In today’s Finshots, we explore how companies are trying to counter the consumption slowdown and its implications

The Story

There’s something quite interesting happening in the business world. Companies are apparently trying to premiumize their products.

What does that mean?

Well, they’re adding a few bells and whistles in the features department. They’re packaging it attractively. And they’re selling it at a much higher price to the folks who’re willing to open their wallets for these extras. They’re okay with moving fewer products off the shelf. They believe that the higher prices they squeeze out of these customers can maintain their profits and margins. Maybe even improve it.

And this seems to be working. The average selling price (ASP) for products in India has increased. Across multiple categories — such as refrigerators and shoes.

But wait…there has been rampant inflation in the past couple of years. So the ASP can inch higher if companies have simply marked up the prices to account for this and passed on the costs to the customers, right?

That’s true. But when Economic Times spoke to people in the industry they found out that it’s not the case. They say that prices have remained more or less steady in the recent past. And people are actually buying more premium products. That’s what is driving the higher ASP.

For instance, in the category of personal care — think shampoos, skin care etc — the sales of packs priced below ₹50 have fallen by nearly 7% in the past quarter. On the other hand, the sales of high-value packs priced above ₹200 have grown by 4.1%. Just to be clear, that’s when compared to the same quarter of the previous year.

Now this phenomenon isn’t just restricted to India. It’s happening in the US too.

And companies are not shying away from talking about it. The New York Times did the hard work of combing through earnings calls hosted by companies and found executives talking about premiumization at least 60 times in the recent quarter.

Now this is quite counterintuitive, no?

Because when the economy is going through a tough time, you’d expect people to tighten their belts. Be prudent in their purchases and try and save every penny they can. And this is when you typically see companies lean heavily on the sachetization strategy. For instance, FMCG companies might try and sell smaller value packs that people can easily afford. They could introduce a ₹5 pack of ketchup instead of a ₹10 one. They do this because they’re trying to maximize their volumes of sales.

So, what’s really going on? Why are companies switching up this tried and tested strategy?

Well, there are two theories at play here.

Firstly, sure, everyone across the income spectrum is worried about the economic environment. But there’s a certain section of people who have the money and are unsure about how to go about their lives. They don’t want to cut back on their lifestyle too much and want to indulge in premium stuff to make themselves feel better.

For instance, if they decide to be prudent, maybe they’ll indulge by buying coffees and sandwiches at Starbucks instead of venturing out for a Michelin star meal. And Starbucks is trying to create even more fanciful and premium concoctions to cater to this lot.

That’s why maybe even ketchup manufacturer Heinz is launching a luxury collection. Yup, we bet you’ll not hear luxury and ketchup used in the same sentence again. They want people who’re cooking more at home these days to indulge in chef-inspired luxurious ketchups at least.

If you think about it, it’s something similar to the ‘lipstick effect’. See, in the 2000s the US was rocked by a recession. People cut back on spending. But Estee Lauder, a global cosmetics company, noticed that their lipstick sales were on the rise. Women still wanted to feel good in a bad economy. And instead of buying other expensive makeup, they opted for the simple luxury of a lipstick.

The other theory is the more concerning one. It’s about the K-shaped economy.

What’s that, you ask?

Well, for a brief period in time during the pandemic, the entire economy came to a standstill. But tech workers saw a boom in their incomes. Also, the higher-income groups that had invested their monies into the stock market became even wealthier. On the other end of the spectrum, lots of low income workers lost their jobs during the lockdown. They struggled to put food on the table. Gold loans shot up as people pledged whatever little they had in exchange for hard cash.

That was the K-shaped economy. The rich got richer. The poor got poorer.

And it looks like the economy is still kind of K-shaped today.

One way to illustrate this is the sales of new two-wheelers in India. Now two-wheelers are typically used as a proxy for middle-income growth in the country. It’s usually the first mode of transport for many families when they can afford it. But the problem is, two-wheeler sales are still lagging. Even today, it is down 16% from its pre-Covid levels.

Maybe the people in the lower-income strata haven’t been able to claw back their lives yet. Maybe whatever they earn today is still going into paying back loans they took when everything was bleak. Maybe they’re not able to fulfil these aspirations and they’re cutting back on expenses even further.

Not to forget that India has already sounded warnings for an upcoming heat wave and a below-average monsoon this year. These are things that primarily affect the lower-income groups and squeeze their spending power even further.

And companies looking at such data points might be wondering if they’re better off focusing on the people who have the money and inclination to spend. Now we’re not saying that companies have abandoned the sachetization strategy, it’s just that they might have made a conscious choice to pay a little more attention to premiumization this time around.

We’ll just have to wait and watch how it all plays out.

Until then…

Don't forget to share this article on WhatsApp, LinkedIn and Twitter

Ditto Insights: Why Millennials should buy a term plan

According to a survey, only 17% of Indian millennials (25–35 yrs) have bought term insurance. The actual numbers are likely even lower.

And the more worrying fact is that 55% hadn’t even heard of term insurance!

So why is this happening?

One common misconception is the dependent conundrum. Most millennials we spoke to want to buy a term policy because they want to cover their spouse and kids. And this makes perfect sense. After all, in your absence you want your term policy to pay out a large sum of money to cover your family’s needs for the future. But these very same people don’t think of their parents as dependents even though they support them extensively. I remember the moment it hit me. I routinely send money back home, but I had never considered my parents as my dependents. And when a colleague spoke about his experience, I immediately put two and two together. They were dependent on my income and my absence would most certainly affect them financially. So a term plan was a no-brainer for me.

There’s another reason why millennials should probably consider looking at a term plan — Debt. Most people we spoke to have home loans, education loans and other personal loans with a considerable interest burden. In their absence, this burden would shift to their dependents. It’s not something most people think of, but it happens all the time.

Finally, you actually get a pretty good bargain on term insurance prices when you’re younger. The idea is to pay a nominal sum every year (something that won’t burn your pocket) to protect your dependents in the event of your untimely demise. And this fee is lowest when you’re young.

So if you’re a millennial and you’re reading this, maybe you should reconsider buying a term plan. And don’t forget to talk to us at Ditto while you’re at it. We only have a limited number of slots everyday, so make sure you book your appointment at the earliest:

1. Just head to our website by clicking on the link here

2. Click on “Book a FREE call”

3. Select Term Insurance

4. Choose the date & time as per your convenience and RELAX