New Normal
Supervalu is replacing many of its private store brands with new umbrella brands such as Baby Basics as seen here.
Coming soon, a new normal for the grocery industry.
Note: This article is based on a new, in-depth whitepaper, “Coming Soon, a New Normal for the Grocery Industry,” researched and written by Revalour, Inc. The whitepaper includes a road map for retailers, private store brand suppliers and major product brands to help them succeed in the forthcoming economic climate. The complete whitepaper can be obtained by contacting Revalour at www.revalour.com.
Welcome to the New Normal.
The “Great Recession” has driven the grocery industry toward a period of unprecedented, permanent change – an environment that will settle-out by mid-to-late 2010 resulting in a “New Normal.” Compelling evidence indicates that this time consumers will not return to the post-recession buying and saving behaviors seen since WWII.
Grocery’s major product brands, retailers, and private store brand suppliers have an opportunity to prosper in the New Normal, but they will need to shift their strategies and manage their business differently to optimize their growth. A major industry focal point will be the development, management and marketing of private store brands (private labels).
Fundamentally, the New Normal will have been shaped by the macro-economic news that has shocked consumers into a new behavior pattern. Consumers control 70 percent of our economy. The 36 percent collapse of real estate values, the 40 percent stock market plunge, the insolvency of banks, the credit crunch, and the highest unemployment in 30 years have led to slashed consumer demand.
While some consumers lost their incomes, most have seen their net worth shrivel. For example, 32 percent of mortgaged homes have negative equity today, and home values are projected to increase only 2 percent a year through 2014.
Consumers are reacting differently than in previous recessions. For the first time since the government tracking began in 1968, consumers are reducing their debt, paying off credit cards and delaying new credit purchases.
With government unemployment forecasts over 8.3 percent through 2011, we are headed for an anemic recession recovery and one that will embed changes in consumer buying and saving behavior that will last for years.
Brand Value
Developments Creating a New Normal for the Grocery Industry — The grocery industry began seeing a change in consumer buying behavior in the fourth quarter of 2008. Driven by a strategy of “putting savings first,” consumers started buying more discounted items, became less brand loyal, shopped more stores, used more coupons, tried more private store brands, and they migrated more toward supercenters, discounters, and club outlets.
But a shakeout is likely to occur after the initial swell of consumer economizing behavior. Consumers always weigh newfound discretionary alternatives and settle into more-lasting new patterns of behavior. From mid-2009 through mid-2010, consumers will be telling major grocery industry players not so much that your price is too high, but rather, your value is too low.
All Grocery Industry Players Have Opportunities During the New Normal — To prosper during the New Normal, grocery industry players must pivot their brand strategies with a keener eye on the consumer’s total brand value set — functional, sensory, emotional, and economic. Then, they must link their strategies to enduring consumer and grocery marketing trends and pursue innovation in products and marketing.
How Major Product Brands Can Profit in the New Normal — The major product brands have some strategic advantages relative to retailers and private store brand suppliers. These are: innovation aptitude, consistently high product quality, in-depth knowledge of consumer buying behavior, a comprehensive understanding of brand management, and the ability to fortify retailer gross margin return on investment (GMROI) through the innovation of “shopper marketing.” The winning major product brands in the upcoming New Normal will leverage all of these attributes.
Smart brands will quickly recognize the emerging New Normal. They will use innovation to deliver new products and brands that have a greater economic value component of total brand value and fill the void left by the consumer’s flight from restaurants with easier to prepare items and/or meal solutions.
Successful organizations will bite the profit-margin bullet early-on and sustain their brands with the media spending and do what is required for a new product’s success. Their advertising will have heightened value messages. Profitable brands inherently understand that it is brand awareness and significantly, the emotional value sub-set of total brand value that solidifies a brand’s long-term marketshare.
Shopper Marketing
Shopper marketing represents a promising new frontier for the major product brands. It is the innovative confluence of major product brands and retailer marketing organizations —buoyed by the combination of their separate, confidential and deep understanding of the consumer, and their brand management/store marketing skills — that create differentiated capabilities, build brand equity, and produce better outcomes for individual shoppers.
Shortly before the recession, many major product brands began ramping-up shopper marketing to strengthen their alliances with retailers. From 2007 to 2008, two annual Grocery Manufacturers Association shopper marketing studies reported that shopper marketing departments had grown with manufacturers from 6 percent to 29 percent and with retailers, from zero to 60 percent. Markedly, these alliances were rapidly taking marketshare.
Retailers Have the Most to Gain During the New Normal — Retailers have three leveragable strategic advantages over major product brands for the New Normal. First, they control private store brands, which can play a very important role in satisfying consumer demand. Second, they literally own and control the first “moment of truth” – what customers see on the shelf. And third, as local merchants they can take the ultimate salesman’s advantage of “knowing what sells in the territory.”
