Private label pricing war in Consumer Packaged Goods.

By Jacob Brown | February 6, 2010

The recession has had a fascinating and unexpected impact on the price battle between private label products and brand name CPG products.

The chart below (from IRI’s January Times and Trends report) shows how the prices of private label products increased MUCH more rapidly than the total  CPG market during 2007 and 2008.  I believe these price increases reflect the growth of the private label category into new higher margin categories (for instance Safeway’s very successful “O” brand of organic private label food).  During this period:

  • Private label prices grew up to 10% or 12% on a quarterly basis. 
  • For the category as a whole, price increases were very steady, averaging in the 4% - 5% range. 

Then came the recession, and everything changed.  Private label prices plummeted.  For example, in Q3 of 2008 the prices for the CPG category grew by 6.4% while private label prices grew by 9.9%.  But, by Q3 2003, CPG prices grew by .3% but private label prices shrank by 5.3%.

Here’s how I interpret this change.  Private labels saw the recession as an opportunity to steal share from brand label products.  They had built up better margins over the past two years and now took advantage of those dollars to improve the perceived value of private labels and appeal to the consumer’s renewed interest in being “Thrifty”. 

As a result, many new shoppers gained experience with private labels and some of them will continue buying private as the recession winds down.  This has resulted in a further, and permanent, erosion of the brand name market.

cpg-quarterly-price-increases

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Social Media gets a little grayer.

By Jacob Brown | January 29, 2010

In its recent report, Boomers and Social Media, eMarketer tracks the rapid adoption of social media among Boomers.  This report provides some excellent information on the growth of Social Media among Boomers and Seniors. 

According to Deloitte data, 2009 was the year that social media bloomed for Baby Boomers, with nearly 47% of them actively maintaining a profile on the social web, which is up 15% from 2008. Further driving home that 2009 was the year of the social BB is the fact that from 2007 to 2008 there was barely a measurable change — just 1% — in that demographic’s adoption of social media.

Not unexpectedly, the vast majority o f these connected Boomers and Seniors are on Facebook.  Having been relatively late adopters of social media, they missed the MySpace days and went straight to FaceBook.  While the statistics show that younger users are very likely to have accounts with both services - everyone knows where they are really spending their time. 

boomer-social-media

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Why Gourmet Magazine Dies While The Food Network Prospers

By Jacob Brown | October 8, 2009

I was on a morning flight from NY to Chicago yesterday, reading the story in the New York Times about the death of Gourmet Magazine.  News about yet another magazine folding is hardly even news.

What makes this more interesting is that I looked up from the article to see that the in-flight entertainment was an episode of Top Chef from the Food Network.  For those of you not familiar with the show, think of it as Survivor in the kitchen.  It’s much more about getting voted off the island than culinary skill.  Not quite the bottom of the food barrel, but close.

On the surface, you can make the argument that, like all print vehicles, Gourmet’s ad revenue simply dried up while Cable TV is still attracting advertisers and viewers.  But, I don’t think that’s the whole story.

Why are there more cooking shows than ever, yet the marquee publication can’t make any money?   And, if you look closely at the Food Network, you see that the focus of their content has changed dramatically over the past 3 years.  To attract viewers, they have moved from cooking techniques to cooking dramas.

I believe that there is an important message here for marketers about how consumers want to receive content.  In the wine business there is an old saying “People talk dry but drink sweet”.  I think that the death of Gourmet and the success of Food Network shows that people talk content, but want entertainment.  But not just any entertainment.

To attract viewers, content must be delivered within the context of current popular entertainment models.  If we’re all watching reality shows on TV, then content needs to fit within that framework.  So, instead of shows about great design, we have Project Runway.  You might trace the trend back to This Old House; the first to weave a deep human element into a do-it-yourself show.  The Ultimate Home Makeover is just its logical extension.

The objective for marketers is not to find new content.  There is no NEW content.  The goal is to find new ways to bend the current popular entertainment models around existing content.  There is plenty of content that people are interested in.  The issue is how you deliver it.  40 years ago we’d have said “The Medium is the Message”.  That still sounds right today.

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Has Social Networking reached the saturation point?

By Jacob Brown | July 9, 2009

There have been countless articles written on the true size of the Social Networking world.  I’ve contributed to the deluge with a couple of posts on my own site (Myths of Social Networking and More Myths of Social Networking). 

Anderson Analytics recently released an extremely useful study on the SNS market.  You can read a summary of the study in today’s Ad Age.  The article focuses on the “Mini Profiles” that highlight the differences between the users of the four primary sites; Facebook, MySpace, LinkedIn, Twitter.  The big headline that is being picked-up online seems to be “Titter users are more into sex”. 

