By Ruth D’souza
If you’ve ever fallen prey to the attractive marketing strategy of small sized products, you are not alone. Be it the attractive packaging, the aesthetic of a product that fits in your palm or even the allure of using it as a sample without spending too much, these smaller packs have proved efficient in one way or another. Conveniently enough, they’re just as suitable for you as for the FMCG companies that produce them. These small packs or LUPs (Low Unit Packs) are a conundrum by themselves. Conveniently priced at lower denominations of Rs 2, 3, 5, 10, these Low Unit Packs are easy to store, can take up aerial space in stores and offer you, as a consumer, an easy entry to the league of better brands, at a cheaper cost. But every attractive solution has a darker side and the economics behind these small packs is not as straightforward as it seems
Here’s an understanding of their complex makeup and economic background.
Growing rural popularity
In terms of growth, the rural sector undoubtedly outpaces urban areas with a contribution of more than 36% to overall FMCG sales. The majority rural population of the country justifiably contribute more to the growth spurt of the LUPs because of their rising disposable income and a rigid demand for value for money. A small sized pack is a feasible option in households where expenses are incurred hand-to-mouth. The rural segment constitutes a big part of the low penetration market witnessed in the country- especially for FMCG products. This, coupled with the onset of financial restrictions cause the LUPs to fit the bill perfectly. A Rs. 10 Cadbury pack is far more feasible than a Rs 100 bar of chocolate. Affordability is the driving factor and the main reason why Kirana shops need a frequent restock of these small, inexpensive products.
Slowly and surely enough, LUPs are penetrating the Urban market too. Overall shoppers display a very particular trend- more and more are buying less and less. Pandemic induced stress on incomes has made people turn to the LUP as a way of continuing to buy their favourite brand at a cheaper cost. The FMCG sector remained resilient even through the testy waters of the pandemic and the LUP strategy was at the forefront of factors driving growth.
A likely cul-de-sac?
The journey of a Small Pack from factory to shelf offers a conundrum to the growth it promotes. LUPs may look small but in reality they cost more to produce, owing to an increased cost of packaging which increases the cost of production per unit. A problem thus arises: these products cost more to produce but are priced at an overall lower cost. LUPs also operate within an inflexible pricing structure which does not allow for marginal price increases.
The core advantage of LUPs is to function as a trial and encourage consumers to move to bigger packs. But the lower price trivializes this advantage, causing consumers to stick to the purchase of LUPs. This explains why their contribution to the share of FMCG profits is increasing but also poses a bigger threat. The price difference between LUPs and Regular size packs is a chasm and once consumers pick a side, there seems to be a limited scope of moving upgrading to the other side. So how does this affect profitability?
The route out of this one-way path is not an easy one, and differs greatly from business to category. The easy way out would be to lower the value in terms of quality, but this could permanently disparage the brand for the consumer. Other solutions would involve decisions regarding production and distribution, taking into account the market penetration and likely competition. The LUP strategy may seem attractive, but a step in the wrong direction would do more harm than good.
Contributions to Profitability
When HUL launched their Horlicks single serve sachets, it was found that most of the first time users made an entry into the brand via this 500 gm serving. While assessing their profits strategies, Mondelez found that 20% of sales came from their rural segment of consumers, with the LUPs being the dominant driver of growth. More recently, Bajaj Consumer Care witnessed overall growth of premium products, sold at lower price points. In the oral care market, LUPs contribution is as high as 80%.
When the Pandemic hit, FMCG industries were faced with the problem of forming new business models to ensure profitability. The use of small packs as a marketing phenomena was a prospect before 2020 but their real value showed at a time when incomes were hit and FMCG earnings seemed likely to suffer major setbacks. Growing demand was met with the LUPs, and the only factor that offset their higher cost of production were the overwhelming sales which became something of a driving force for profitability.
The decision between premium or small pack is one of the foremost questions that need to be addressed. According to a Bain Researcher, 55% of people spend more at lesser prices during periods of economic slowdown while 26% look to spend more by purchasing premium products and 19% spend on new products. In the chaos of the pandemic setting, the FMCG sector certainly took a hit in 2020, shrinking by 21% in April-June. But the sector showed resilience in battling the second wave of 2021, with a year-on-year growth of 36.9%. Part of this resilience was owing to innovative marketing strategies, of which the LUP contributed greatly.
In the befuddlement left behind by the onset of the pandemic, consumers turned to easy solutions. Small packs are simple. A Rs 20 bottle of coke is convenient. It fits in your hand and slips into your bag, two things that a larger Rs. 200 bottle cannot do. While income levels shrunk in households, LUPs gained utility. Consumer staple companies like Hindustan Unilever Limited are moving towards models with inventory ranges that are simpler and smaller. The penetration of LUPs is steadily increasing, FMCG companies can refine their supply chain by narrowing the production of bigger packs which have a lower penetration. As far as marketing strategies go, LUPs have played angel in disguise for the companies with a well implemented strategy. In a post Covid economy, it’s the small packs that contribute large profits in their own simple, convenient way.
References and Further Reading
Ambwani, M. V. (2021, January 11). Small packs give big comfort to FMCG firms in pandemic times. The Hindu Business Line. https://www.thehindubusinessline.com/companies/small-packs-give-big-comfort-to-fmcg-firms-in-pandemic-times/article33552182.ece
Bose, I. (2019, July 28). How small sizes are packing a punch in retail. Financial Express. https://www.financialexpress.com/industry/how-small-sizes-are-packing-a-punch-in-retail/1658452/
Yadav, N. (2020, June 1). HUL CEO says the product inventory range will be smaller and simpler hereon— analysts believe others may have the same plan. Business Insider India. https://www.businessinsider.in/business/corporates/news/hindustan-unilever-limited-ceo-sanjiv-mehta-says-the-product-inventory-range-will-be-smaller-and-simpler-hereon/articleshow/76128468.cms
The Nielsen Company. (n.d.). PACK SMALL, GROW BIG LEVERAGING THE POWER OF SMALL PACKS TO DRIVE GROWTH. Nielsen Featured Insights. https://www.nielsen.com/wp-content/uploads/sites/3/2019/04/nielsen-featured-insights-leveraging-the-power-of-small-packs-to-drive20-growth.pdf