Brazil: Downsizing VS price rises- making the right choice

Inflation and the loss of purchasing power will significantly impact the finances of Brazilians and change consumer habits. As brands anticipate these changes in behaviour, we see cases of “downsizing” (reducing packaging sizes), a common strategy during a financial crisis, as a way of avoiding increasing prices.

This strategy is already seeing some success in Brazil, but occasionally it only works in the short-term. There are risks in the medium and long-term that must be considered going forward.

The biggest factors that could directly affect consumer behaviour are:

• Reduction in the purchasing cycle
  With smaller pack sizes it is possible that consumers will have to make more frequent purchases, especially in essential categories. As each purchasing opportunity is to some extent independent of the previous purchase, there is always a risk of the consumer choosing a different brand the following time.
• Reduction in volume purchased monthly
  In less essential categories, it is common to see lower income consumers letting the product run out and then, instead of buying again immediately (as in the previous case), maintaining their normal purchasing cycle. This therefore reduces monthly consumption, producing in the medium and long-term a fall in annual consumption.

Differentiation is a key driver in uptake of new products, tending to make them less elastic, which is particularly important in times of crisis.

The risk of increasing prices

Another alternative to price rises is a change in the product formula (replacement with cheaper materials) so that the price of production can be decreased or maintained and consequently the same price is kept for the end consumer, without denting profit margins.

This alternative is great if it doesn’t cause (or as long as the consumer doesn’t notice that it has caused) a decrease in product quality. One direct risk is a possible loss of the main asset of a brand: their current consumer.

But in the case of both downsizing and changing the formula, the brands are exposed to an even greater risk: reputation. If consumers do not support a change, this may affect the brand trust.

The better known the brand is and the closer a relationship it has with the consumer, the bigger the risk. Additionally, even when made by well-known brands, these decisions can often confuse consumers.

Innovating during inflation

Ipsos studies on innovations and their price elasticity have looked at creating an inflation-resilient portfolio. In our paper Innovation in Inflationary Times we highlighted that differentiation is the most important factor in a price rise.

Differentiation is a key driver in uptake of new products, tending to make them less elastic, which is particularly important in times of crisis. This is obvious to some extent - the more unique the product, the more difficult it is for the consumer to change it for a competitor’s product.

We also know that even in times of crisis, innovating is a requirement for brands and while there is a lot of space for innovation there is very little margin for error.

How brands should respond

There is no “one size fits all” answer. Some common solutions for times of crisis, such as a simple downsizing or a change of formula may be an unnecessary risk for certain brands. We must assess risks not only in the short-term but also in the medium and long-term.

Brazilian consumers are more aware and more demanding. We need to understand or predict what the perception will be of any potential change, whether it will be noticed and whether it will be accepted. One risk or one breach in brand trust can end up being worse than simply choosing to increase prices.

With the polycrisis we face today, consumers may be sensitive to prices, but their attitude may change if the situation improves in the future. In which case, perception of the brand’s real identity and the way it behaves now may end up coming back to haunt it.

The less of a “commodity” that a product is, the more it can justify its price by the unique benefits or results it offers in the category.

A less well-worn path may be, for example, to study alternatives that combine a price action (increase or downsizing) with other actions that can help the brand differentiate from its competition and break away from price-focused competition. The less of a “commodity” that a product is, the more it can justify its price by the unique benefits or results it offers in the category, and the more wiggle room consumers will give it to charge more than its competitors.

Brands that innovate will benefit as well as those that maintain their identity, and are transparent with their customers through this period.

Table of content

1. Introduction
2. Feeling the pressure: Context
3. Understanding human psychology during the polycrisis
4. Has disruption become the new normal?
5. The Indian consumer's response to inflation
6. Turkey: Re-designing adaptation in the shadow of hyperinflation
7. Brazil: Downsizing VS price rises- making the right choice
8. Malaysia: Between money well spent and life well lived
9. Understanding Argentina
10.  France: The end of recklessness