In the FMCG industry, packaging of products has always been the most important factor driving consumer behaviour and fuelling marketing initiatives. A change in packaging technology always brings about a paradigm change in consumer patterns. Tetra Pak, a Swedish company introduced a flexible packaging product in the 1950s and forever changed the packaging of liquid consumables.
The next breakthrough in flexible-packaging occurred in 1983. C.K. Ranganathan, a Madras based entrepreneur started selling shampoo in small packets (later called ‘sachet’, meaning small bag in French), instead of bottles, to make it affordable to the poor. These sachets were small, flexible, and inexpensive. Ranganathan’s firm, now known as Cavin Kare, started on a shoestring investment of $300 became the market leader in shampoo in the Indian rural market by the early 1990s.
There was a fortune to be explored at the bottom of the pyramid. Even today, around 4 billion of the global population of 7 billion are living on a budget of less than $2 per day. These potential consumers are hungry to improve the quality of their lives by using new technology. With this in view, MNCs like Unilever and Johnson & Johnson entered the sachet market through India in the mid-1990s. The advent of the new millennium already saw 60% of shampoo sales in India in the form of sachets (see Exhibit 1 for complete evolution). Early in the 2000s, P&G, the largest consumer goods company globally started selling their flagship shampoo brand – Pantene in sachets in South-east Asia and India. The sachet market was no longer constrained to India. It was a huge opportunity for all companies to grow their businesses across categories in developing markets. Industry bigwigs like Unilever, P&G, Nestle, Kraft, ITC, L’Oreal and others started selling everything from food & beverages to laundry products in the form of sachets.
Exhibit 1: Evolution of Sachets in the Hair Care Market Segment
This large-scale explosion of sachets was great news for consumers. The minimum price payable for a premium product like Olay had gone down from $10 for a tube to Rs.10 for a sachet. Sachets had opened a new plethora of products for consumers worldwide. The developing markets witnessed an unprecedented growth in their demand for consumer goods in the new millennium. Nearly 90% of this growth was driven by demand for sachets (Exhibit 2 shows the approximate number of sachet users in India in the 2000s).
(Data as per IRI’s 2011 FMCG review)
For manufacturing companies, the picture was not so rosy. For small companies like Cavin Kare, which had introduced the world to the concept of sachet, it was now difficult to compete with MNCs like Unilever and P&G. They could not leverage scale across products like the MNCs. While Cavin Kare cannot manage more than 5 variants in their sachet SKUs (Stock Keeping Units), Unilever has more than 100 sachet SKU variants. As a result of fierce competition, MNCs emerged on top with growing market shares (See Exhibit 3 for total sachet market share split in India).
(Data as per IRI’s 2011 FMCG review)
For the conglomerates like Unilever and P&G, sales volumes had increased multifold. However, this had come at the cost of diminishing profits. Large scale proliferation of sachets had led to price wars in almost every market category. Returning to the shampoo industry example, the typical gross margin for any shampoo making company is around 70% – 80% for bottles. This number comes down to almost 20% – 30% for sachets. Therefore, the increase in profits is not proportional to the increase in sales for any manufacturer. Further, price wars in almost every category have led to companies selling their product at a loss in order to grow market share and maintain marketing momentum. When P&G launched the Rs.3 Pantene sachet, Unilever immediately slashed the price of their Clear sachet to Re.1. Cavin Kare responded by launching a 50 paise Chik shampoo sachet. Consequently, profit margins keep going down with increase in sales. Further, manufacturing costs also have risen with companies vying for higher service levels and increased manufacturing capacity. Almost every company today faces the higher profitability vs. greater market share conundrum.
The cost pressure has led to new capabilities in supply chain excellence for companies to reduce costs. Relatively new concepts, such as ‘Shelf Back Design’, may be the path forward. The idea is to design and operate the supply chain “from the shelf back”, delivering whatever it takes to win the consumer (see Exhibit 4 for an example). However, this design requires a lot of flexibility and responsiveness, which may limit the cost reduction potential of the design.
Overall, sachets have been instrumental in bringing about 2 key changes in the consumer goods industry. Consumer base has increased multifold on account of the packaging innovation while manufacturing firms been forced to look out for more innovative supply chain solutions to compete for cost. Technological and operational improvements at every link of the supply chain is now the need of the hour to sustain profitability.
Himanshu Pandey is a PGP1 student at IIM Ahmedabad, and a member of the Consult Club. Prior to joining IIM-A, he worked with Procter & Gamble in the Supply Chain function as a capacity planner and project manager. He holds a Bachelors degree in Aerospace Engineering from IIT Bombay.