But, I think a much more interesting finding is being overlooked.  According to Anderson, we may be running out of new SNS users.

According to Anderson Analytics 110 million Americans are current SNS users (defined as having used on of these four sites in the past month).  In other words 59% of the US online population have used Facebook, MySpace, LinkedIn, or Twitter in the past month.  If that is even close to being correct, it is a phenomenal number.  THAT’S JUST HUGE.

 

Have used a Social network in the past month (US Only)

Have used a Social network in the past month (US Only)

 

But, an equally interesting number is the statistics on the Non-Users.  According to this data, SNS has just about reached its upper limit.  73% of Non-Users will be trying SNS: “Not in my lifetime”. 

Non Users of Social Networking (US Only)

Non Users of Social Networking (US Only)

If we’re reaching the ceiling on domestic growth, that suggests we’re going to see a fundamental change in the SNS marketplace.   A shift from a Growth Strategy (just get more members) to a Value Strategy (provide a better service). 

With a shift to a Value Strategy I’d expect to see these networks invest heavily in adding value to:

  • Their feature set in order to retain members and steal share from other services.
  • New ways that marketers can communicate with and leverage members.
  • Understanding their members, so they can demonstrate to marketers how their members are unique, better, different than the members of other sites.

It is clear that the market is placing more pressure on SNS to develop realistic and near-term revenue streams.  As growth slows, this pressure will only increase and providers will either finally start charging users some fees or provide much greater access to members for advertisers, or both. 

As I’ve said before, consumers are very willing to pay for the services they value.  The fact that these SNS don’t charge, represents a fundamental lack of faith in the value of their services.  If it provides value, people will pay.  If they’re not willing to pay for it, stop wasting everyone’s time and go start a new company.

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Posted in Advertising, Consumer behavior, Marketing Trends, Social Media | Tagged , , , , , | 5 Comments

Why have deep discounts stopped working for some retailers?

By Jacob Brown | June 7, 2009

Over the past 9 months, moderate and up-scale retailers have resorted to unprecedented deep discounts to drive sales and maintain store traffic.  And it worked, for a while.

Now, it looks like these price promotions have begun to wear out.  The Wall Street Journal had a very interesting article on the topic the other day Discounting by Pricier Chains Fails to Give Retail Sales a Lift. 

Discount retailers are holding their own.

  • TJ Max: Up 5%
  • Ross Stores: Up 4%
  • Old Navy: Up 3%

At the same time, revenue for moderate and up-scale retailers continue to decline, even in the face of the most brutal discounting in history.

  • Limited: Down 7%
  • Macy’s: Down 9%
  • Dillard’s: Down 12%
  • Bon-Ton: Down 12%
  • Nordstrom: Down 13%
  • Saks: Down 26%

The easy response is that consumers are being more careful with their money and looking for bargains.  But, I think that is only a partial explanation.  I believe that, in part, this indicates that the consumer’s perception of a retailer’s prices have become more powerful than the actual price of the merchandise. 

Regardless of the true price of the merchandise, perceptions of moderate and up-scale retailers are in conflict with their emotional need to shop “Value”.  It doesn’t matter how good the deal is, Macy’s just feels wasteful if you’re worried about losing your job. 

This leaves Abercrombie and Fitch in the worst possible position.  For the past year they have held the line against discounting; fearing the long term damage it would do to their brand and their margins.  Sales crumbled.  They finally gave in and launched a huge price promotion.  But, it looks like it may be too late; consumers have already branded them as too “over-priced”.  Even with all the discounts, their May sales dropped a gut wrenching 28%.

This all suggests that retailers need to pay attention to their brand’s positioning as much as their price points.  Just running ads for sales and promotions won’t do the job.  The brand’s positioning must be in line with the consumer’s emotional needs, in the same way as prices need to be in line with their wallets. 

Regardless of their prices, consumers need to feel that Macy’s is a responsible choice, rather than an extravagance.

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Burger King and McDonald’s take separate paths to Value.

By Jacob Brown | June 3, 2009

Price promotions are an important tool, especially in these difficult economic times.  But, the panic of declining sales often leads marketers to confuse price promotion with brand strategy.  No where is this more evident than in fast food, where we’ve seen many restaurants try to drive traffic by virtually giving away their food.

A recent LA Times article outlined some of the radical pricing policies that fast food companies are trying.

  • Taco Bell has its Why Pay More” menu of 79-to-99-cent items.
  • El Pollo Loco has taken it one step lower — 69-cent tacos, with a limit of 10.
  • Wendy’s has its “3conomics” campaign offering three sandwiches at 99 cents each.
  • And of course Burger King, McDonald’s and everyone else has a $1 Value Menu.

