U.S. Retailers Roll Out New Playbook

10/8/2009
Pricing these days is a balancing act. Cash-strapped consumers are pinching every penny and comparing prices across formats, forfeiting convenience for savings. Retailers have gamely responded by sharing cost concessions, but when retailers roll back prices en masse, two things happen: 1) no single retailer enjoys a competitive advantage from price cuts, merely maintaining parity with respect to traffic, and 2) category volume increases slightly, but not enough to offset the price decline.

Consumer packaged goods unit prices have nosedived in 2009. For example, as of March 2009, Nielsen research showed prices up 4.1 percent over the prior year, but dropping precipitously for the next few months as price increases ranged from just 1 percent to 1.9 percent. This stands in stark contrast to January results, marked by a 5.5 percent unit price increase across the store, more consistent with the aggressive 2007 and 2008 pricing patterns.

Handle With Care

While food staples like cheese, milk and fresh eggs led the pricing pack in 2008, those price points proved to be highly perishable. Last year’s price leaders, according to Nielsen, became the biggest losers in 2009, with eggs scrambling to maintain profitability after a 23.8 percent price plunge to $1.63 per unit. A carton of milk sank 19.3 percent to $2.38 per unit, while cheese prices were shaved by 9.6 percent to $2.75 per unit.

Other poor performers among the 30 categories with the most dramatic unit price cuts were diet aids (slimmed down by 8.8 percent), baby needs (wiped out by 7.6 percent), fresh produce (a limp 6.5 percent decline in unit price), and shortening and oil prices (slid by 6.0 percent). Not a single category among those recording the greatest declines managed to eke out dollar sales growth. Conversely, five of the seven categories posting the greatest price increases realized dollar sales growth for the four-week period ending July 11, 2009.

Down, Not Out

Most economists agree that we can expect further contraction of the economy by approximately 2 percent for the remainder of 2009, and that waning consumer confidence will translate into less spending at retail and lower demand for manufacturers. The key to selectively -- and strategically -- lower prices is price elasticity of demand.

Nielsen research on pricing and promotion shows that most categories have a price elasticity much lower than -1.0, with most falling into the -.30 and -.70 range. For a sample category with a price sensitivity of -.40, a price reduction of 10 percent converts into a unit sales increase of 4.3 percent, but a dollar sales decline of 6.1 percent. The recommendation then, is to be highly selective about which categories get earmarked for price reductions in order to realize a sustainable volume competitive advantage.

Clip it or Click it

As retailers and manufacturers look to keep shoppers spending -- and, conversely, saving -- they’re leveraging ways to simplify the art of coupon clipping and clicking. Multi-tasking consumers are leveraging every possible vehicle for savings, with coupons enjoying an unprecedented resurgence. One reason is renewed reach and accessibility. Thanks to Internet, mobile phone and in-store kiosk distribution methods, coupon redemptions were up 23 percent for the first half of 2009, and redemption growth outpaced distribution, up by 20 percent. Key coupon activity stats from Winston-Salem, N.C.-based Inmar for the first half of 2009 show 188 billion coupons distributed and 1.6 billion redeemed.

The new generation of coupons reflects the immediacy of the media, with shorter expiration periods, fewer multiples and flat values. Food items represent the most active coupon segment, and the 80/20 rule runs true to form: during the first half of the year, 81 percent of units purchased with a manufacturer coupon were from just 19 percent of households. Both low and heavy coupon users have stepped up clipping activity, although all but the heaviest coupon user groups experienced negative total unit growth.

Winning Numbers

Free-standing inserts (FSIs), a mainstay of the grocery channel, accounted for 89 percent of coupons distributed and 51 percent of coupons redeemed. The second-largest category of redeemed coupons was electronic checkout, at 10 percent, followed by instant redeemables, at 9 percent; instant redeemable cross ruff (a coupon that’s on, or inside the packaging of, one product but good for another), at 6 percent; shelf pads, at 5 percent; direct mail and handouts, at 3 percent; in-packs and the Internet, at 2 percent; and electronic discounts and in-ads, at 1 percent each.

