Value Trapped!

Will high inflation turn the tables in favour of local brands?

Global brands have long been considered superior to home-grown brands or private labels. These brands have been commanding price premiums above local options to sustain their bulky business models involving state of the art manufacturing, imported ingredients and big brand budgets. For these big multinationals delivering the requisite return on investment, year on year basis is an axiom without consideration for long-term implications. But have the tables been turned in favour of the local brands?  

Have Pakistani consumers begun to see local brands equivalent to multinational brands in quality? Do multinationals need to think beyond the bottom-line and build their foreign-yet-local credentials to sail through 2024? 

The ability to charge a premium has always been a question at the heart of all brand studies. Brands tend to take price increases based on their equity or the percentage inflation that year. Last year most FMCGs companies posted a double digit increase in value through price increase. This price increase was mainly a function of inflation causing a shift in the baseline for ability to charge premium for a brand. Consumers remained on the receiving end of this change, and since this increase was propelled by inflation and brand equity, we saw some dramatic shifts in their purchasing habits.

For most FMCG companies 2023 was a difficult year all around, starting from political unrest to the highest ever inflation recorded in the history of Pakistan. Depleting foreign reserves in a dollar-strapped economy and the government’s overall outlook on the imports kept companies jittery about the future pricing strategy. We came very close to an economic default, or defaulted and never knew about it according to some economic experts. Just to put things into perspective we became the 17th most expensive economy to live in on the list of 190 countries. That caused a major shift in how organisation operated too, especially from the companies that had raw material sourced from outside Pakistan. Their problems varied from sharp price increases to potentially more threatening questions. The one on the top of the list was, will they be able to sustain production if the hold on opening (Letter of Credit) LCs continued during FY 23?  

In a normal year a 10% price increase coupled with some de-grammage on the low-priced SKUs would require a lot of research and different pricing scenarios played out.  Followed by a begrudgingly taken decision to increase the price with a compromised topline. Not this time however! The chaos for the most part was managed through bulk buying in the beginning of the year, followed by a sharp increase in prices in Q1 & Q2 as the dollar domino impact continued. What did that mean for the FMCG overall? We saw a massive increase of 36% in price, which includes your food and non-food sectors. Normally an increase of 10-15% is a good benchmark in terms of price increase. If this massive price increase was not enough, it was paired with multiple de-grammages throughout the year to maintain a profitable outlook for the business. We will get to what it meant for the consumer in a little bit, but what it meant for most companies will make for a very interesting case study.

 For the giant manufacturers of categories like tea, personal hygiene, and homecare their volumetric sales took a steep decline. The bottom line is, however, an entirely different affair. They have posted a 25-30% increase in their bottom line, this value increase, however, comes at a cost. The trend seems to follow throughout the FMCG industry regardless of the nature of business baring few categories.

This followed a spiralling maze of price discounts and promotions to ease the price increase, while some brands chose to talk more about the message of value for money. One of the badly hit categories by this ongoing situation is packaged masala and frozen food.

 In both the categories we witnessed an increased advertising airtime, to increase TOM around the value for money message. Many companies launched new price sensitive SKUs to keep their brand relevant. However, which one of these approaches will work is yet to be seen. But one thing remains clear, understanding consumer behaviour and a quick response has become a key to success in these trying times.

Now let’s get to how all of this has changed consumer behaviour. Households that did monthly groceries are now shopping weekly to manage their budget. The ones who were buying weekly have now moved to daily buying. The consumer is in constant war to manage her budget while making the best choices for her family. Contrary to the common belief, research shows that rather than switching brands consumers look for value for money and settle for a somewhat good brand with a slightly lower price rather than choosing the one that’s the cheapest. 

The advertisers attempted to capture consumers’ attention mainly through two messages in their communication 1) value for money 2) low priced recruiting packs. Another topic that came to the forefront in 2023 was made in Pakistan. It became a big issue for the soft drink & the fast-food chains in the fall out of boycotting foreign brands. Multiple ad-hoc research has indicated a negative impact of ongoing Palestine-Israel conflict on the overall foreign brand association.  

While Q1 of FY 24 looks heavily loaded with advertising budget for most brands, the larger question remains whether they will be able to grow topline. And whether they will  get lucky, and meet last year’s bottom line, especially for multinationals that have posted yearly results of highest profit ever. Given that an increase in the dollar rate is inevitable in Q2 of FY 24 there will be another round of price increases. This will further have an impact on the low and mid-priced portfolio of businesses. Because after a certain point, the consumer’s willingness to spend more, plummets for the same quantity especially for middle income households. What we know from similar markets as Pakistan, is that during inflation the middle-income household downgrades to the value segment for a mid-range product. Whereas upper middle-class moves to the premium segment if they see a price increase in the mid-range products because they see more value in it. Regardless of how the market reacts to the new onslaught of economic changes, it will be interesting to see how H1 pans out for Pakistan’s FMCG companies.

Omar Farooq
Omar Farooq
The writer is a marketing professional

1 COMMENT

  1. “Value Trapped” could refer to a situation where an investment, asset, or entity is perceived to be stuck or unable to realize its full potential or intrinsic worth. In any of these contexts, the term “value trapped” implies a sense of frustration or dissatisfaction with the current state of affairs, along with a desire to find ways to unlock or realize the full value potential of the investment, asset, or entity in question. Finding solutions to address the factors contributing to the perceived value trap may involve strategic decision-making, risk assessment, and proactive measures to optimize outcomes.

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