When raw material costs rise, fuel gets expensive, and packaging costs climb, just like regular consumers, businesses feel it just as much. Consumer goods and FMCG companies in particular have developed a playbook to fight back. Broadly, there are four strategies companies use to combat inflation.
Common Inflation-Combating Strategies
1. Pricing Strategies - The most visible response to inflation is adjusting prices. But it is not always as simple as just raising them
- Shrinkflation
Ever noticed your favourite biscuit pack feeling lighter than it used to be? That is shrinkflation i.e. reducing the quantity or size of a product while keeping the price the same. It is subtle, and most consumers do not notice it immediately.
- Premiumization
This one is counterintuitive. Instead of cutting costs, some companies move upmarket by launching premium variants at higher price points to improve margins.
- Price Hikes
Sometimes companies simply raise prices. This approach is usually adopted when input costs rise significantly over a long period (think raw materials, fuel, and packaging) making it impossible to absorb costs without hurting profitability. It also works when demand for the product is relatively inelastic, meaning consumers will pay more regardless.
2. Cost Engineering - When raising prices is not an option, companies go inward and start cutting costs without the consumer noticing
- Reformulation Companies quietly tweak the recipe of a product to reduce the amount of expensive ingredients used. The product looks and feels the same on the shelf, but the formulation has changed. This is common in the food and personal care industry.
- Ingredient Substitution Food companies replace expensive ingredients with cheaper alternatives to maintain profitability without significantly raising prices. Palm oil replacing other edible oils, or cheaper flavour compounds substituting for natural extracts, are common examples in the F&B space.
- Packaging Tweak
Switching to lighter packaging, cheaper materials, or simplified designs can meaningfully reduce costs at scale. It sounds minor but across millions of units, it adds up quickly.
3. Supply Chain Actions - Pricing and reformulation can only go so far. The smarter long term play is controlling your supply chain.
- Supplier Diversification
Relying on a single supplier or region is risky when inflation hits. Companies spread sourcing across multiple vendors and geographies to stay competitive and reduce dependency.
- Backward Integration
This is where companies start controlling parts of their supply chain they previously outsourced. Agricultural commodity dependent firms especially benefit here by owning farms, processing units, or logistics reduces dependency on external suppliers and shields them from price volatility. Amul is a textbook example of backward integration done right in India.
- Strategic Stockpiling
When prices are expected to rise, companies buy and store raw materials in advance. It is essentially locking in today's price before tomorrow's inflation hits. Requires capital and storage, but can be a significant cost advantage.
4. Derivatives - Hedging - This one is less visible but widely used, especially by large companies with significant commodity exposure.
Hedging involves using financial contracts like futures, options, or forwards, to lock in the price of a commodity in advance. For example, an airline worried about rising jet fuel prices might enter a futures contract to buy fuel at today's price six months from now. If prices rise, they are protected. If prices fall, they may end up paying more than market rate.
FMCG companies do the same with commodities like edible oils, wheat, and sugar. It does not eliminate the impact of inflation but it smoothens it, giving companies time to plan and adjust without being blindsided by sudden cost spikes.
Not every company uses all four strategies. The mix depends on the industry, the product, and how much pricing power a brand has with its consumers. But understanding these levers gives you a clearer picture of what is really happening when your favourite brand quietly changes something and does not tell you about it.
All strategies should be developed with an eye on the customer, and all implementations are carried out with an understanding of their impact on the customers.