During this decade, retail grocery marketing dynamics have been changing. Many retailers have been increasing their skill to build brand value for not only their store banners, but also, for their in-store departments and significantly for their private store brands. Supercenters, club stores, and some other non-traditional retail outlets have taken bigger marketshare. All major retailers have been seeking to lock-in marketshare growth by pursuing unique marketing strategies in closer collaboration with their suppliers to build customer loyalty. Many grocery marketing dynamics are expected to continue their trajectory during the New Normal.
Private Brands
Evolving Private Store Brands Will Be the Retailer’s Key Growth Opportunity — Private store brands will continue to be a stalwart retailer opportunity during the New Normal, providing the major way for retailers to distinguish themselves, build customer loyalty and improve profitability. Because of the underlying consumer economic factors aforementioned, private store brands will enjoy a tailwind for years.
Significantly, private store brands have evolved since the late ‘90s going from being price-centric to consumer-centric. This is manifested by the emergence of three private store brand product tiers — opening price point, national brand equivalent, and premium/specialty— that are notably aligned with manageable consumer segments.
Each of these consumer segments think, are motivated, and purchase their grocery products differently. For example, those consumers aligned with the opening price point tier place heavy emphasis on the lowest priced products they consider “good enough,” and they have little brand loyalty. (See Total Brand Sub-set Value graphic.)
Consumers in the national brand equivalent tier buy products but choose brands, and they put these brands within a “consideration-set” by category. In making their final brand selection, these shoppers use all four value sub-sets of total brand value — functional, sensory, emotional, and economic. Many are brand loyal, but to varying degrees depending upon the product category.
Finally, the consumer segment that corresponds with the premium/specialty tier is generally not price sensitive. These people place heavy emphasis on the functional, sensory, and emotional sub-sets of total brand value and they tend to have the highest brand loyalty. Like national brand equivalent consumers, they buy products but choose brands and do so within categories.
Retailers probably can’t grow very fast in the national brand equivalent and premium/specialty consumer segments by going it alone. They should ally themselves with private store brand suppliers that can bring them category brand management skill and provide marketshare-taking capabilities.
The Key to Private Store Brand Success: Brand Management of the Three Distinct Consumer Segments — The first priority for retailers should be to correctly align their private store brand strategy with their store’s target consumer segments. This best positions them to further their customer loyalty goals and optimize profitability.
Retailers should reconsider their brand architecture. The natural tendency is to look at models that have worked for others and many retailers can be seen mimicking Loblaws’, Kroger’s, and Safeway’s storewide brand paradigms. But is this the best approach in the New Normal?
Storewide Brands Are Not Expected to Be a Winning Strategy for the New Normal — Years ago storewide umbrella brands were appropriate; they presented a single point of distinction to the consumer, price. (See Percentage of Consumers by Segment graphic.) Today, that strategy is mostly outdated, because 85 percent of private store brand growth lies with the national brand equivalent and premium/specialty consumer segments, where the consumer’s ultimate buying decision is not dominated by price but rather, total brand value.
Retailers that believe a ubiquitous store brand strategy will be the best approach should examine past major product brand extensions. In the late ‘80s, over 50 percent of the new brands were brand extensions. The overwhelming majority failed. The brands extended across too many categories; their brand promise had become too diluted or confusing to the consumer, and while they were less costly to launch, they failed to command meaningful marketshare.
Extended brands also bombed because of single point flops—a product performance shortfall or recall. Even though those fiascos were only in one category, the negative overtone harmed the brand’s sales in other categories.
Flourishing retailers during the New Normal will identify, define, and offer national brand equivalent and premium/specialty private store brands within large product categories or groups of closely related categories that are sufficiently large to support building an emotional connection with consumers through advertising, package design, and promotion.
These private store brands will be more relevant to consumers than storewide brands and better able to penetrate the consumer’s consideration-set for a category. They will have superior distinction and better total brand value, and thus, produce greater loyalty and profitability for their stores.
Retailers Can Use Being Local to Their Advantage — Being local gives retailers the opportunity to outperform the major product brands in the critical area of brand experience, the second “moment of truth.” Consumers have regional taste preferences in many categories and the major product brands often don’t cater to these tastes. Retailers can take marketshare from the major product brands by identifying their regional consumer taste preferences and offering private store brands that cater to them.
However, retailers should also end the practice of having their own exclusive flavors. Once thought a prime way for retailers to differentiate themselves, exclusive flavors shift the consumer experience to something less desirable and thus, reduce volume.
Innovation Can Be a Major Growth Catalyst — Retailers also should use product innovation, not invention, to leverage their first “moment of truth” strategic strength. Invention is the creation of something new; innovation is the successful commercialization of something new.
Experience shows that major innovations are ever-present in almost every category, and there are advanced ways to discover them, reduce their risk, and profitably bring them to market. Through innovation, retailers can make their national brand equivalent or premium/specialty brands consumer destination points. This will significantly build store and brand loyalty, as well as increase profitability.
