Cutting
edge
All
over the world, manufacturers vie with each other to keep prices down
for their consumers. No where more, than in India. On a recent visit,
I was surprised to see Pepsi and Coke bottles selling at Rs 5 and a
Nescafe sachet selling for Re 1. A similar bottle of solft drink in
Europe will cost no less than Rs 15 or 20, a similar sachet, if you
get such a small sachet that is, probably Rs 10.
It
is clear therefore that companies have now taken the decision that by
dropping the price line to such low levels, it will be able to attract
a huge, yet uncommitted, buying population and the volume will go up
in an extra ordinary fashion. Whether this has happened or not, I do
not know, but theoretically it is possible. There are enough case studies
in business schools that will stand testimony to this unique market
phenomenon of drop price and grow volume.
A
financier would be interested in knowing what happens to the margins?
They get shot to pieces, till either the cost of production can be really
squeezed down to a point where no further squeezing will be possible
(is this possible in India?) and simultaneously there is a huge volume
growth, which would give the economy of scale. Interestingly, for such
a big country like ours, population of 1 billion and growing, Indian
consumption is still very low. Whichever index one sees of per capita
consumption, we are low and low off the scale.
Therefore
one should probably thank the early risk takers of today who are making
desperate attempts to try and blow open and expand the market. It is
about time that this phenomenon happens, as for far too long we have
talked about the potential of this huge Indian market and till such
time consumption takes place in a big way, our economy will not take
off and the numbers will not be meaningful. Interesting to observe here
what Reliance Infocomm is trying to do, by lowering its call costs to
virtually nothing, it is also trying to unleash a huge potential yet
untested.
But
in this low cost regime that we apparently are in for, what happens
to the quality? We see reports of mineral water bottles of questionable
quality. The quality of the PET bottle was bad in any case, now the
contents are unsafe. Anyone who has been on an Air India flight would
have struggled with a packet of moong daal, as the packaging is awful.
Indian
pharmaceutical companies, in their zest to lower costs, use packaging
material that would not pass the test anywhere in the world. It is clear
that in the effort to keep costs down, quality standards are being compromised
with, but this could be our undoing.
With
a WTO calendar that is staring one in the face, we will be exposing
ourselves to serious competition from Asian, Asean countries and China,
where packaging and product quality are not compromised with, products
are of a high standard and yet priced competitively. Indian companies
need to be extremely careful that in their attempt to unleash the market
forces, they do not get left out of the race...(contd)
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