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Thursday, December 06, 2001

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Less profits from low unit packs?


Shunu Sen

A large number of players, including big brands such as Coca-Cola and Pepsi, have ventured into the mineral water market. Yet, none of the large players seem to have made a foray into selling mineral water in sachets, and have left this sector to unorganised players. Surely, there are significant profits to be made here too, given the likelihood of large volumes. So, is there some strategic reason for this? -- Kavitha Narayan, Chennai

In a low per capita income country such as India, low-unit packs have been a key strategic tool used to increase penetration across several categories. Shampoos were one of the first few categories to successfully employ this concept in India, such that sachets today account for over 50 per cent of total shampoo volumes. Across several other categories, where high price is believed to be a purchase barrier, from teas to soaps, companies are focusing on low-unit packs to increase penetration and hence sales.

Chocolates are a good example, where we have seen the launch of unit packs in the price range of Rs 5 to Rs 6 per 15-18 gm packs. Clearly a low-unit pack at Rs 5 places the product in the consideration set of several target consumers who might have earlier found the regular product too expensive. But more importantly, it also opens up new and more frequent occasions for consumption.

From a manufacturers point of view, however, there is another important element to this situation - cost of producing and distributing a low unit pack.

The bottled water market meets both the conditions from a consumers point of view and low unit packs clearly offer a way of increasing the penetration and hence volumes. But will this necessarily lead to improved profits? Maybe not!

Very often, the cost of distributing and packaging low unit packs are not proportionately lower than those of a regular pack. This means that though a low-unit pack may be priced at a low price point, the consumer may actually end up paying a higher price per unit! The per unit price becomes critical in the case of products where consumers perceive the product to be a luxury or too expensive for (regular) use. In such a case, in addition to offering a lower price point, it may also be necessary to offer a lower per unit price. In the case of shampoos, the per ml cost of an 8 ml sachet is lower than the per ml cost of say a 100 ml bottle!

This obviously squeezes the manufacturers margin. He is under pressure to ensure sufficient volumes so that he makes money. And yet, as the proportion of sales coming from the low-unit pack increases, his total percentage margin actually decreases! Most manufacturers would therefore try to get consumers to migrate to a higher unit pack as soon as possible.

Now coming to the bottled water market in India, the questions that most companies are probably asking themselves is, can we package and distribute a low-unit pack at a low price and deliver a low per unit price? Remember, packaged water is still a luxury in a country like India. Also, there are several other beverage options available at cheaper price points.

With aerated drinks becoming cheaper (200 ml now available for Rs 6), it is possible that the price sensitive consumer will prefer a sweetened beverage to just bottled water. This puts further pressure on bottled water manufacturers to offer even lower prices, which may not be viable. Are there sufficient low cost packaging options that will be safe and durable, and still be in line with the overall brand image of the brand?

A national brand such as Aquafina or Bisleri will probably be very choosy about the kind of (quality, graphics and so on) packaging that their brand is seen in. Will overall margins be sufficient to support brand-building activities? The market in India is still considered price sensitive and brands are trying hard to differentiate themselves in a market considered to be a commodity. Can adequate width of distribution be ensured in order to deliver required volumes?

Regional brands, by definition, have lower marketing and distribution overheads and are therefore in a better position to offer the lowest unit packs. However, it is interesting to note that Bisleri (being the largest volume player by far) did launch, and has been able to sustain a low-unit pack (500ml for Rs5). The 500ml pack has no doubt fuelled volume growth, but it is unlikely that manufacturers (with the possible exception of Bisleri) would be able to turn it into a profitable option.

Bisleri itself, is focussing simultaneously on several other packs and consumption occasions (such as large packs for home consumption) to deliver the required volumes as well as profits.

(The author is CEO, Quadra Advisory, a strategic marketing consulatancy. Readers may send in their questions on marketing issues to The Editor, Business Line, 859, Anna Salai, Chennai 600 002 or e-mail them to bleditor@thehindu.co.in)

 
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