KARACHI: The idea of introducing affordable packs of three to 20 rupees in various household items helped retailers make deeper inroads in rural areas. This marketing strategy paid dividend as reflected in the balance-sheets of consumer products’ giants.

This new strategy also worked in cities with large populations where people could not afford to buy costly 400 to 1,000 gram packs owing to high prices and their falling purchasing power.

For example, Unilever Pakistan Limited and Colgate Palmolive Pakistan Limited showed better financial results despite challenges, like uncertain political and economic conditions, during the last two to three years, followed by rising production costs caused by the surging input costs, high prices and rising utility and transportation charges.

Although prices of big packs have risen sharply, companies have kept prices of small packs unchanged to maintain their sales volumes. However, there is a possibility that companies might have reduced quantities in small packs and must have been charging the same old price.

The price-hike might have caused a slowdown in sales of big packs, but the increase in margin per unit has improved the sales figures every year.

The aggregate turnover for the two Unilever companies in Pakistan — Unilever Pakistan Limited and Unilever Pakistan Foods Limited was Rs23 billion in 2006 and Rs25.7 billion in 2007. In January to September 2008, the turnover is Rs25.8 billion.

Similarly, according to Colgate Palmolive Pakistan Limited’s annual report 2008, its sales has surged by 21 per cent to nine billion rupees in 2007-2008 as compared to 7.4 billion in 2006-2007 despite political unrest, inflationary pressure, rising prices and surging input cost as mentioned in the report.

Sales in 2005-2006 were Rs6.3 billion. Gross profit surged by 11.54 per cent to Rs2.097 billion in 2007-2008 from Rs1.9 billion in 2006-2007 Gross profit was Rs1.6 billion in 2005-2006.

Chairman and CEO of Unilever Pakistan, Ehsan A Malik, when asked about the problems being faced by the economy as reflected in the spending patterns of the household, said spending patterns have always differed between urban and rural households and this difference has sharpened due to current economic challenges.

Urban consumers have cut back on eating out, leisure travel and outlay on durables and clothes while the rural consumers are not spending significant amounts on most of these categories and have additionally benefited from higher crop prices.

In most of our categories of soap, shampoo, laundry powder, the company continues to experience volume growth, particularly in rural areas where growth is running twice the urban rate.

After flirting with cheaper options, consumers in both urban and rural areas have reverted to tried and tested brands, the CEO said.

In summer, our soap and ice cream sales peak. In winter, tea and skin creams do well. Most of our competitors do not have this portfolio width, so that is one reason why our growth this year is higher than them, he said. The second of course is rural reach. We have done considerable work to improve it this year, so our rural growth is running at almost twice the urban growth, he added.

To a query about inflation’s impact on company’s turnover, he said the company had to make price increases to recover unprecedented inflation in input costs, exacerbated by the rupee devaluation against the greenback. Because of strategic buying, the Unilever was able to buffer the impact of input cost inflation. Therefore, despite increase in price, our brands continue to offer relatively good value to consumers, and that is why the company continues to see volume growth.

He said the company has, wherever possible, tried to maintain key price points -- Rs10, Rs15, Rs20 etc. Despite price increases, our gross margins are below last year’s.

Ehsan Malik added that any cutbacks in urban consumption have been more than made up by increase in rural penetration and consumption. Rural households are larger than urban, therefore, consumption per household is higher. TV has played an important role in driving aspiration for quality brands.

About changes in production and marketing strategies of the company, he said the company locally produces 99 per cent of what it sells in Pakistan, therefore, our brands have not suffered from the regulatory duty imposed by the government recently. Also as local value-addition is higher in locally-made products, the company does not suffer as much from devaluation of the rupee as compared to those competitors who rely entirely on importing ready to sell packs.

“We have stepped up capacity to produce smaller, more affordable packs in order to make it possible for consumers to continue to use brands that they are accustomed to,” he said.

On Unilever’s future plans, Ehsan Malik said the company has been in Pakistan for 60 years. There is a significant potential for growth in every category as the per capita consumption lags behind similar countries in Asia. Unilever, therefore, continues to invest in marketing, sales and production capacity. People in Pakistan own 30 per cent shares of two principal Unilever companies and the entire board and management committee (i.e. the top management) is Pakistani.

He said in 2007, for every Rs100 of value generated (i.e. the difference between what we sell our products for and what it costs us), Rs62 went to the government in customs duties, excise duty, sales tax and income tax, as also contributions to Workers Welfare Fund (WWF) and Workers Profit Participation Fund (WPPF), Rs18 went to employees by way of salaries, four rupees were consumed in depreciation, leaving Rs15 for shareholders, 30 per cent of whom are local.

Similar questions were asked to Director Dalda Foods Private Limited’s Inam Bari who said consumers’ spending is divided into two broad categories: a) discretionary and b) essential.

As far as the discretionary items, like clothes, dining-out and consumer durables / electronic items, a noticeable decrease of almost 50 per cent is being observed. On the other hand, only 10 to 20 per cent decrease is observed in spending on essential items which include food and essential clothing etc.

He said consumer demand and sales turnover have been impacted in all industries. In the current scenario, he said he does not see any sector where there was inelasticity in prices.

“Demand is being impacted across the board, be it consumer items, durables or industrial items.”

Director Research Jehangir Siddiqui, Mohammad Sohail said economic problems being faced by Pakistan’s economy have been reflected in spending patterns in areas like food items, cellular connections, shopping etc.

He said inflation has severely eroded the disposable income of the common man. Demand is inelastic in case of necessary food items, power, gas, school fee, rent, etc. Due to inflation, the demand of luxury items, like TV, airconditioners, cell phone, cars, furniture has been affected.

He said poor is becoming poorer but recent economic slowdown has made many rich people losing their wealth.

Sohail was of the view that the size of parallel economy is shrinking. But there are no comprehensive studies that can suggest the exact size of parallel economy.