Focusing on nine major consumption categories..
Chandrasekhar wrote this case under the supervision of Professor Miranda Goode solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 2010, Richard Ivey School of Business Foundation Version: (A) 2010-10-21 In December 2009, Pravin Kulkarnii, general manager, Parle Products Pvt. Ltd. (Parle), a leading Indian biscuit manufacturer, faced a difficult decision involving the potential price increase of the company’s flagship glucose biscuit brand, Parle-G. The input prices of two major raw materials, sugar and wheat flour, which comprised 55 per cent of manufacturing costs, had risen during the past 18 months. Consequently, the margins of Parle-G had decreased from 15 per cent of revenue to less than 10 per cent. The pressure to reinstate margins to 15 per cent led Kulkarnii to consider raising the price of Parle-G biscuits. Since Parle-G’s introduction in 1939, the biscuit brand had been strongly associated with offering value for money1 (VFM), a marketplace perception that had remained unfaltering for more than 60 years. In fact, the VFM perception was associated not only with Parle-G biscuits but had come to define the entire glucose biscuit category. Parle-G was sold to consumers in 46 stock keeping units (SKUs) at 12 price points (see Exhibit 1). The average price of Parle-G was approximately US$1 per kilogram. For example, a packet of 15 biscuits weighing 82.5 grams (g) sold for a maximum retail price (MRP) of INR4.00 (US$0.08).2 Worldwide, very few processed and ready-to-eat food items were available for US$1.00 per kilogram. Even the manufacturers of new glucose biscuit products were forced to tow this price line to be minimally competitive in the product category. Parle had the distinction of having maintained the US$1.00 per kilogram price point for Parle-G since 1990.3 In fact, VFM was the consumer perception that had led Parle-G to become the largest selling biscuit brand by volume in the world in 2002,4 as validated by a study by global market research firm A C Nielsen. That top ranking had since been retained by the brand. 1 Value for money referred to the consumer paying a minimum price for a product while gaining maximum utility. The term was frequently used in marketing consumer packaged goods, always with reference to the buyer and not the seller. 2 On December 15, 2009, one U.S. dollar equaled 48.6 Indian rupees. 3 Ranju Sarkar, “Price Warrior,” Business Standard, May 4, 2009; available at londonessays.com standard.com/india/news/price-warrior/356973/, accessed October 4, 2010. 4 Shweta Jain and Reeba Zachariah, “Parle G Largest Selling Biscuit Brand in World,” Business Standard, March 14, 2002; available at londonessays.com, accessed December 21, 2009.
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In January 2004, in its first attempt in 13 years to offset rising costs, Parle had hiked the price of its 100-g packet of 16 biscuits, from INR4.00 to INR 4.50. The 100-g packet was Parle’s best-selling SKU, contributing to 50 per cent of brand revenues every year. The idea was to test the waters with the leading SKU before increasing the prices of other SKUs. The company had to roll back the increase quickly, however, because sales of the 100-g packet dropped by more than 40 per cent within six months. The negative consumer reaction was spontaneous and nationwide, forcing Parle to reinstate the previous pricing of its Parle-G biscuits. Four years later, management took remedial measures to deal once again with rising costs. This time, Parle focused specifically on reducing the weight, or grammage, of the 100-g package. This reduction was done in phases — first, from 100 g to 92.5 g in January 2008, then to 88 g in May 2008 and to 82.5 g in January 2009. The number of biscuits was also decreased from 16 to 15. Consumers noticed these changes; however, as long as the company did not tinker with the price, consumers seemed to go along with the grammage reduction. Said Kulkarnii:
Biscuit is a regular consumption item in the overall food basket which comprises 49 per cent of the budget of an Indian family. There is a general tendency among consumers everywhere to look for bargains while shopping for food categories. That explains the price elasticity of demand in India for biscuits in general. Price elasticity is particularly prevalent in the glucose category of biscuits. It prevails among all classes of both urban and rural consumers. Unlike the “indulgent” variety of biscuits consumed only occasionally, the “functional” variety of glucose biscuits is a staple diet among Indian urban consumers. Some classes of urban consumers use it as a supplement during both breakfast time and tea time. Some use it as a daily source of nutrition and calories. For all classes of rural consumers, glucose biscuits are a major source of energy and nourishment. Indian consumers don’t mind the prices of premium biscuits going up. But, with glucose category, they are price sensitive. That is why I have to proceed with caution.5
In addition to reducing the grammage across SKUs, the company had undertaken cost-control measures to safeguard margins. For example, Parle had brought manufacturing centers closer to the wholesalers by franchising production so as to reduce distribution costs. The company had also consolidated buying and entered into forward contracts with vendors of raw materials to reduce supply chain costs. Additionally, wax-coated paper had been replaced by bi-axially oriented polypropylene (BOPP) paper to reduce packaging costs. The company could go only so far by using such me
asures. A price hike seemed like a necessity to restore margin levels, particularly because the company had ramped up its own manufacturing capacity by 10 per cent on an investment of INR500 million in 2008.6 A hike in price had the potential to increase the margin of Parle-G by 50 per cent and to perhaps restore it to the earlier level of 15 per cent. But, if the experience of 2004 was any indication, consumers would be extremely sensitive to a price hike. Kulkarnii was caught in a dilemma. 5 Based on a personal interview on June 04, 2010 6 Nishith Triveti, “Parle to Ramp Up Biscuit Manufacturing Capacity,” Business Standard, August 13, 2008; available at londonessays.com /331229/, accessed February 22, 2010.
