Since inflation is the most important topic of discussion these days across the world, I began to think about how that affects brands and how brands in turn manage inflation. Is there a connection at all, and if so, what are the different dynamics at work?
Effects of cost-push inflation
At the outset, all companies are impacted by inflation if it is of the cost-push type. This is when commodity, raw material costs and other expenses in the production and selling of goods shoot up due to either supply shortages, or demand for such goods being in excess of supply. Emerging out of the pandemic lockdowns, the world saw a release of pent-up demand which put huge strains on the supply of goods and services, since these take time to adjust to sudden spikes in demand. As a result, inflation in western economies, especially in the US, started to rise.
In India, it was a slightly different story since festive demand and pent-up demand coincided in a short burst of economic activity as lockdowns ended and that led to price rises in the latter part of 2020 itself. Besides, the entire world is facing a supply shortage of chips and semi-conductors of all types and this has affected India as well, especially in the automobile industry. Steep inflation is also expected in the prices of other electronics goods such as mobiles phones, tablets, laptop computers, television sets, etc. However, the bigger contributor to inflation in India, in my view, has been the steep and continuous rise in fuel costs, as the Indian government kept increasing excise and taxes on fuel for many years, and these had to filter through as general inflation in due time.
When it comes to brands, how do companies deal with price rises? I think a lot depends on the industry and the consumer segments. For example, the consumer packaged goods industry (what we call FMCG in India) tends to be rather resilient. This is particularly so in the foods and groceries segments as their demand is usually relatively price-inelastic. In personal care products, there might be some strain especially in the lower end of the market. That said, if inflation persists and grows over a long period of time, companies might eventually decide to raise prices at the premium end of the market and perhaps also experiment with smaller pack sizes.
High inflation can force the lower end of the market to consider reducing purchases or trading down to a cheaper brand, and most companies try and prevent this in some way, if the lower end of the market is large and valuable enough for the company to want to protect. Take, for example, a brand like Parle-G Glucose Biscuits in India – the company is reported to have seen a huge surge in demand during the pandemic, since it constitutes an important part of the every-day diet of the poor and working-class folk. However, at a time of high inflation, especially in wheat, flour and agricultural commodities’ prices, the brand will surely face a tough time. Since the brand accounts for a very important and large part of the company’s revenue, they will try and maintain the price for this brand and perhaps increase it on their more premium brands.
A company like Britannia, on the other hand, operates mostly at the premium end of the market, where it is seen as an indulgence product. They would enjoy greater pricing power. And here again, brands do come into play. Larger companies and better-established brands usually do manage to raise prices and not see sales fall. Indeed, even in normal times, it is often considered the sign of a strong brand if it is able to raise prices and command a premium over its competitors.
These are anything but normal times, though. Let us now address the other kind of inflation, which is wage-price inflation, where wages through the economy start to rise and companies then raise prices. This has started to occur in western economies like the US and UK where, along with good pace of job creation, there has been a tightening of the labour market. Indeed, thanks to the generous stimulus cheques to households across America, many people have decided to wait for the right job with the right pay to come along, and as a response to that as well as to the rise in minimum wages, earnings across America have risen steadily over the past two years. This along with pent-up demand, including for services which were mostly shut due to lockdowns, have sent inflation higher. Energy and commodity costs add up as well and inflation is the highest that America has seen in around four decades.
Companies do increase prices in response to this kind of inflation, knowing that the market can bear a higher price. And it is usually seen in premium discretionary products, lifestyle products and services. This is not even remotely a scenario in India, where unemployment is still at very elevated levels and one is not hearing of any great salary raises anywhere. And although many of the large companies in India tried their best not to lay off workers during the pandemic and lockdowns, many of the smaller businesses were badly impacted. There are reports of smaller businesses in India being decimated by the accelerated digitisation programme of larger companies. In all cases, though, companies would try and trim costs and expenses first and improve productivity, and only later raise prices if necessary.
