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Don't touch my wallet

As inflation figures rage, marketers have a huge challenge on their hands—to keep the price-value equation just right for consumers. BT's Rachna Monga & A. Subramanian report.

For Yogendra Kumar Srivastava, a 37-year-old salaried individual who lives in Faridabad, his car is his lifeline. There’s no other way of reaching his office, a telecom company in Okhla Industrial Estate in Delhi. Srivastava, who heads a family of six (including his parents), wishes there was some other way. His monthly petrol bill is steadily rising, moving from Rs 2,800 to Rs 3,000 in quick time. This is at a time when his equated monthly installment (EMI) on a housing loan is set to go up by Rs 2,000. Srivastava has no choice but to cut back. The number of dinner outings has come down from twice to once a week. “Even if there is a sale in the malls, we think twice before stepping in. We constantly ask ourselves— do we really need new clothes? Can we postpone any kind of big-ticket purchase—like a flat-screen television, for instance— for some time,” shrugs Srivastava.

As you read this, engineers at the Indian manufacturing facilities of Korean consumer durables major Samsung are pulling out all stops to bring down costs. Just one of those initiatives involves reducing the number of screws in a colour TV mould by going in for “locking-type” moulds. “This has resulted in some cost savings,” says R. Zutshi, Deputy Managing Director, Samsung India.

 

 Amit Sahu

Residence: 1 BHK apartment in Versova in Mumbai

Profession: Senior manager with a private sector bank

Feeling the squeeze: Petrol prices of almost Rs 56 per litre are eating into his spending power

Action: Shares a cool cab to work, along with a few other colleagues who live in the vicinity

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Amit Sahu, a 30-year old senior manager with a private sector bank in Mumbai, has stopped taking his car to work. Ever since petrol prices went up from Rs 50 to Rs 55.76 per litre in the city, Sahu has stopped filling the tank. To reach his office in central Mumbai, he rides a Cool Cab (an air-conditioned taxi) along with colleagues living in the vicinity. A bachelor who doles out advice to his bank’s customers on investment products, Sahu is clearly feeling the pinch of soaring fuel costs.

Call them gimmicks or consumer carrots, but Hyundai Motor India is doing its bit to lure buyers in an era of high fuel costs and finance charges. Last fortnight, the Korean car giant began offering a free fuel voucher worth Rs 2,700 with every Santro and i10 purchased (between June 20 and 30). A few days later Hyundai launched an ‘exchange and upgrade’ scheme that claims to allow owners of compacts to graduate to bigger cars at lower monthly loan payments.

Renu and Ravi Jethwani, a young couple living in Thane, a suburban area of Mumbai, are saving Rs 7,000 a month by using office transportation—instead of riding together in their Maruti Swift to reach their respective offices. But that’s a tender mercy. The EMI on their home loan will soon go up by at least Rs 1,000, to Rs 35,000. Recently the Jethwanis had planned a holiday to Kashmir, but with airfares going up from Rs 17,000 to Rs 24,000 on the Mumbai-Srinagar route, they’re now planning a holiday closer to home—preferably to a place that doesn’t involve flying. Perhaps a train.

“This is not just a possibility but a reality,” says Siddhanta Sharma, Executive Chairman, SpiceJet, a low-cost airline. The reality he’s talking about is flyers downgrading to rail travel. That’s primarily because the price of jet fuel, which accounts for between 45 and 55 per cent of an airline’s operating costs, has shot up by a little over 80 per cent in the last one year. “Trains run on fuel that is subsidised by over 47 per cent,” bemoans Sharma. Even as rumours of SpiceJet being an attractive acquisition target floated in the market, Sharma was preparing to knuckle down and confront the cost dilemma head-on. For one, SpiceJet is now flying into fewer airports than before (to 16 as against 19 a few months ago). For another, it is focussing on signing long-term maintenance contracts instead of shortterm ones. “These were ongoing exercises but given the way fuel prices are headed, they have gained urgency,” adds Sharma.

Suddenly the Great Indian Middle Class—all 300 million of them—isn’t looking so pretty after all. Touted for their propensity to spend brazenly, their mounting aspirations, and their burgeoning purchasing power, these Children of Consumerism have been the toast of a shining India over the past sixseven years. Their rampant consumption did its fair bit to boost economic growth, and provided a huge fillip to service-oriented and consumer-targeted businesses. More and more cars have been hitting the roads; more Indians discovered the joy of flying (if it is a joy, that is); international vacations are no longer Bucket List-like wishes, trawling malls and marching into multiplexes became almost a constitutional right in urban India; eating out was a religion; and credit card marketers and loan providers laughed all the way to the bank (their own).