With one exception, these restaurants are may be doing more harm than good as they focus on price and neglect the brand.

For example, Burger King recently announced that starting in June it will significantly increase its price message.  Burger King will be spending two thirds of its ad budget on value meal products, like its BK Shots and $1 Whopper Jr.  Cheap, Cheap, Cheap. 

“The current marketplace is demanding value and the company is being responsive to that consumer-driven demand,” Russ Klein, Burger King’s president of global marketing strategy and innovation, said in an email.

But is low cost and low quality really what Americans are looking for?  McDonald’s has taken the exact opposite approach.  McDonald’s is boosting its support for higher priced/higher margin products.  According to an Ad Age article:

“In the last eight months, we have placed greater emphasis on flagship-quality products,” McDonald’s USA CMO Neil Golden said in an interview. “And it’s making a difference. These are the products consumers love and feel good about enjoying on a regular basis, and it’s been a very successful part of our business.”

By paring price promotion with a strong quality message, McDonald’s boosts margins and continues to strengthen its core brand platform.   And increased sales of higher margin items results in more marketing dollars to support the brand.  So just when Burger King is trying to raise sales from its Value Menu, McDonald’s is seeing the percentage of sales from their Value Menu decline.  Whose strategy is right?  In the past 12 months:

  • Burger King’s stock is down over 40%
  • Wendy’s stock is down about 40%
  • McDonald’s stock is up about 3%

This doesn’t mean that you can’t promote based on price.  It just means that price promotion without reinforcing core brand strengths is self defeating.  You can sell a lot of tacos for $.69, but if they taste so bad only a 15 year old boy would eat them, you’re just going to dig yourself deeper into a hole.

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Technology helps seniors to take their medicine.

By Jacob Brown | June 1, 2009

When we think of seniors trying to maintain their independence, the issues that come first to mind are falling, cooking, bathing.  But, in fact, the ability to consistently take their medication and monitor their own health status are perhaps the biggest barriers to being able to remain independent. 

As we age and our short term memory naturally begins to decline, our ability to manage multiple medications becomes compromised. 

  •  “Have I taken my lunch time medications already?”
  •  “What’s my blood pressure today?”
  •  “Have I done my exercises?”
  •  “What pills do I take on Wednesday?”

All of these tasks rely on neurological capabilities that erode with age.  Failure to accurately and actively manage these responsibilities result illnesses that lead to the loss of independence.  A number of organizations are developing technology solutions to aide seniors in these tasks.   A recent article in the Journal of New England Technology describes a new project under development at MIT’s AgeLab.  Is developing a virtual pet they call “pharm animal.” (possibly the worst name I’ve ever heard - even for a prototype).   

“Each time the senior takes their medication, they notify the pet. “If you don’t take the medication, the pet gets sicker and sicker and shuts off or dies, depending on how cruel you want to be,” …the device can be networked via pager technology to a pharm animal owned by, say, a grandchild. If the child sees the pet’s condition worsening, they can call their grandparent and prompt compliance.”

 To me there are two fascinating and important elements to this technology:

  • It links the senior’s care to a family member - rather than some anonymous monitoring organization.
  • There is a wonderfully human component about linking self care and caring for the virtual pet.

As healthcare resources become more constrained, inexpensive ways to help seniors maintain independence will be come increasingly important.  Remaining independent is both beneficial to senior health and the healthcare economy.

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Use ROI to justify website usability research.

By Jacob Brown | May 27, 2009

Budgets drive virtually every activity in larger organizations.  Any expenditure has to be justified with a business case, which typically includes at least a basic ROI on the project.  This is a very useful process when you’re trying to run the numbers on upgrading a $1,000,000 Cisco phone switch or opening a new branch office.  But, an ROI analysis can create a difficult barrier when you’re trying to scare up the money to do some website usability research.

Time and again clients have called me complaining that they know they need to do some usability work, but they can’t get approval because its “impossible to quantify these soft benefits”. 

Forrester Research recently issued a report detailing the cost benefits of website usability, its called: Need To Cut Costs? Improve The Web Site Experience.  This very useful report includes an ROI model that can be used to help win the funds. 

 Forrester’s analysis focuses on the Call Center cost savings that you achieve from a more usable site:

  • Fewer calls about products
  • Fewer calls about the site
  • Shorter calls for complex issues

While I think the article is VERY useful, they failed to mention two areas that I believe are equally important, and that can also be quantified.

