Wednesday, October 15, 2008

The new normal: private label or inferior goods?

It is pretty much a given that private label market share will increase in times of recession or economic uncertainty. So it was no surprise to read that Wal-Mart has decided to increase its emphasis on private label products.

This is a bit of a reversal for Wal-Mart, which has actually been de-emphasizing private label for the past year or so (their decision to cut back on private label soft drinks drove Cott to the brink of disaster).

But there are some other possible directions consumers can go to save money, and a report from Booz & Company offers some thoughts on an alternative movement toward “inferior goods” in a setting they refer to as the "new normal."

The word “inferior” is used here as economists might use it – goods “that attract consumers more when purchasing power declines.” An example cited is that consumers who once used disposable antibacterial wipes might choose to switch to a private label version; or they might instead switch to an “inferior good”, such as paper towels (or they might switch from paper towels to a washcloth).

Manufacturers who have become used to premiumization – consumers constantly moving up to higher-priced brands within a category, or further up into higher categories – will now need to adjust to the “new normal”, in which consumers trade down.

As always, there are opportunities in any major change, even a downward trend. The Booz report offers as an example how Kraft is positioning its DiGiorno pizza not against other frozen pizzas, but against pizza delivery services ("It's not delivery -- it's DiGiorno"). Preparing a frozen pizza might be an “inferior good” for many consumers, compared to calling Dominos, but if the cost is half, it’s a choice many more consumers might make.

The report offers some recommendations for taking advantage of the new normal. I suggest you read the full report to get the thinking behind each, but they are:
  • Don’t blindly lower prices to regain volume. If the consumers are moving to a different category, lowering your price will not necessarily keep them in your category.
  • Find the inferior products that will attract consumers as their purchasing power decreases. This might mean introducing a sub-brand (at the risk of cannibalization) or finding new channels or distribution formats (e.g., Starbucks selling ground coffee at the supermarket).
  • Cement consumers to your brand. If you attract consumers with your inferior good – give them a brand experience that will keep them around when good times return.
  • Make the new normal feel better. Give the consumer a reason to feel good about trading down (e.g., your product is more environmentally responsible).
And, amidst all the gloom, let’s maintain some perspective. Bad as the economy is, it will not stay bad forever. Good times come and go, and so do the bad times. We will dig our way out of this and the companies and people who prosper will be those who work now to lay a foundation for future success.

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