units. That’s because it’s costlier to stock products in many small packets compared with a single large one. Consumer goods makers have turned that on its head.
Buying several single servings of biscuits, chocolates or chips is either cheaper or offers more grammage than stocking your kitchen with a bigger bag of equivalent weight. So while you pay Rs 40 for 200 grams of Britannia Industries Ltd.’s Good Day biscuits, four Rs 10 packs give you 240 grams. Parle India Pvt Ltd., Mondelez International and PepsiCo Inc.’s Lays are among the other companies that have deployed this strategy.
The reason is the success of selling everything in affordable sizes to drive consumption in towns and rural areas. And it has paid off, helping boost volumes of India’s food and beverages market that, according to Nielsen India estimates, accounts for a fifth of the nation’s $52.8-billion consumer goods industry. To be sure, the trend is not new. India’s sachet revolution was built on this strategy by selling Re 1 and Rs 2 packs.
“It is easier and cheaper to sell smaller units compared with bigger ones,” Mayank Shah, category head at Parle Products, told BloombergQuint. “Volumes of affordable sizes are much higher. You can mass produce them at multiple locations.”
Agreed Alpana Parida, managing director at brand consultant DY Works. “The Rs 10 price point works as a magic price point for consumer companies as these bring in volumes.”
Emailed queries to Britannia and Mondelez on dual pricing remained unanswered.
Robin Hood Strategy
The difference in pricing stems from where the packs are sold. The larger ones are targeted at supermarkets and big-box stores. The affordable units, however, are largely retailed through kirana stores and are aimed at consumption in towns and rural areas to draw consumers to try new or premium offerings.
Such units work as trial packs and is a way to get people to shop into a category or a brand, according to Arvind Mediratta, managing director, cash and carry chain business at Metro Cash and Carry. Brands need to be available at affordable price points and then drive repeat usage, he said.
But it comes at a disadvantage.
“Usually, packaging bigger amounts is cheaper,” said Parida. In biscuits, depending on the type of biscuits and extra material used, including separators, pushes up costs, she said.
Amit Kumat, managing director and chief executive at Prataap Snacks Ltd., maker of Yellow Diamond wafers, said larger-sized stock-keeping units lead to savings. Packaging cost doesn’t increase in proportion to the sales price, he said, adding it roughly falls by around 10 percent when you move from a Rs 5 to Rs 10 unit.
That’s where the dual targeting helps. Consumer goods makers work on wafer-thin margins on smaller packs, while higher-priced bigger units cushion profitability. In a way, it’s like a Robin Hood strategy of business—charging affluent buyers more to subsidise low-paying consumers.
Still, according to Parle’s Shah, gains are not so big. Selling through large-format stores is costlier. Margins for products retailed through supermarkets and hypermarkets are higher at up to 15 percent compared with mom-and-pop stores that get 10-12 percent, he said. Moreover, large retailers also offer discounts, narrowing the benefit for consumer companies.
For example, at a Reliance Retail store in Mumbai:
- Parle Bourbon offers buy-two-get-one-free on a pack of 150g. Parle G, 800g pack costing Rs 65 is sold at a discount of Rs 7.
- Hide & Seek 200g biscuit retails Rs 7 lower than the MRP of Rs 50.
- Oreo can be bought at a 10 percent off on 100gx3 pack at an MRP of Rs 75.
- Krackjack 400g pack is sold at Rs 45 compared with an MRP of Rs 60.
As a result, targeting different types of consumers with different sizes of servings squeezes margins. But that’s the tradeoff they make to drive penetration.
“India is under-branded and there is work to be done by the FMCG world to introduce new categories and develop habit as affordability matters a lot,” said Devendra Chawla, chief executive officer at Spencer’s Retail, citing the example of shampoos that food companies have emulated. To develop a habit from using soap to shampoo and then conditioner, the affluent consumer gets promotions like conditioner free or extra at the same price, he said. “For the aspiring consumer, a sachet still has better value than large bottles.”