FMCG firms have been betting high on their Low Unit Packs (LUPs)
The low-income segment makes up a huge percentage of the Indian population. A report published by People Research on India’s Consumer Economy (PRICE); a Mumbai-based think-tank, revealed that the share of the middle class in the total population of India rose from 14 per cent in 2004-05 to 31 per cent in 2021-22. For such a population, a big commodity pack is not only unaffordable there always is a risk of wastage too, with bulk packs. Instead of buying a big batch of Nestle’s Munch chocolate worth Rs 200, a daily labourer in India prefers a small size packet of the same chocolate for his children which costs him barely Rs 5 or Rs 10. Similarly, a middle-class woman in India prefers buying a small sachet of Ginger Garlic Paste or Garam Masala for Rs 5 to prepare a daily meal instead of buying a huge pack that might expire if not used in time. Similarly, a small packet of Haldiram namkeen seems ideal even for office-goers during their tea breaks.
In a low penetration market like India, such small packets also known as Low Unit Packs (LUPs) are in high demand as compared to the slower-moving large packs. Hence, for almost all fast-moving consumer goods (FMCG) brands, LUPs have become a lever of their growth strategy. LUPs help to increase market penetration, and distribution, while protecting market share. However, for companies, there is more to LUPs than meets the eye.
Why LUPs are proving to be a double-edged sword?
Although LUPs contribute a significant percentage of the total sale, they remain controversial for most FMCG brands. As compared to the bigger packs, the per unit production cost of LUPs is relatively high as they involve a bigger packaging cost. But even though the production cost is high, it’s almost impossible to increase the price of LUPs, unless every other competitor in the market agrees. And considering the established consumer behaviour toward LUPs, a consensus amongst competitors to hike rates is unlikely. Thus, despite very high volumes, the margin on LUPs is very low.
Horlicks Health & Nutrition Drink (Classic Malt) could be an interesting case study to justify the lower margin scenario. The 450 gm big pack of Horlicks Health & Nutrition Drink (Classic Malt) costs Rs 199, which works out to Rs 0.44 per gram of the product. On the other hand, the Rs 5 LUP of the same drink contains 20 gm of product, at Rs 0.25 per gram. That costs Horlicks approx. 43 per cent margin loss on LUPs.
The Kellogg’s Chocos 1.15 kg Super Saver pack costs Rs 515 (Rs 0.44 per gm), whereas a mini version of the same product costs Rs 10 for 26 gm (Rs 0.38/ per gm), with a 14 per cent less margin. In the case of Amul Ice cream (Vanilla), a 1 L family pack is priced at Rs 195 (Rs 0.19 per ml), giving a 21 per cent extra margin as compared to the same ice cream cup which is priced at Rs 10 for 65 ml.
In the case of Haldiram’s Namkeen Aloo Bhujiya, although the profit margin is the same in terms of both LUPs (Rs 5 for 20 gm) and larger packs (Rs 255 for 1 kg), there will always be an extra expenditure on the production of LUPs, decreasing the overall profit margin. Hence, although LUPs do contribute overall to total sales, the margins are markedly lower. This not only erodes the brand’s profitability but also prevents consumers from turning towards bigger packs, resulting in long-term effects.
For the bigger brands like those mentioned here, this margin loss might be nominal, however, the smaller brands and new entrants are pressurised to start on the lower profit margins with LUPs because of the competition from big players.
An inflation-induced shrinkage
The Indian economy has been severely affected by geopolitical crises such as the Russia-Ukraine War and also the palm oil export ban from Indonesia. In such a scenario, LUPs have been thriving in the market for Indian consumers. FMCG firms have been betting high on their LUPs. Rising input costs and the pressure in terms of maintaining the same price point of the product have been challenging Indian FMCG players. A decrease in grammage (quantity per pack) has been the go-to strategy for almost all FMCG companies during inflation in addition to opting for lighter, cheaper, and recycled packaging and spending less on operations like marketing. Increasing the price would not be a great strategy as even a small price hike adversely affects the sales volume, particularly in a country like India. However, there are companies like Nestle and Hindustan Unilever that have increased the prices of their noodles, coffee, tea, etc. Although FMCG companies are cutting down on their grammage, this might hardly add to their profit margin as the move is part of their strategy to cope with inflation. Consumers are surely paying more for less, but brands are hardly gaining any benefit from it.
Parle-G biscuits, one of the famous Indian glucose biscuits manufactured by Parle Products, is a well-known example of inflation-induced grammage reduction. According to Saptarshi Prakash, Swiggy’s Director of Design, until 2021, an LUP of Parle-G biscuit was priced at Rs 4 while the company started with almost 100 gm in 1994. As the years passed by, the brand slowly but steadily reduced the grammage of the product to 92.5 gm, then 88 gm and finally we have a 55 gm biscuit pack which costs Rs 5. A significant 45 per cent reduction in the grammage since 1994 is what inflation did to Parle-G.
Many other food and beverages (F&B) brands manufacturing potato chips, chocolates, etc. have been using this strategy to not only gather a bit more profit but also to tackle increasing material and input costs. Launched in 2017, the Punjab-based Lahori Zeera brand cut down its quantity per bottle by almost 20 per cent (200 ml to 160 ml). Even big brands like Coca-Cola and Thums Up have reduced their quantity per bottle from 250 ml to 200 ml. The price of Nestle’s Maggi Noodles LUP increased from Rs 10, to Rs 12, and now it costs Rs 14 for almost 30 per cent less product. Haldiram’s have also been following this trend by reducing the weight of their Aloo Bhujia from 55 gm to 42 gm.
Could bridge packs be the new LUP?
LUPs of Rs 1, Rs 5, and Rs 10 have their own market at different societal levels (mainly in rural areas. Bridge packs – a middle category between the low and large unit packs that cost mostly in the range of Rs 10 to Rs 20 (or a little more in some cases) have been becoming popular. Bridge packs might help in the customer conversion process of upgrading from extreme LUPs to larger packs. For instance, Parle-G’s Rs 2 pack is already out of the market. The brand is also going beyond the Rs 5 LUP. The company recently introduced a Rs 15 bridge pack of Nutricrunch crackers to the market. New-Delhi-based Greendot Health Foods has also launched a bridge pack of Cornitos at Rs 35. Hindustan Unilever has also been actively working on the bridge pack strategy in its FMCG business.
For most F&B companies in India, there is no scope to further reduce the pack sizes of LUPs. But LUPs drive significant sales in the rural parts of India, where consumers have lower purchasing power as compared to their urban counterparts. Bridge packs would be much more suitable in urban areas. In such a scenario, it would be interesting to see what Indian FMCGs have planned for consumers in FY 2023. Will LUPs become extinct in 2023? Will the bridge pack become the new LUP? Would price-correction be the way forward? Or would bulk packages become the only selling items? The answers would be interesting and game-changing at the same time.
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