Middle India, a region made up of approximately 400 towns each with a population of 1-10 Lac, are home to 100 million Indians and today constitute up to 20 percent of the country’s FMCG consumption. In fact, only the metros and Middle India have outpaced the all-India growth story in the last eight years. Even today, Middle India leads the pack across urban and rural segments for FMCG value growth rates.

Although some companies have partially penetrated the Middle India market, many tend to overlook smaller towns, ignoring the fact that these markets are perhaps easier to penetrate due to relatively sparse competition. Considering the expected growth of population in this area, rise in incomes and aspirations and the expected influx of people from even smaller towns to Middle India, this market is expected to create huge opportunities for marketers in the coming few years.

Why do Middle India cities matter?
These cities are ready to behave like the metros of tomorrow. Of the total INR 1.4 Trillion (280 Billion USD) in FMCG sales in 2010, goods worth about INR 287 Billion (5.74 Billion USD) were consumed by the Middle India population. This number makes up more than 20 percent of the overall FMCG sales, and 30 percent of the urban FMCG sales.

Middle India is also home to 30 percent of all urban stores, comprising over 900,000 million stores today. In addition to this, the annual per capita FMCG consumption of Middle India towns touched INR 2,800 (56 USD), which exceeded the national average by INR 1,600 (32 USD). This is a significant achievement for these smaller towns, considering the fact that the metros breached the INR 2,800 (56 USD) mark as recently as 2009.

Strong and vast market market potential
Out of 81 FMCG categories tracked by Nielsen, 49 product categories across personal care, over-the-counter drugs, household care, and food outgrew the all-India rate. Over 30 categories saw growth rates faster than 1.15 times the all-India rate. The top five fastest growing categories like diapers, scourers, liquid toilet soaps, acne preparations and air fresheners, which fared strongly in the past year, performed even better in 2011, indicating continued possibility of robust growth in the near future.

Interestingly, the focus on hygiene, health, personal grooming and convenience seems to be driving the rapid growth in these towns. Middle India is also accepting evolved categories like breakfast cereals, air fresheners, acne preparations, and liquid toilet soaps. The metros took on to many of these categories in a big way just a few years ago and Middle India does not want to be left out.

These developments bode well for FMCG companies, especially in light of the fact that this market is still in a nascent stage, and is expected to grow substantially in the next five years. The rise in demand for consumer products and relatively lower penetration of FMCG companies in these towns means that competition is not as fierce in these towns as would be in larger metros. A few major players with adequate capital and wide distribution networks are already cashing in on the opportunity. The annual turnover of the top ten FMCG players from the Middle India segment rose more than 42 percent by INR 35.8 Billion (716 Million USD) in just two years between 2009 and 2011.

For more detail and insight, download Nielsen’s Managing the Middle India Gold Rush report.

Consumers planning to spend more than last year on holiday gift giving are in the minority, but those that are planning to increase spending are concentrated in the Asia Pacific and Middle East regions. Europe dominates the top 10 list of countries with the largest percentage of consumers planning to spend less this year.

Books, Technology and Clothing Top Gift-Giving List
The product categories likely to get a sales boost this holiday season include books, clothing and technology, where more than half of global online consumers expect to spend more or about the same as last year.

Regionally, holiday shopping preferences vary for the top five gifts where consumers plan to increase spending compared to last year. Technology products are at the top of the list in Asia Pacific and Middle East, toys in North America, books in Europe and clothing in Latin America.

While holiday traditions and celebrations differ across the globe, celebrating within a holiday budget is universal. Many consumers still grappling with a sense of economic uncertainty are in a recessionary mindset. As a result, continued spending restraint in many parts of the world will likely have an impact on consumers’ holiday gift-giving budgets.

The summer of 2008 seems like a distant memory given all that has happened in the past two years. But one thing most Americans are unlikely to forget about that year was the average price of gas reaching $4.11 per gallon. Fortunately, the price level settled back to $1.61 by the end of that year. But just two years later, the average price of gas has crept up to $3.05 per gallon, and some analysts expect the price to continue to rise to near 2008 levels.

With this in mind, how will consumers react to higher gas prices, especially in an economy fraught with uncertainty? During the summer of ’08, U.S. consumers told us how they responded by reducing shopping trips, eating out less, buying for value and using more coupons. And what they told us they were doing aligned perfectly with their behaviors.

It was during that year that the “staycation” came into existence as consumers cut-back on unnecessary travel and did more at home in an effort to save money. We saw a flurry of meal deals from food retailers and manufacturers as they aggressively fought to win trips that restaurants were losing. Will past consumer reactions to gas prices come into play in 2011? We think so, so how are you preparing for another round of opportunities for increased at-home consumption?

