Does Price Still Rule in the ‘New Normal’?

Discussion
Oct 08, 2010

By Ben Ball, Senior Vice President, Dechert-Hampe

The 2010 IIR Category Leadership
Conference, held in conjunction with the private brands Conference in Chicago
last week, raised this interesting question (somewhat serendipitously): Are
retailers and manufacturers right to stay laser focused on price in the post-recession
environment?

Due to a speaker cancellation, the panel discussion on “Responding
to the Changing Shopper” sponsored by SmartRevenue was preceded by a presentation
by Nielsen on retailer brands — a presentation originally geared to the largely
retailer audience in the private brands conference next door.

The Nielsen presentation
highlighted the fact that private brand unit growth has quickly returned to
its historical pattern of about +0.2 points per year post the recession and
suggested that U.S. private brand penetration will probably never reach European
levels due to lower retailer concentration in the U.S.

Lisa Rider, VP, retail
marketing at Nielsen, noted that shoppers’ willingness to embrace private brands
varies greatly by category, and that the relative importance of the purchase
ranks just ahead of unsatisfactory product experiences as the reason shoppers
don’t adopt private brands. Nielsen also noted that those
brands could soon encounter some stiff headwinds as the population shifts to
an older and more Hispanic profile — both typically underdeveloped segments
for private brands.

The panel discussion that followed featured some pre- and
post-recession shopper behavior tracking by SmartRevenue, along with panelists
from The Kellogg Company, Dole Packaged Foods and OfficeMax.

Among the tracking
study conclusions was the fact that, while more shoppers reported “making
a list” post-recession, only about two percent more shoppers interviewed
in-aisle actually had one in hand (31 percent post- versus 29 percent pre-recession).
Similarly, about the same percentage of actual purchase decisions were made in
aisle post- (45 percent) as pre-recession (47 percent).

The study did find a
much greater jump in the percent of shoppers who ranked “price” as
a top box purchase driver for National Brands (+16 points from 23 percent to
39 percent) than that for private brands (+3 points from 65 percent to 68 percent).
But it also found that “post-recession shoppers are not willing to sacrifice
quality and are, in fact, placing even more value on health considerations
[than before the recession].”

In discussing the study findings, both the
manufacturer and retailer panelists related specific instances of shoppers
valuing factors like “quality” and,
in particular, “health issues” equal to or just below price in driving
purchase decisions. And Reggie Jonaitis of OfficeMax pointed out that manufacturer
promotions are now essentially required to be totally self-funding because “the
incremental sales don’t offset the margin loss” anymore.

Discussion Questions: Are manufacturers and retailers placing undue emphasis
on price as the key driver in “the New Normal” economy? Are you surprised
by findings that there has been little change in shopper behavior due to the
recession? Do you agree that private label growth rates will ease post-recession?

Join the Discussion!

22 Comments on "Does Price Still Rule in the ‘New Normal’?"


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Dr. Stephen Needel
Guest
7 years 6 months ago

I think we’ve always over-played the idea that low prices rule. I do, however, think that value rules, and in a recession, we saw a re-evaluation of the value equation for a lot of low-risk/low-priced products that helped private label sales. What I take from the article is that shoppers want value for their money (and we were seeing this 30 years ago, when I was at Quaker–nothing much has changed). If branded products are giving them a good value, they’ll do well. Good value may mean a lower price or it may mean a product with more [perceived] benefits.

Ryan Mathews
Guest
7 years 6 months ago

First of all, we are dealing with “Old Americans” not a “New Normal.” People still suffering from the impact of the recession are income restrained. Those who aren’t are going to drift back to their prior purchasing patterns. It is, after all, easier to treat yourselves to a bowl of Corn Pops than it is to buy a second home.

Paula Rosenblum
Guest
7 years 6 months ago

I think price as a sales driver has always been overrated. It is us as an industry that create this in large part. In general, people are okay as long as the price is “close.” In other words, $1.79 vs. $1.87 isn’t really a shopping deterrent. Convenience will override that price differential. But when a retail emphasizes price, and highlights differences between itself and its peers, or when price differences are too dramatic, the shopper starts to feel like a fool and will revolt.

So it is up to us to de-emphasize price as a differentiator, assume that the web and mobile phones are there to keep us honest, and put a focus on the true scarce commodity, customer service.

Gene Hoffman
Guest
Gene Hoffman
7 years 6 months ago

It’d be hard for manufacturers and retailers to say, “We don’t want to play the game by the rules we created.” The world of marketing and retailing has cheapened the seats to see today’s game. Not everyone is playing that game. It raises some questions such as, “Why doesn’t the sports and entertainment world sell highly discounted tickets?” Have you bought a ticket to a pro football game or a rock concert lately?

Will consumers cotton quickly to new price levels after being bombarded with offers of “90% off” and “Buy 1 and get 2 free,” etc? Consumers don’t know what the fair price is anymore so they react mainly to discount offers and claims.

As Pogo and his whiz bangs might characterize this manufacturer and retailer conundrum, “We saw the enemy and it is us.” Like the toxic spill in Hungary, it will take time to clean up this mess.

