The Hindu Business Line : Price pyrotechnics

COMPETITIVE pressures can drive companies to do strange things. Despite substantial increases in the cost of raw materials — including sugar, wheat, steel, plastic and packaging material — over the last several months, not many companies have braved consumer alienation by increasing MRPs. And even those that have announced price increases have done so by first absorbing some of the cost hikes themselves.

But product managers still face the problem of how to maintain MRP and manage inflationary pressures simultaneously. And they have been finding smarter and smarter ways to achieve the twin objectives. Take, for instance, the confectionery industry, which was frantically looking for ways to contain costs. Many companies in this sector have resorted to reducing the grammage of products (net weight) while keeping the same prices. In fact, the net weight of several 50-paise toffees and candies that a consumer buys now is almost half of what it was earlier.

Says Lotte India's Managing Director N. C. Venugopal, "As confectionery makers operate on tight price points, they have to look for alternative ways to manage rising input costs. One way is to reduce grammage. In recent times, a child could end up buying as little as three gm of a confectionery product for 50 paise against 5.5 gm earlier."

Not only does the end-consumer pay the same amount of money for lesser product weight, even retailers have to settle for this differential. For example, a retailer buying one kg of Ravalgaon Cherry will get only 180 pieces (5.5 gm each for 50 paise), whereas he would get 250 pieces of Coffy Bite (4 gm each for 50 paise) and 330 pieces of Alpenliebe (3.03 gm each for 50 paise). While the price paid for the total weight (one kg) remains the same, the number of pieces per kg varies widely, thanks to the grammage jugglery, point out industry watchers.

And this trend is not restricted to confectionery. Within the FMCG segment, it is religiously followed for products as varied as ice-creams, packaged curds and other eatables.

Supporting the industry's endeavours to maintain MRPs in an environment of stiff competition, analysts and industry watchers are quick to point out that reducing grammage while keeping MRPs constant is really no violation of the Weights and Measures Act.

"The Act does not specify what the MRP should be of the product for a particular weight/grammage. It only says that all packaged products must conform to prescribed variations in weight, and this provision most companies comply with," analysts said.

An entirely different kind of price equation has been worked out by a recent entrant in the fast moving consumer goods industry — India Household & Healthcare Ltd (IHHL), the sole licencee for LG Household & Healthcare Ltd (that owns the LG Care brand) in India.

When the company began operations last year, it priced a one kg pack of detergent brand Super Enz at Rs 159. But the company soon realised that unless it braves a price correction, sales would not pick up, given the price war unleashed by Procter & Gamble and Hindustan Lever Ltd (HLL) by then. So, later in the year, IHHL brought down the effective price of Super Enz by 60 per cent when it offered its Double Rich shampoo, worth Rs 99, free with a one kg pack of Super Enz.

This promotion continued for several months till the company felt the pinch of spiralling input costs. And it decided then to effect a price increase of sorts. IHHL has now changed the offer; one can get 1.5 kg of Super Enz, but no shampoo, for Rs 159. This translates to a 32 per cent price reduction, against the 60 per cent offered during the earlier promotion.

Says the IHHL Managing Director Vijay R. Singh: "There can be no further price cuts for any of our products. Even after the freebies we are offering, Super Enz is the most expensive detergent brand right now; we cannot lower prices since there is a hefty import duty." And with severe competitive pressures in detergents, the company does not want to take chances by hiking MRP.

Meanwhile, in the case of the consumer durables sector, there have for long been talks of refrigerators or air-conditioner makers overstating the actual capacity of the products in order to save on costs.

More recently, it has been seen that in both the consumer durable and automobile industries, a few companies are focusing on selling "stripped-down" variants of products, targeted at the price-conscious consumer.

"The idea is to get consumers to pay extra for features or accessories," points out a market watcher.

Particularly in the semi-urban areas, he says, there have been instances of companies selling a television without woofers or even a remote control, which cost extra. There are also firms selling refrigerators minus the side-trays. A similar trend is visible in the automobile sector as well.

"Auto companies have been decreasing the number of variants per model to save on costs. At the same time, there has been a rationalisation of features on the variants. The idea is to get consumers to pay for add-ons/added benefits," says Anang D. Jena, Synovate Motoresearch Chief, Synovate India.

Meanwhile, some analysts point out that "tweaking" the product by removing frills/features may not only be about saving on costs but also about providing maximum value to the consumer. "Consumers do not buy products on the basis of prices or discounts. Consumers are seeking value. By removing a few items, accessories and such, manufacturers certainly aim to service consumers for whom the product now makes more value sense. This is extremely popular in the automotive business also. Every manufacturer has several variants of a model, with different levels of accessories, fittings, trims and at times even specs to offer value to different consumers at different price points," says Neeraj Bhatia, General Manager, TNS Automotive.

At the end it is all about choices and trade-offs. "The manufacturers are offering choices and the consumers are looking at trade-offs," he says.

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