  • Increased Revenue. Fewer abandoned purchases mean more sales. It takes only a fractional improvement in conversion levels to produce meaningful revenue improvements. 
  • Stronger brand image. Conversely, a negative web experience erodes positive brand perceptions, and can result in lower customer revenue.

Web managers will find that they have more luck raising usability research funds if they focus on the tangible results of research rather than talking about the vague benefits of creating a more “user friendly” site.

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Long Term Shift to Private Labels?

By Jacob Brown | April 23, 2009

There has been a lot of press recently on the dramatic rise in Private Label products.  Most of the articles say something like: “Consumers are moving to store brands in an effort to save money”.  Case closed.

In reality the causes of the shift - and the implications of the shift are a little more complex. 

For the Retailer

Previously many retailers were reluctant to actively promote their private labels, fearing this could damage their brand as a retailer (make them look like a downscale discounter) and strain their relationship with manufacturers. 

But, the downturn has provided them with the “Cover” they need to aggressively push private labels.  Retailers see this as a strategic opportunity:

1. They look like they’re responding to a consumer desire to be thriftier.

2. They get better margins on private label products.

3. They now have a huge club with which they can beat manufacturers into giving better deals.

Manufactures are responding with increased promotional activity and new marketing campaigns.  But they are fighting as hard as they can against any “new deals” for retailers.  They know that if they go down that path there’s no turning back once the economy picks up.

For the Consumer

Similarly, the downturn provides that extra motivation for many consumers to finally make the move to private labels.  Previously they feared the negative halo that surrounds store brands, now the change looks smart - not cheap.

As a result, the growth in private label sales appears to be coming more from new buyers making the change to store brands - not private label shoppers increasing their purchases.

In an IRI study late last year, 91% of shoppers said that they will buy some private-label products this holiday season, up from 30% a year earlier.

This has an important long-term impact on brands.  Once families become accustomed to private labels, it will be hard to reel them back into branded products.  Already there are reports that private labels are causing significant damage to 2nd tier brands.  Ad Age recently reported:

Package food companies have begun tacit admissions of the growing threat. Con Agra said last month that it would begin to de-emphasize its Act II popcorn in favor of its better-selling Orville Redenbacher brand.

Bounty’s three tiers (strategy). Value-price Basic, launched three years ago, is staving off private-label incursions.

Sara Lee CEO Brenda Barnes said that she would be focusing marketing dollars on products with leading market-share positions.

Long Term Implications

Once we come out of the recession, new pricing and promotion strategies will be needed to bring consumers back into the brand fold.  There is no question that brands will always have a place in our retail marketplace.  But, its not clear how companies will be able to re-energize their brands and re-capture those who have spent some time on the Private Label side of the aisle.

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Decline and Fall of Global Media

By Jacob Brown | March 24, 2009

Yesterday’s Ad Age featured an article by Bob Garfield that I think does a great job of summing up the factors leading to the decline of global media.  I certainly enjoyed reading it - I hope you will too.  Bob Garfield Article.

The  Bottomless Pit of CPMs

Garfield points to the primary factor fuelling this mass implosion as the collapse of the banner ad.  The cost, and effectiveness, of internet advertising is racing towards zero.  And, it is taking it with it all media companies - both traditional as well as all the new media structures. 

According to PubMatic, there has been a 47% decline in CPMs (what it costs to run an Internet ad) since Q4 2007.  There are so many places to run ads, and the click through rates are so low, that sites can’t fight this downward pressure on prices.

drop-in-cpms

Media Proliferation

Garfield uses a wonderful quote from Randall Rothenberg to help explain the second factor grinding down global media.  The proliferation of sites delivering an ever increasing amount of content to a finite number of viewers.

“It is a disequilibrium between supply and demand.  Today the average 14-year-old can create a global television network with applications that are built into her laptop. So from a very strict Econ 101 basis, you have the ability to create virtually unlimited supply against what has been historically relatively stable demand.”

A Culture of Free

Lastly we have the culture of free.  The internet has created a culture of free.  Information is free, entertainment is free, distribution is free, access is free.  Consumers haven’t had to pay for anything, since the sites were being supported by a combination of some advertising revenue and a lot of investor dollars.  But now the VCs are hiding and the price of a banner ad is approaching zero. So no one is left to pay. 

Hope for the Future

So, as the investment dollars disappear, the whole structure, along with the culture of free, is going to come tumbling down.  And, after a period of tremendous struggle, I believe paying for content will be back in vogue.  

Value will be determined by revenue, not just eyeballs.  Remember the 1st rule of capitalism.  If you can’t charge people for your product - find a new business.

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