Retailers Should Re-examine Their Current Practices to Optimize Growth — Retailers should consider replacing some major product brands with their brands in every product category. Some major product brands have little enduring brand loyalty. Often they hold the third, fourth, or lower marketshare. Significantly, they have anemic, if any, consumer advertising and do not sustain an emotional bond with the consumer. These brands can be precisely identified and replaced by national brand equivalent or premium/specialty private store brands with little or no volume loss and increase profitability.
Soliciting product bids from private store brand suppliers is mostly obsolete. This practice works for the opening price point segment but not for the other two. Why? Not all the bidders’ products deliver the same consumer experience. Consumer experience is at the very heart of brand (and store) loyalty.
Retailers should consider shedding the “price-gap” metric and use price elasticity of demand instead with an additional GMROI review. Price-gap is generally imprecise. Price elasticity is a major component of effective brand management and a mostly precise metric; it optimizes revenue and profit, can be precisely consumer researched, and in-place within weeks reaping additional profits.
Retailers should also revisit the packaging design for their national brand equivalent and premium/specialty brands. Too often, private store brand packaging doesn’t stack up to the major product brands. The most important encounter consumers have with a brand is on the store shelf. When consumers are at the first “moment of truth,” any shortfall in private store brand value perception relative to major product brands lowers volume and revenue.
To build loyalty, promotions should not be confined to price reductions. For example, continuity and contests/sweepstakes promotions are often highly effective at building brand loyalty or converting brand switchers to become loyal. To generate brand trial, almost nothing is better than sampling. Premiums and special packs are good ways to increase the perceived value of a brand and build your brand’s loyalty. While all these promotions have their place depending upon a private store brand’s development, all of them are important growth considerations for national brand equivalent and premium/specialty private store brands.
One More Important Tool for Retailers: Shopper Marketing — Shopper marketing is rapidly expanding and its payout is proving to be a win-win for both the major product brands and retailers. However, retailers would likely be better off doing this with their private store brand suppliers.
An Evolving Private Store Brand Model for the New Normal — Supervalu is aligning its private store brands for its optimal competitive advantage during the New Normal. It is taking a holistic consumer-centric approach by leveraging consumer research and bringing an innovative private store brand strategy to life.
Supervalu is shedding over 100 private store brands, and launching narrow umbrella brands such as Baby Basics, Culinary Circle, and Wild Harvest and a single large category brand, Java Delight. (See Baby Basics photo.) In addition, it is removing its store banner brand names from products in the opening price point segment.
Supervalu appears to understand the critical importance of the first “moment of truth” by making sure packaging design connects with the consumer just as effectively as any competing major product brand. Furthermore, it also appears to understand the importance of the second moment of truth - consumer brand experience. Supervalu recently opened an innovation center with test kitchens and sensory labs meant to propel product improvements and innovation.
Significantly, Supervalu is working to have a promotion array for its private store brands that is as efficacious as any national brand. Supervalu strongly believes in developing close working relationships with suppliers and looks to them for the category consumer insights, ideas, and product innovations that will help take marketshare from the major national brands and its competitors.
The New Normal Offers a Huge Opportunity for Private Store Brand Suppliers — Private store brand suppliers will have tremendous growth opportunities during the New Normal. However, many of these firms lack a strategic strength relative to the major product brands and retailers. Some are too small. Others have internal conflicts, because they pursue a dual strategy of providing both major product brands and private store brands.
Until a few years ago, private label supplier success hinged on being the lowest cost producer and the fastest follower of the major product brands. That was true when private store brands were all about price. At best, that is cost of entry today.
The most successful private store brand suppliers will quickly align their strategies with retailers in the New Normal. To achieve this, they will shift their business orientation from sales/production to consumer/marketing.
During the New Normal, retailers will increasingly gravitate toward private store brand suppliers who provide a “total solution.” The savviest suppliers will understand they now are competing on the full spectrum of consumer segments, especially national brand equivalent and premium/specialty. Stronger retailer-private store brand supplier alliances are expected to take shape.
The most prosperous private store brand suppliers will deliver value-added services such as true innovation, regional product taste superiority vs. major product brands, category consumer insight, store brand management skill, major brand equivalent packaging design, and effective promotion capabilities including shopper marketing. This combination will not only take profitable marketshare from the major product brands but also significantly, improve retailer GMROI, the paramount profit metric for grocery retailers.
Certainly, the grocery industry’s New Normal will have challenges. But it also presents major product brands, retailers and private store brand suppliers profitable new opportunities if they adapt and innovate their business, marketing, and brand strategies to take full advantage of new consumer perceptions, attitudes, and behaviors. n
*Steve Cartozian heads-up Revalour, Inc. and serves as its chief strategic innovator. His company provides innovation rooted: corporate, marketing and brand management consulting, inclusive marketing communications deliverables, and advanced new product development services. Catozian has over 25 years of experience and graduated topmost in his marketing major from Loyola University. He can be reached through Revalour’s website at www.revalour.com or at 847-749-2250.