Herb Sorensen
Guest
7 years 6 months ago
“While more shoppers reported ‘making a list’ post-recession, only about two percent more shoppers interviewed in-aisle actually had one in hand.” This statement shows the folly of trusting what shoppers say about shopping–they simply do not know or understand their own behavior. And this is just the tip of the iceberg. In fact, shoppers, retailers and brand manufacturers all overemphasize the role of price in shopping. This is a direct consequence of the fact that all are thinking about (when they do at all) and communicating in rational, cognitive terms. The reality is that shopping is mostly NOT a rational, cognitive process. This is demonstrated by the FACT that real shoppers in real stores rarely look at prices on the shelf. No wonder that Neale Martin wrote the book, “Habit: The 95% of Behavior Marketers Ignore.” Martin contrasts the “habitual mind,” with the “executive mind.” The habitual mind gets most of the business of life taken care of, including most of shopping, and is on autopilot, subconscious. The “executive mind” takes over when the habitual… Read more »
Ian Percy
Guest
7 years 6 months ago

Let’s see…the price wars of the last ten years got us where? Yup there’s a winning strategy we should definitely continue.

Gene offers us the wise insight that we’ve created the very problem or “rules” that we now find debilitating. Once you’ve passed the ‘tipping point’ however, it is virtually impossible to go back. As an industry, heck as a nation, I doubt we’ll ever truly recognize that all our struggles and lack come from self-inflicted wounds.

Bill Emerson
Guest
Bill Emerson
7 years 6 months ago

I don’t know. Apple is forecasting $30 billion in sales from the iPad next year and Macy’s is announcing an aggressive rollout of the My Macy’s initiative. The point being that offering the same product in a homogeneous national assortment will lead to price as the primary consideration, but only if retailers choose to do that.

Mark Burr
Guest
7 years 6 months ago
Post-recession? I suppose. There is certainly not total agreement that a new normal of 10% unemployment is just a factor to become acceptable. Yet, there is a large majority that does in fact think so. So call us in ‘post-recession’ if that works. It’s not really. But if it works, why not? Is ‘price’ a self-inflicted wound? Maybe. However, no matter what any study or report says, it is the factor. It always has been the factor. It always will be the factor. Ignoring it and considering an ambiguous factor of ‘value’ as the top factor is denial at best. Certainly there is a ‘value’ equation for a certain set of consumers. However, in the end, the factor in that equation that always wins is price–period. American consumers have proven that they will sacrifice all for a cheap pair of sneakers and a $10 toaster. So discuss value all day long. Value is price–period. List all the factors in the equation and the overwhelming number of consumers will sacrifice every single one of them for… Read more »
Joel Rubinson
Guest
7 years 6 months ago

I see this as a strategic discussion. especially with CPG, I’ve often thought (but not that I’ve analyzed this deeply) that markets evolve in predictable ways.

For example, a new market gets established, like energy drinks with Red Bull or body sprays like Axe. Then success drives a few entrants who make incremental differences in the attributes and add a lot of marketing spin. They invariably get a smaller “fair share” of the market. Regardless, this begins to train the shopper to look for features.

Then lower price alternatives begin to emerge, emphasizing features and parity performance but at a lower price.

In this context, the question becomes strategic. Are national brands going to go down the path of features, price or find a new path to discovering differentiation, relevance and value?

Ed Rosenbaum
Guest
7 years 6 months ago

I might be on the other side of this discussion; but I believe price is still a major driver. Yes, slight increases will not deter one from making a purchase. Larger increases will delay the purchase until it becomes value effective.

The survey showed an increase from 23% to 39% stating price is the driver. Folks, that is almost a 67% increase when you view the numbers. Would you think that to be significant? Maybe this began ten or so years back. During that time we had much more disposable income. Today our disposable income is down possibly 30% if we are even still employed. That too is significant.

Al McClain
Guest
Al McClain
7 years 6 months ago

The main thing I take from this discussion is that the price/value equation is complicated.

Some consumers will pay a mini-fortune to have the latest/greatest iPod, iPad, iPhone, Kindle, or even the hippest (if that word is still used) pair of jeans or fragrance.

But, we have been through a truly great recession, preceded by the cataclysmic events of 2000 and 2001 and interspersed with a less-than-optimal economy. I think consumers are increasingly viewing many products and entire categories as commodities to be acquired at the lowest possible price, regardless of brand or whether the product has one additional unnecessary features.

Bottom line: differentiate or become a commodity.

Tim Smith
Guest
7 years 6 months ago

I find it funny to see folks with high income commenting that they want to get away from price, willing to pay more and we should too.

Have you shopped recently with someone who had to wait until payday to shop? Seen a mother in a store tell her kids they can’t buy brand X or item X this week? Not talking just about Walmart, but the Aldi’s, Dollar & Family Generals. Are your neighbors experiencing layoffs, or job changes if they were lucky enough to find something quickly?

Who benefits from the higher prices? Will retailers keep it all or will they “partner” with suppliers so everyone gets to dip their beak in this profitable Utopia?

