What is downtrading?

It is a word that companies dread. Downtrading is a consumer behaviour where buyers switch from an expensive or bigger product to either low unit packs or lower-end brands. This can lead to a drop in volumes for FMCG companies.

When high inflation puts the purchasing power of consumers under pressure, they resort to downtrading, be it in small-ticket items like packaged consumer goods and food or vehicles and durables.

Customers can either go for smaller packs of the same brand or for a more affordable brand, in the same product category.

Several major commodities such as crude oil, edible oils, wheat and steel have witnessed sharp inflation this year because of the Russia-Ukraine war.

Faced with unprecedented raw material cost pressures, companies have hiked prices to the tune of 10-15% over the last six months, which include grammage reduction in items like soaps and snacks. 

Some categories have started seeing downtrading by consumers. They are shifting to economy brands or smaller Stock Keeping Units (SKUs). 

The rural market has been witnessing a slowing demand scenario, specifically in discretionary categories.

In times like these, price-sensitive customers go for no-frills packs that satisfy their basic requirements. 

Manufacturers, therefore, sell the same products at different price points as downtrading tests the brand loyalty of customers. 

By staying at various price points, companies can sell products that suit the price demanded by different customer segments. 

Products like soaps, snacks and biscuits are priced as low as 1 or 5 rupees even though profit margins of companies take a hit at that level. This is done to retain market share when there is downtrading.

The expectation from companies is that when a customer down trades, he or she can choose the lower-priced pack of the same brand rather than shift to a different brand.  

Customers opt for products with lower quality or fewer features to save some cash.

But sometimes, they can switch to an entirely different product that fulfils the same need. 

For example, one may switch from using a handwash liquid to soap for washing hands or switch to a different type of vegetable oil for daily cooking if it is available at a lower price for the same quantity.   

With inflation compromising consumer wallet size, they are clearly giving more priority to essentials over discretionary items.

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