So what’s gone wrong now? To put it simply, the cost of goods and services has increased as manufacturers and marketers have no choice but to pass a part of the higher cost of doing business to the consumer; at the same time the cost of loans for buying homes, cars, consumer durables and vacations has climbed, leaving Consumer Joe significantly lighter in the wallet; a dismal picture is complete with investors’ portfolios getting eroded, and the virtuallyassured returns of yesterday no longer flowing in.

With consumers preferring to tighten the purse-strings, marketers clearly have their task cut out. Their #1 priority in such climes is to get the price-value equation right. This means justifying a higher price tag on their products with added attributes (in terms of quality or quantity).

 A marketer’s checklist in inflationary times…

How to keep the consumer interested.

  • Discount, systematically: Target only consumers feeling the pinch. Which means discount only at key price points and on small packs

  • Encourage multi-unit buying: For consumers with cash in the wallet, discounts are not what they’re looking for; instead encourage them to stock up in anticipation of the next price hike

  • Get more efficient: Squeezing out efficiencies and cutting costs are exercises that never end, be it in terms of inventory management, sourcing and across the supply chain

  • Pass on costs, if you have to: But it would help if you are able to convince the consumer that you are offering more value—that’s where innovation can play a role

  • Don’t trim marketing spends: Rather than waiting for the slowdown to end before launching a blitzkrieg, keep the activities going, and try to gain sales

...And a consumer’s guide to surviving inflation

  • Down trade if you have to: Sniff out that petrol station that hawks regular fuel

  • Buy in bulk if you can: Inflation may not end in a hurry, and could in fact rise; it would make sense to stock up select items at current prices.

  • Watch the fine print: The price of noodles, ice cream and tea you buy may not have risen; but check the weight, it may be a tad lighter as marketers attempt to be loyal to price points but not necessarily to quantity, particularly on smaller unit sizes. May make economic sense to buy a larger pack at a slightly higher price

  • Get demanding (if you aren’t already): Ask your neighbourhood retailer for the best deals available—there are always plenty for the taking, even in an era of high prices

  • Substitution isn’t bad: Ever thought of trading in your petrol vehicle for a diesel one? It may make sense depending on the kilometres you do every day
 

Alternatively, they need to take a close, hard look at their entire supply chain, and see where costs can be shaved off; or get into the research labs and innovate to bring down costs. At times when prices are less affordable, the not-so-cash-rich consumers are likely to defer purchases, or even opt for cheaper brands. “It (high inflation) is a challenge because one would like to minimise the price increase so as to not disturb consumer’s buying sentiment,” says Samsung India’s Zutshi. Adds V. Ramachandran, Director, Sales & Marketing, LGEIL (LG Electronics India): “In an inflationary environment there’s pressure on certain sections of society and their potential access to highvalue products.”“Businesses need to be resilient to manage the situation,” says D. Sundaram, Vice Chairman, Hindustan Unilever. If marketers anticipate demand to slow down as a consequence of rising prices, they have two options ahead of them: To either go slow on advertising and promotions and wait for the slowdown to tide over; or to continue with the regular marketing activities— or even step up spends—and gain market share. Most companies have chosen the latter option—of aggressively pushing ahead with innovative offers and discounts. Here’s a rough sample of who’s doing what across sectors.

  • The Fun Republic chain of multiplexes is resorting to differential pricing for morning and evening shows. Morning shows are priced at around Rs 70 in Mumbai. “So people who cannot afford evening or night shows, which are priced at around Rs 250, can go for the morning shows,” explains Atul Goel, CEO, Fun Republic. The multiplex is also rewarding loyal customers with freebies.

  • Godrej Consumer Products (GCPL) has introduced value packs in soaps. For instance, you can avail of a discount on purchase of four soaps. “While you maintain the price-value equation it is important to see to it that there is no compromise on quality,” says H.K. Press, Executive Director, GCPL.

  • Samsung has introduced innovative finance options. One of them: A Re 1 cash-down scheme for airconditioners, where the customer gets an air-conditioner for Re 1, and pays for it in six EMIs. That’s one way to boost consumer sentiment, says Zutshi.

  • A commodity sector like cement has problems of its own. Even as raw material costs are soaring, the government is keen to keep prices in check. In a recent report Macquarie Bank has forecast that prices will be down by 5 per cent by 2010.

     No gain, more pain

    Rising interest rates and plunging stock prices compound consumers’ woes.