James Tenser
Guest
7 years 6 months ago
Several core truths are exposed in this discussion. Allow me to recap: 1) Despite what they say to survey researchers, habitual shopper behaviors around pre-planning and value-seeking are slow to change – even under economic stress. 2) Price-value is perceived differently in commodity categories (like grocery and personal care), as compared with fashion goods or less-frequent, higher-consideration goods (like electronic gadgets and household items). We should be wary of making generalizations without also making a few distinctions. It clouds the discussion, and the survey question above is a good example. 3) Who says high-fliers like Apple (and HTC, Sanyo, Motorola, etc.) are not affected by price competition? The continual stream of new and improved gadgets with more power and features for similar price points is all the evidence you need to conclude that this is a race to keep consumers dazzled by novelty. The continued “churn” of new models blocks the present ones from becoming commoditized, heading off the inevitable lower-cost knockoffs. Are shoppers behaving differently now that they have confronted tough economic times? Many… Read more »
Ted Hurlbut
Guest
Ted Hurlbut
7 years 6 months ago

I think the most interesting point in the piece was the last point:

“Reggie Jonaitis of OfficeMax pointed out that manufacturer promotions are now essentially required to be totally self-funding because ‘the incremental sales don’t offset the margin loss’ anymore.”

We’ve now arrived at a point where the promotion no longer generates plus margin dollars. We’ve so trained consumers to shop for the deal that they no longer respond to the deal with additional spending, they simply structure their spending around the deal. It gets tougher and tougher for retailers to make money this way.

In those categories where retailers have made price the name of the game (commodities and near-commodities) the consumer is driven by price, and the value equation is defined by price. From an economic perspective, however, this is what happens to commodities; prices get driven down to the point where margins are sliced paper thin.

Lee Peterson
Guest
7 years 6 months ago

It’s definitely time to de-emphasize price, if for nothing else than to differentiate. The noise about price is deafening, to the point where it doesn’t really matter if you say you’re cheap because 1) consumers KNOW who’s got good prices and who doesn’t and 2) you sound just like your competition!

How is Apple doing it? You don’t hear them running around yelling, “cheap! cheap! cheap!” I think they’re the perfect emulator to get us out of this no-marketing slump. But, you know, that’s going to take hard work!

Brian Kelly
Guest
7 years 6 months ago

Coming off September’s comp discussions and the 9% unemployment data point, it seems the role of price in the value equation remains “optically” important to capture share of mind.

Since Q4 sales are predicted to rise 2-3% without much new on the short term horizon, most retailers remain in a share of market fight.

So for now, any national retailer hoping for an up comp, price should remain an important support point in the promise of value. To forgo that is risky business.

Or as we like to say, “retail ain’t for sissies.”

Mark Burr
Guest
7 years 6 months ago

There’s been a couple of summaries of the discussion. However, Mr. Tenser may have it right. It could be all that and a bag of chips!

Craig Sundstrom
Guest
7 years 6 months ago

I think Al highlighted the problem nicely (and I don’t say that just because he’s RW’s founder!): every seller wants to differentiate their product, since to do so (completely) is to become a monopolist…the ultimate in pricing power; that so many compete on price seems to suggest that few succeed in that pursuit (differentiation); but why? Part of it of course is simply that there are fewer makers and sellers as local and regional names have been merged or eliminated over the years. And years of a “national media” and mobility between regions have also diminished differences. But neither of these is a complete answer, since these forces have been at work for decades. It’s possible we’ve simply reached a critical mass of commonality; but it’s also possible that today’s corporate leadership isn’t very good…an ominous possibility which, while I can’t say “yes that’s true,” I wouldn’t say it’s untrue either.

Doug Stephens
Guest
Doug Stephens
7 years 6 months ago

The fact is that most brands and/or retailers have little choice but to fight on price because in many cases it’s the only thing that differentiates them from their competition. In the absence of any qualitative or performance difference in products or retail experiences, consumers naturally defer to price as the primary modifier. This is always the case but is certainly exacerbated by tougher economic conditions.

Be different and price becomes less of an issue. Be really remarkable and it might just become a non-issue.

Kai Clarke
Guest
7 years 6 months ago

This is simply a closed view on private and national brands vs. pricing. Pricing has always been a factor and will always be a factor when considering mass products at mass appeal. Wal-Mart, Costco, Home Depot, all of the dollar stores, etc., remind us that consumers consider price to be important. This doesn’t mean that customer service and customer satisfaction do not play an important part…they do, but old or new “normal” we have over 50 years of price leading retailers who remind us every day how important price is to America’s consumers.

Ben Ball
Guest
7 years 6 months ago

Wow! What a great discussion. Clearly the question of “how important is price?” lives on.

One technical note if I may.

To Scanner and others who picked up on the “post-recession” terminology–that is based on the reported commentary and not necessarily my personal opinion or the opinion of Dechert-Hampe.

To the many who somehow pointed out that this is largely a bed of “our (collectively) own making”–Amen!

Craig Rosenblum
Guest
Craig Rosenblum
7 years 6 months ago

Retailers may chose to move away from focusing on price, however, recent shopper research of loyal shoppers shows that retailers can be above parity in service, assortment, merchandising, cleanliness and more, but if your pricing is 8+% higher than the competition, 80+% of the shoppers will go elsewhere.

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