Beat category shifts with prices
Imagine this scenario. A near-monopolist, which commands a 75 per cent market share in a segment that generates four-fifths of its annual profits, and a distant second player, decide to hike prices of their products again. The aim is to beat the negative
effect, which resulted due to earlier price
increases that were forced by the Government. In effect, the strategy seems to be to ‘Rob Peter (Consumer), or make him pay more, despite the fear of changing consumption to aid Paul (Maker) to increase profits.’ At first glance, it does not make sense.
If the higher prices, as per reports, led to shifts to lower-priced products, or moves from premium to semi-premium brands, even higher prices may force these trends further, and impact the profits more, or so it may seem. However, according to news reports, which are still unconfirmed and
speculative in nature, the two firms want to increase the prices further. Channel checks by a media firm hints that the price
increase may be 10-20 per cent, and across premium, non-premium, and standard brands. While this may seem inexplicable, the aim seems to be to propel profits through similar volume of sales.
One of the reasons for this bizarre decision is that the segment, or products, in question, which we deliberately refuse to mention or specify because the strategic impact is important, is one that is resilient to price hikes, yet amenable to switchovers to lower-priced products. When the Government increased the taxes on this segment by a huge margin, which included excise duty and was effective from February 1, 2026, the prices of the products in the different price ranges zoomed by between less than eight per cent for the low-priced ones, and more than 40 per cent for the premium brands.
According to media reports, there were no remarkable impacts on either the number of users or the overall sales volumes. But what happened, given the price-sensitive Indian market, was that the consumers shifted from the higher-priced premium brands to
lower-priced ones in the same category, or to semi-premium products. Thus, while
the level of sales remained the same, the profits dipped, as both the lower-priced premium and semi-premium brands enjoyed lower margins. In many cases, users did consume less, but the drop was 5-10 per cent
at the most, which was partially made
up by new consumers.
Most analysts feel that the impact on volumes, if any, and in any case marginal and not significant, may be temporary. “While higher retail prices could temporarily weigh on volumes… companies have historically displayed strong pricing power, allowing them to protect profitability even in
elevated tax regimes,” says one of them. Others contend that given the addictive nature of the products, consumption dips marginally for some time, and may reach new peaks later. Over the decades,
despite ups and down, sales have faltered but perked up because of various factors that countered the higher prices.
So, how will the higher prices work in practice? When the prices were hiked across the board, they were forced due to the higher taxes, which implied a 22-28 per cent increase according to the analysts. Hence, one assumes that the difference between the earlier and new prices were entirely because of the tax burden.
Thus, none of the increases helped the bottom line because the extra money did not accrue to the firms. A large proportion of the second price hikes will directly add to the corporate coffers and, thereby, boost both the margins and profits, but only if overall sales and volumes remain intact.
Let us first understand the tax structure. There is a portion that is fixed as a percentage of the invoice prices, another which is fixed as an absolute number, and both depend on the length of the products. In the case of the first price increases, it was because of the two tax components. In the second instance, as invoice prices go up, the percentage tax will go up too, but the fixed component will remain the same.
Hence, there will be differences that will remain, and these will end up on the balance sheets of the manufacturers. Suppose the price was `100 in January 2026. In February, because of the new taxes, it went up to `150, based on the highest increase in prices. The `50 included the percentage tax, and fixed one.
Now, if the firm hikes the price further to, say `170, `10 may go towards the percentage-based tax, but the remaining `10 will accrue to the firm, as the fixed-tax portion remains as it was earlier. Suddenly, the firm is richer by `10 per pack of the product.
If the overall volumes remain the same, and even if there are switchovers between the price categories, from premium to semi-premium, the higher profits remain intact if the second price hikes too are across the board. Over time, the firm assumes that some of those who switched will revert because of either habit, taste, health or sheer addiction. Ergo, profits will be higher.
This may explain why the share of the leader, the near-monopolist, shot up from `304 to more than `316 in a single day on Wednesday. Yesterday, it was down by a tad, a mere rupee. The price of the runners-up in the market share zoomed from `2,122 to a high of `2,284 on Wednesday, before settling down a bit.
Yesterday, after dipping to `2,218.5, the price was up above `2,250, although almost a percentage down compared to the closing the day before. The enthusiasm immediately after the news of second price hikes was slightly dented because the concerns related to further switchovers to low-priced products, and deeper-then-expected dent in volumes.
One will need to watch how the consumers react to the new price hikes, if they happen, and will this contrast with what happened in February and March 2026. As we mentioned earlier, shifts and switches to lower-priced products will matter less, if the price increases are across the board, or even confined to the largest-selling brands.
But the overall volumes need to be intact, and even perk up in the future. But if sales shrink, and shifts happen simultaneously, the firms may be in trouble. This may turn out to be the acid test to determine how resilient an addictive and habitual product is, and how far firms can stretch prices.