    V.N. Kulkarni runs Abhay, a loan-counselling centre in Mumbai. Over the past few weeks, Kulkarni has been deluged by visits and calls from individuals saddled with home loan debt, huge credit card bills and high-interest personal loans. It doesn’t help that the stock markets have been brought down to their knees—in 2008, the 30-share BSE Sensex has crashed by 36 per cent from its peak, leaving investors’ portfolios in tatters. Investors who’ve taken the mutual fund route may not have lost their shirts but they are unlikely to have escaped without scalding their fingers.

    For retail brokerages and asset managers, it’s indeed a grim period, what with investors naturally reluctant to put their money in equities simply because there’s not much of an investible surplus in their hands. “Investors haven’t stopped their existing systematic investment plans (SIPs) in a big way, but they are not making fresh investments either,” says Mehul Jhaveri, a financial consultant in Mumbai. Investors like Ketan Dalal, a salaried individual in Mumbai, are moving away from stocks.

    Dalal has reduced his stock portfolio by a fourth and parked money in fixed deposits and gold exchange-traded funds. As investors choose to sit on the sidelines, financial services firms are devising strategies to woo them. Mutual funds and their distributors, for instance, are focussed on SIPs. “We have been aggressively pushing SIPs to our customers. We plan to bring value-addition to the SIP options in various funds,” says R.S. Srinivas Jain, Senior VP & Chief Marketing Officer, SBI Mutual Fund. Some mutual funds like Reliance MF, Birla Sun Life MF have bundled an insurance cover along with the SIP option and are promoting it in a big way.

    For higher-net worth individuals, brokerages and banks are peddling capital protection products based on stocks, commodities and gold. “While investors haven’t put in fresh money, we are telling them that it’s the right time to build a portfolio. Our major branches have a specific counter that is advocating the concept of SIPs as well as other asset classes such as gold and commodity-based products to customers,” says Kanwar Vivek, Head -Retail Liabilities Group, ICICI Bank. Clearly, the retail investor has got to weigh his choices carefully now—should he take that weekend break or is that money better off in a mutual fund? It’s getting increasingly difficult to do both.


“The only strategy (in such a situation) is to keep working on cost control,” says D.D. Rathi, Director & CFO, Grasim Industries. The best way to cut costs is to expand— by setting up new plants closer to the market, to save on transportation costs; and by generating captive power to bring down the electricity bill. Grasim is spending Rs 7,000 crore on these expansions over a three-year period that ends next March.

  • As a part of its value engineering initiative, Samsung is optimising the current specs of its components. In the case of colour TVs, the integrated circuit (IC) line-up has been changed. Instead of using two ICs, Samsung has developed one integrated IC, which allows for additional features. The Korean major is also giving a three-band equaliser instead of a two-band equaliser that existed earlier. To step up productivity, Samsung has reduced the tact time (time between two TV sets rolling out of the line) at its Noida CTV plant from 4.9 seconds last year to 4.5 seconds.

  • Watch-maker Titan Industries has chosen to reinvent the brand, with a new tag line that says: “Be More.” “It invites consumers to come to the store and buy,” says Harish Bhat, COO - Watches, Titan Industries. Bhat, however, maintains that “inflation has not affected us and we are not seeing consumers defer purchases”.
 

 Multiplexes

“We are cautious, but don’t forget that multiplex footfalls also depend on the (quality of) films being released” - Atul Goel, CEO, Fun Republic

Read about other sectors

If marketers like Bhat are not too concerned about inflation, it’s because of two reasons: One is the affordability factor, which many companies think they’ve cracked. “You can buy a Titan watch from Rs 1,000 to Rs 10,000. We keep our prices fair and affordable,” says Bhat. Adds Manoj Kohli, CEO, Airtel: “Our fundamental brand strategy has always been availability, affordability and simplicity. We will continue to highlight these three aspects, but may focus on the affordability aspect a bit stronger. I believe that Airtel offers consumers an aspirational product that is affordable.”

The second reason for optimism amongst marketers is the still-low penetration levels—particularly in semi-urban and rural areas—in many categories, particularly newer ones like mobile telephony. As Kohli points out, penetration of mobile services is still only 25 per cent in the country, the heady growth of the sector not withstanding. “A majority of the population still doesn’t have a phone of their own. After food, clothing and housing, communication is the next important human need; it is not a luxury,” adds Kohli.

Clearly, as customers shift into the cut-back mode, marketers have one of their biggest challenges in recent times on their hands. Random, across-the-board promotions and discounts may appear an obvious reaction, but just lower prices may not be what the consumer is looking for. When they are not in a mood to drive, or in a mood to ditch their favourite brands in favour of some cheaper labels, companies have to be able to convince them about their value proposition. And in case it’s not good enough, there may be no better time than now to redefine it.

Additional reporting by Suman Layak, T.V. Mahalingam, Kushan Mitra & Shamni Pande