Growing the market vs fighting for market share
I think there is another angle to consider: whether the brand is trying to grow the overall market or is engaged in a brand fight. I think during inflationary times, if a brand is trying to sell a new concept or grow the market in a category, it would try and maintain price in order to generate trials, gain acceptance and traction. If it is engaged in a pure brand fight, and is the market leader in the category, it would raise prices in response to high inflation.
There are some who believe that large companies are engaged in making super-profits at this time, with raging inflation. It is certainly true for energy companies, and perhaps some tech and electronics companies. But that packaged consumer goods companies are engaged in price-gouging is hard to believe. An article in the HBS Working Knowledge newsletter that an ex-Ogilvy colleague shared on LinkedIn and that I happened to read suggests that companies in the US are marking up prices by a significant amount and are making huge profits simply because they can. I haven’t read the academic paper yet, but since the article seems to stress on household products, I am not surprised that demand has been price-inelastic. What did surprise me is that consumers were not willing to change brands easily, which suggests high brand loyalty still exists. This goes against everything one has been reading in the business media for the past decade or so about dying brand loyalty, thanks to millennials’ preferences, of course!
Increased concentration of market power
It does bring me to another important area of consideration, regarding companies’ ability to raise prices. And that is increased concentration of market power. With more companies driving growth inorganically, and increased mergers and acquisitions, there has been significant consolidation in several industries during the past decade and more. According to this article, global M&A deals grew by an all-time record amount in 2021, both in numbers of deals and in value, to cross US $ 5 trillion for the first time ever. This helps already large companies grow larger with immediately accretive businesses, while saving hugely on costs as usually happens with mergers and acquisitions. Big business gets bigger, with fatter margins. There is nothing stopping the few companies dominating entire industries from raising prices when they need to. Inflation is the best excuse they need.
Impact on customer profile
Next, I would like to spend time thinking about what happens when companies raise prices on certain brands repeatedly over a period of time. I am not sure if companies think about the consequences of repeated price hikes, but I would imagine that at some point the consumer profile of the brand would change. It would be an older, more affluent consumer and one whose station in life and family size determines his or her brand choices. I don’t think many companies consciously take a decision to review their customer profile for brands in such instances, but they ought to.
Inflation upsetting entire segments
Another aspect that automobile companies especially in India might want to consider is taking their entry level models of cars into services such as rentals. It appears from the latest set of corporate earnings for Maruti Suzuki, India’s largest carmaker, that entry level cars have suffered the most as a result of inflation, both of car prices as well as fuel prices. If repeated price hikes over the past couple of years have put these cars out of the reach of first-time car buyers, that too for the largest car brand in India, then it might be that the bottom end of the car market in India is falling out. This is a large and still growing market in India, and it might be worth looking at the feasibility of a car rental programme for precisely the first-time car buyer, while at the same time studying the used car market. It might also be an opportunity for Tata Nano to make a comeback, this time a better vehicle, competitively priced and with the right brand strategy to address this particular segment.
I say car rentals is worth exploring also because I think the world is going to be shifting to shared mobility and mobility as a service over the next few years. This entry level car problem might be a sign of what’s to come. As a corollary, it is therefore very likely that the customer profile for entry-level cars now has indeed changed for all times.
Inflation, EMIs and brand decisions
Finally, let’s look at the rise of brand purchases on credit in India. From what I have been reading in the media and seeing on sites like Amazon, etc., buying almost everything, including household groceries, on credit seems to have grown hugely in India. This includes buying on installments, through EMI payments. I am not a buyer using EMIs, but there is obviously a very large market out there that is doing so. It looks like the biggest American affliction is now in India. The more prices rise and the more entrenched inflation is, the more consumers will buy on EMIs. Have brands studied what it means to sell using EMIs, how it affects consumers’ brand choices and brand perceptions, as well as sales?
These are just some of the ways brands are affected by inflation, and vice-versa. It always helps to think of the dynamics and consequences of prices and inflation as sometimes, it can upset or change entire markets or at least segments in the long term.