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All you wanted to know about down trading

Parvatha Vardhini C | Updated on July 27, 2020 Published on July 27, 2020

Pay cuts and job losses have been the norm since the outbreak of the pandemic. To ride through the rough patch, everyone’s focussed on maintaining a tight leash on expenses and cutting down on discretionary spending. Down trading is a tool that consumers deploy in such situations to shield their finances.

What is it?

Down trading refers to the practice of switching from expensive products/brands to cheaper alternatives in a bid to conserve cash. As customers turn price-sensitive, bells and whistles no longer appeal. Products which meet the basic requirements are preferred over those that are perceived to be value-adding. Scouting for value-for-money goods defines customer behaviour when they down trade. This trend is seen not only in small-ticket consumption items but also in vehicle or durable goods purchases.

Why is it important?

Down trading is important for buyers who are hard up for cash. If washing hands with any humble bath soap will help prevent the spread of coronavirus, hand-wash liquids and hand sanitisers, which may come at higher prices, need not be the ‘go to’ option for those who cannot afford them. When customers down trade, essentials such as food items are accorded a greater share of the wallet than discretionary goods such as beauty products or deodorants. When car and two-wheeler buyers want to tighten their purse strings, commuter bikes and compact cars see more interest than adventure bikes or SUVs.

Down trading is not something companies wish for. Hence, spotting this trend in the market assumes significance. In normal times, consumer companies increase profitability by adding premium products as well as products with low market penetration to their portfolio, as they earn better profit margins on these. When the buyer becomes price-conscious and leans towards essentials, profit margins will have to come from ramping up volumes to benefit from economies of scale as well as from controlling costs.

Second, customer loyalty is also tested when down trading occurs. For instance, even if you don’t change your vehicle, batteries and tyres have to be replaced at regular intervals. Customers could save on cash outgo by going to the unorganised market where, say, cheaper imported tyres or local brand batteries are available. Ditto with items such as edible oil, bakery products or snacks, which also have a huge unorganised market.

Even well-entrenched companies might face competition from newer, less established brands that may come out with attractive offers. To keep their customers, bigger brands may then have to introduce low unit packs priced attractively, though they may end up diluting margins.

Why should I care?

You may easily be able to afford cream biscuits and cookies instead of the no-frills Marie or Parle-G. But then, small drops of water do make up an ocean. And, you can make good savings on your monthly grocery bills if you cut out the discretionary or impulsive buys. Buying a smaller car or a used car may give you more peaceful nights, rather than opting for one which stretches your finances. On the flip side, settling for lesser known brands, say, in the case of consumer durables, tyres or batteries or even packaged foods, may bring forth quality issues.

If you are an investor in stocks of consumer companies, you need to watch out for how your company is responding to down trading. Some may play the volume game to gain market share even though they have to sacrifice on margins. For others, profitability will be the key. Stocks of companies which are agile and responsive to market situations may be better bets than those that don’t spot the trends.

The bottomline

A penny saved is a penny earned, but don’t be penny wise and pound foolish.

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Published on July 27, 2020
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