SUMMARY: When retailers compete on price and rollbacks are market-wide, retail traffic trends rarely change. More importantly, Nielsen research shows that price rollbacks can actually reduce category dollars, making an effective pricing strategy a necessity.

Rob Schram, Vice President Analytic Consulting, The Nielsen Company

When commodity costs for foods rose dramatically in 2008, most manufacturers were forced to raise prices to protect margins—some more than once. Once commodity prices dropped, retailers put pressure on manufacturers to lower prices. But as the Great Recession took hold and consumers cut back on spending, manufacturers wanted higher prices to stick to compensate for the flat unit growth experienced in most categories.

And so the price wars began. And true to life, in war there are no winners. When retailers compete on price and rollbacks are market-wide, there are no inherent traffic gains. In fact, Nielsen research shows that price rollbacks can actually reduce category dollars.

Profitable Pricing
Retailers intending to fight on price better know which categories to target or they will be fighting a losing battle. Price elasticity is a measure of consumers’ likelihood to purchase in relation to a change in price. If you raise prices on categories with a price elasticity of less than one, or take a price rollback, you can actually decrease category sales. It’s a delicate balancing act. A price rollback may slightly increase category volume, but not as much as price goes down—so dollar sales actually go down. And vice versa on price increases—sales go up, but not as much as volume goes down.

Pinpointing best-bet categories requires knowing how elastic they are to price changes. High-elasticity categories are more sensitive to price changes because they are considered less of a necessity. When the opportunity cost of buying these products become too high, consumers opt out. These categories are typically commoditized products with low differentiation. Examples include:

• Paper towels
• Canned vegetables
• Canned pet food
• Canned fruit
• Incontinence care

Conversely, low-elasticity categories are more insensitive to price changes because they are typically the “must have” items that consumers will continue to buy no matter the price. These categories are typically perishable, convenient and are less commoditized. Examples include:

• Sliced cheese
• Dry pet food
• Macaroni & cheese
• Frozen side dishes
• Deli meat
• Bath tissue
• Microwaveable meals

Six Keys to Successful Price Planning

1. Plan pricing from two starting points – supply side / demand side. Define profit goals by forecasting the cost of goods, labor and transportation costs and plant capacity. And understand consumers’ price sensitivity to both your price and your competitor’s.
2. Establish a cyclical price management process. From planning and implementing to tracking, maintaining on-going control of the process will ensure that profit requirements are met and promotion response is achieved.
3. Take a portfolio approach. Understanding the price elasticity of each item in the portfolio in relation to the profit impact of a price increase provides a path to meeting corporate profit goals in a unified approach.
4. Focus on hard metrics at the center. Hard metrics with common definitions like shelf prices, list prices shipments and financials across brand groups must be the focus of any price planning approach.
5. Establish KPI’s and milestones. Determine scorecards for all key brands and track results and the execution. Be prepared to adjust the plan to react to marketplace changes and competitive initiatives.
6. Endorse and enforce. A portfolio approach means that some brands will take price changes and other will not. All parties in the process must follow the process and understand the broader goals.

Price wars are a long-term proposition, where over-reacting often leads to failure. Long-term winners innovate and differentiate and know that while price is important, value is more important. Careful planning, research and ongoing management are the steps it takes to win the war on price.

• Market Index volume, in terms of unit and country currency change
• Retail channel shifting
• Shopping frequency and spending trends
• Overall consumer confidence

“Nielsen collects and analyzes data on tens of thousands of products around the world. As we were thinking of new ways to leverage this valuable resource, we thought it would be useful to summarize this information and create a monthly snapshot of consumer and retail trends across the globe. We expect that the Nielsen Economic Current will provide our clients and others with another valuable tool for evaluating these trends at both a macro- and microeconomic level,” said Todd Hale, Senior Vice President, Consumer & Shopper Insights at Nielsen.

In addition to global and regional components, the Economic Current will follow trends in eleven countries representing over 70 percent of Global GDP.  Countries were chosen based on their importance to the overall global economy as well as countries where Nielsen captures a broad set of consumer, retail and media content. The countries which the Economic Current will track on an individual basis are:

• United States
• Canada
• France
• Germany
• United Kingdom
• Italy
• Spain
• Brazil
• Russia
• India
• China

Over the course of the next week, Nielsen Wire will feature brief summaries on key sections of the latest edition of the Economic Current. In the months ahead, new editions of the Economic Current will be supplemented with podcasts by senior executives and analysts who will provide further insight on global consumer trends.

For the complete report, click here.

Of the more than 122,000 items introduced, 3,882 (3.2%) achieved more than $1 million in sales, while 198 items (0.2%) achieved more than $10 million in sales.  Only 15 items (0.01%) generated more than $50 million in sales.  The new items generated more than $21 billion in sales in 2008, representing 5.7 percent of all CPG sales reported by Nielsen for the year.

Those categories that saw the most new product launches were cosmetics, candy, paper products and bread and baked goods.  The snack category, which saw 3,619 new products, generated the highest sales – more than $21 billion – and accounted for 18.2 percent of all snack sales for the year.

“Most of the top new items are extensions of existing brands.  Of the top 100 new items, 98 were extensions, with only 2 entirely new brands,” said Tom Pirovano, Director of Industry Insight at Nielsen.

Even though the number of new items introduced in 2008 remained about the same from 2007 (122,743 versus 122,530), they generated 6.6% more sales.

“The consumer shift to private label items requires that brands innovate and add new features to win back shoppers.  It is difficult to predict the year ahead, but we expect new products to have more health and wellness claims, additional package size adjustments and more premium private label products,” said Pirovano.

Under the multi-year agreement, Nielsen will provide P&G with retail tracking, insights on consumer purchase behavior, marketing analytics, and Nielsen Answers™, Nielsen’s technology-based business intelligence solution. 

“P&G chose Nielsen for our technology capabilities, our deep, rich content, our strong focus on process improvement and productivity and our approach to innovation and client service,” said John J. Lewis, president and CEO, Nielsen Consumer Group, North America.  “We welcome the opportunity to bring our people and capabilities across The Nielsen Company together to deliver on these areas for P&G.”

View the full press release.