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INDIAN BISCUIT INDUSTRY India was the third largest producer of biscuits in the world, after the United States and China. Although 15 per cent of Indian biscuit production was exported, domestic demand for biscuits fueled industry growth. Biscuit manufacturing was divided into two sectors — organized and unorganized. The former consisted of 60 per cent of the national market. The unorganized sector, comprising mom-and-pop establishments and catering to markets of the rural interior, did not have easy access to bank credit, technology and information systems. This sector was also largely outside the national statistical data pool. Growth in the Indian biscuit industry was largely organic because of the limited scope for consolidation in the organized sector. Low-priced varieties ruled in the rural markets where players in the unorganized sector had put up entry barriers for branded biscuits. In comparison with most branded counterparts, several times a day, competitors in the rural market provided local stores with freshly baked biscuits that carried the aroma of newness, in an unbroken and powder-free form. These rural competitors and local retailers had developed long-standing relationships that branded players could not easily change. In the organized sector, the five main categories of biscuits were glucose, marie, sweet, cream and milk. Glucose was a high-volume, low-margin biscuit category that represented 42 per cent of the biscuit market and was accompanied by strong consumer expectations of low price points. Sweet, cream and milk were “indulgent” categories that carried premium prices. Marie was an in-between category, used largely at tea time. Parle-G was part of the glucose category. The growth strategy of all biscuit majors was to secure the migration from the entry-level glucose category to the indulgent categories. The latter were available at price points beginning at INR5. The organized sector produced 1.7 million tons of biscuits per annum, valued at INR110 billion in 2008. The sector was growing at an average annual rate of 15 per cent.7 The rate of growth of individual categories varied. Low-priced categories traditionally grew at a higher rate than premium categories. Of late, however, the premium categories, which historically had grown in the range of 8 to 10 per cent each year, were not only catching up to the rate of growth of the low-priced categories but were moving into a range just above the 20 per cent range. This upward growth was consistent with some positive factors in Indian economy. A study by McKinsey Global Institute, released in May 2007, showed that the income levels of households in India were rising, as were the consumption levels of many goods and service categories. Focusing on nine major consumption categories (including food products) and 30 subcategories, the study concluded that the percentage of spending on discretionary items would grow dramatically, whereas the spending on basic necessities would grow more slowly.8 The study classified Indian consumers into five categories on the basis of individual annual incomes: globals (those earning above INR1 million per annum, nearing average international standards), strivers (those earning between INR500,000 and INR1 million per annum), seekers (those earning between INR200,000 and INR500,000 per annum), aspirers (those earning between INR90,000 and INR200,000
7 Indian Biscuits’ Manufacturers Association, “Biscuit Industry in India – Status Paper”; available at londonessays.com, accessed September 17, 2010. 8 www.mckinsey.com/mgi/publications/india “The Bird of Gold: The Rise of India’s Consumer market,” published by McKinsey Global Institute, McKinsey and Company ,May 2007 page 16 of 194 accessed September 2, 2010.
This document is authorized for use only in Kyuseop Kwak’s SPR_2019_24760_Pricing and Revenue Management at University of Technology Sydney from Jul 2019 to Sep 2020.
Focusing on nine major consumption categories.
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