Chhota packet, bada problem: a look at low unit packs

Low unit packs have become common in the FMCG space. Our guest author cautions against rushing into this format.

Sachets, or low unit packs (LUPs), have become a defining feature across FMCG categories in India. Ever since CK Ranganathan upended the shampoo market with Chik, category after category has succumbed to the charms of LUPs. Depending on the category, LUPs contribute between 25 and 75 per cent of the total sales. This note will argue that it’s high time to take another look at these sachets.

What’s not to like?

The advantages of sachets are obvious. India is a low penetration market. There is a large low income segment that doesn’t have the cash to buy large packs even in the categories it’s interested in. These consumers tend to be in smaller towns and villages, and they shop in small kirana stores. These stores don’t want to lock up working capital in slower moving large packs.

When new brands enter categories with LUPs, the market leaders are forced to launch their own LUPs to defend their share. Thus, the compelling benefits of increasing penetration and distribution, and protecting market share drive the brands to adopt LUPs as a lever of their growth strategy.

The dark side of the moon

Typically, the cost of producing LUPs is higher per unit (kg/ml, etc.) than larger packs. The cost of packaging is more; the production process is less efficient. In an ideal world, the higher costs would be offset by higher pricing. Unfortunately, the LUP segment is also driven by rigid pricing. Most LUPs are priced at convenient coinages – Re 1, Rs 2, Rs 5, Rs 10, and so on. Unlike large packs, it becomes very difficult to increase LUP prices, unless all the competitors do it together (and that’s rare and possibly illegal).

This creates a significant pricing gap between LUPs and large packs – the former being cheaper than the latter. A recent UBS report across 100-plus products shows that across multiple categories (like shampoo, health drinks, skin care, tea, etc.), the pricing was the cheapest for small packs. What that means is the consumers are incentivised to buy LUPs and disincentivised from upgrading to larger packs!

Present perfect, future tense

This sets up the core of the long-term problem. You are driving the consumers into the category with the cheapest offering and then not giving them a path to increase consumption via larger packs. You’re a prisoner of the price point and can’t take a price increase even as your costs rise; further eroding your profitability, which was lower to start with. Your distribution becomes dependent on the easier-to-sell LUPs and there’s no easy way to break this addiction.

The health drinks category is an interesting case study. When I used to manage Horlicks a decade back, the key driver of category growth was new users. They accounted for about 50 per cent of incremental growth in a typical year. This made sense; category penetration was only 21 per cent. Virtually all new users came into the category via the 500 gm pack – that was the largest SKU for the category and most widely distributed. Single serve sachets were virtually absent, though Bournvita was pushing it very aggressively.

As I was leaving the business, Horlicks, the largest brand, started a strong push with single serve sachets, though it was at a far lower margin. In terms of pricing, the consumers pay 50 per cent less for a sachet than the equivalent grammage of a 500 gm pack. Fast forward 10 years, and Horlicks LUPs have 10 per cent market share (for context, that’s double the share of Complan), but at a significantly lower margin. Category penetration has crept up to 24.5 per cent but, unlike shampoos, there has been no explosion in category growth.

One can argue that launching a cheaper extension at 50 per cent lower pricing would have given Horlicks greater options for the future, without trapping the mother brand into an SKU portfolio/pricing matrix that is difficult to get out of. It seemed the easy solution in the short-term, but it creates long-term issues. Horlicks, under Hindustan Unilever (HUL) ownership, with its distribution strength, may find better traction with its LUP strategy; but the core challenge will remain.

Out of the labyrinth

Is there a way out if you find yourself caught in the sachet trap? The answer is yes, but a potentially painful and risky yes. Much depends on how much LUPs already contribute to your business and category. Some companies take the easy (but dangerous) route by giving a cheaper, but lower quality product in the LUPs. This carries significant brand risks and dilutes the category experience of a first-time buyer.

Other solutions are tougher, but more strategic. These include a pricing reset; rationing LUP production and distribution; partitioning markets based on penetration and competition data or taking a wider portfolio/category view with defined roles for brands and SKUs. It is difficult to envision one strategy that would be valid across brands and categories.

There are brands that have done a great job of their LUP strategy. Kellogg opened up a completely new consumption segment (out-of-home dry consumption) with its LUP strategy, which was based on a key consumer insight. Parachute has managed a sensible, but attractive consumer sachet pricing, which will avoid the problems we have outlined above. Generally, as a company, Nestle does a very good job of sachet pricing - whether for Maggi or Nescafe.

In summary, this note is to caution against rushing into a seemingly simple growth strategy like LUPs. It requires a long view, a deep understanding of consumer habits and a robust prediction of cost structures and pricing elasticity. It can be done, but requires deep thinking. LUP-driven growth is one area where angels fear to tread.

The author is ex-MD of Grohe, ex-CMO of Micromax and GSK, and is now founding partner at A Priori Consultants, a marketing strategy firm.