Internet coupon redemptions grew exponentially, with a 308 percent increase over the prior year. Magazine on-page coupons (157 percent), instant redeemable cross ruff (177 percent) and direct mail (168 percent) enjoyed triple-digit growth as well. While redemptions for FSIs were up 31 percent, only 0.5 percent of distributed FSIs were redeemed -- a much lower redemption rate than that experienced by all other forms, except for magazine on-page coupons.

Well-Heeled Clippers

Coupon users represent an appetizing demographic comprising younger female heads of household (54 years old and under), larger households, and more affluent families ($70,000-plus annual income) who reside in areas designated as “comfortable country” or “affluent suburban spreads.”

Typically, coupon enthusiasts are frequent shoppers and bigger trip drivers who patronize most retail channels serving the consumer packaged goods industry. While non- and light-coupon users book bigger shopping trips -- stocking up because of the lack of frequency -- coupon enthusiasts represent the second-biggest per-trip spenders in the grocery channel.

Store Brands Soar

In every downturn, there’s a beneficiary, and at grocery, it’s private label. For the year ending July 11, 2009, store brands hit an all-time high for dollar (16.9 percent) and unit shares (21.5 percent). Even as store brands continued to flex their marketing muscle in edible categories, they also racked up gains in the nonfood, health and beauty, and general merchandise departments. Lead brands -- the No. 1 or No. 2 brand when a store brand was the category leader -- generally held their own against the onslaught of private label. Private label share gains were primarily at the expense of all other brands.

Store brand sales levels and growth are still skewed to edible categories, but store-brand growth (not share) in nonfood, health and beauty, and general merchandise departments has been generally stronger than brands. Store-brand share development is greatest in commodity categories (e.g., milk and eggs) or those with little differentiation (e.g., first aid and pain remedies). As might be expected given its value positioning, store-brand development lagged in categories with high levels of marketing support and those requiring high levels of innovation, such as beer, candy, and health and beauty.

Accelerated Development

What’s behind the surge in store brands? Which shoppers are most likely to purchase store brands at an account? Do their brand preferences differ by department or category? Shopper behavior across lead retailers within four different formats was analyzed, drawing on Nielsen consumer panel data.

Top-line results reveal that the Kroger demonstrated the greatest -- and most consistent -- growth in store-brand sales from low to very high spenders. Slower store-brand growth was detected at Costco and Walmart, with Walgreens ringing up a second-place ranking on store brand-sales growth. In all four retailers, shoppers (even among very high-spend shoppers) are far more likely to seek branded offerings when shopping competitive retailers. Retailers need to understand whether competitive shopping is driven by not having the right branded assortment in their stores or from competitors offering greater branded value or less store-brand focus.

Walmart was the only retailer whose shoppers devoted a greater share of their total spend to store brands when shopping in competitive retailers.

While brands drive the majority of category dollar and unit sales, further store-brand expansion is likely, given the slow rate of economic recovery and the strong retailer focus against store-brand label initiatives. Kroger, Walgreens, Walmart, Supervalu and other retailers have expressed the desire to expand store-brand presence along with assortment cuts to reduce store clutter and improve store shopping experience. And retailer store-brand focus has never been greater, as there are better-quality offerings, expanded assortment, and increased marketing muscle and support.

Small and mid-tier brands remain at risk from private label poaching as retailers push to shelve house brands. Unless these smaller brands are unique or niche brands, their manufacturers may initiate or expand into private label contracting or pursue direct-to-consumer options. In any case, these brands need to proactively leverage analytic insights to demonstrate why their brands are deserving of shelf space.

Tread Carefully

A word of caution to retailers: don’t let price gaps between store brands and brands get so large that they drive declining category sales. While price decreases benefit consumers, both manufacturers and retailers would be rewarded with lower sales. And with more and more consumers turning to coupons in this tough economy, continue to make usage easier with increased distribution and delivery methods. Finally, promote store brands with brands where there’s limited shopper overlap to drive category sales, and along with noncompetitive or complementary branded offerings to build larger baskets.

- Nielsen Business Media
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