A number of the habits consumers formed in response to the high gas prices then have remained in place, and are likely to accelerate if gas prices go much higher, including buying gas linked to spending levels at grocery stores and purchasing gas at outlets offering other incentives.

Retailers and manufacturers should look back at how their core shoppers and buyers responded to past gas price increases in 2008 and begin planning now for 2011. While it’s not yet clear how high gas prices might go, any further rises coupled with elevated levels of unemployment are likely to drive consumers to take additional steps to save money. It’s never too early to have the strategy in place to respond.

Todd Hale, Senior Vice President, Consumer & Shopper Insights

In 2007 and for much of 2008, rising gasoline and commodity prices led to a wave of price increases in the consumer-packed goods industry. For some categories, it was not uncommon to have two to three price increases as ingredient, packaging, energy and transportation prices jumped sharply. During that time, many retailers—particularly those selling food and beverages—experienced a lift in sales and profits. As recessionary pressures intensified at the end of 2008, gasoline and commodity prices started to drop and many retailers began passing on the savings to their shoppers and cutting prices broadly to be more competitive with value retailers.

Lower prices on groceries, gas and other household items have offered some degree of relief to stretched American consumers. With uncertainty about the economy persisting, shoppers continue to watch their money and seek out value. But to retailers, lower prices present challenges: how to grow market share without taking a hit on the bottom line; and, after being very vocal about the savings they are providing their shoppers, how do retailers elevate prices without disenfranchising shoppers?

Nielsen’s recent review of retail prices found that over the 4-week period ending June 12, 2010, prices were off or flat versus year ago providing exceptional value to consumers, but weakening trends for retailers. Unit prices have been dropping sharply since March 2009, and the number of items on promotion—in the form of feature ads or displays—has gone up. When one store slashes prices to gain competitive advantage, others follow suit. Meanwhile, brands have resorted to more promotions to stimulate sales and stem the growth of private labels.

Unfortunately for retailers, these price cuts and heightened promotions have not achieved the desired effects as both dollar and unit sales are off in each of the last three (four-week) periods. But the big unanswered question is: would the situation be worse without these value efforts?

Which Departments Are Faring the Best?
For consumers, the good news is that prices across all departments are better now than what was experienced for much of 2008 and into early 2009. Some departments showed price increases in recent quarters, such as dairy, fresh meat and fresh produce, but prices are still very attractive for consumers seeking savings. Within dairy and fresh produce, it is interesting to note that increased prices are yielding stronger retail sales trends.

The deli department has held up quite well, while alcoholic beverages is the shining star of departments, posting sales increases in both dollar and unit terms.

The departments with the most negative sales trends were fresh meat, non-food, and general merchandise, with dollar and unit losses the greatest among the non-food and general merchandise departments. Dry grocery department sales trends were similar to the total store trend. The frozen department was on a stronger sales trend, but unit and dollar sales have fallen in recent periods.

In a further sign that price cuts were not having a positive impact, only one of the top 16 categories with the largest price cuts actually saw dollar sales rise. So drastic price cuts don’t appear to provide incentives to alter the frequency of consumption!

Unemployment Continues to Stall Recovery
Perhaps the biggest factor preventing retailers and CPG companies from raising prices is the state of the U.S. economy. While the Great Recession may be officially over, the recovery has really only started in earnest—and in unique ways, namely, without the growth of jobs. After four straight months of job creation, the momentum was stopped dead with a surprise June announcement that the economy had once again shed jobs—this time 125,000. The unemployment rate dropped to 9.5%, but including people who are not working full-time but would like to be, that number goes up to 16.5%. Moreover, almost half (46%) of unemployed individuals have been without a job for more than 27 weeks. And, unemployment is particularly high among ethnic, younger, less educated and male populations.

These statistics are obviously sobering, and they limit the ability of CPG manufacturers and retailers to raise prices without losing customers to value brands and channels.

What’s the Answer?
As prices have fallen, so have same-store sales trends for retailers, particularly those focused on grocery. Retail price wars are having a negative impact.

So how do retailers get through this period? In the short-term, look for opportunities to raise prices on selected items when justified; merchandise assortment that you have a competitive advantage; look for opportunities to up sell shoppers to build baskets; offer your biggest spenders the special kind of attention they deserve.

Until consumers feel more confident about the state of the economy, their personal finances and job prospects, they are going to seek bargains and keep their spending in check. While there have been some signs of optimism, it seems as if something arises that cancels out any progress made. One thing is for certain, however: until there’s a period of consistently positive economic news in the U.S., consumers will be skittish, and retailers and CPG manufacturers need to be prepared to continue weathering the storm and finding innovative ways to grow share without sacrificing dollars.

With all eyes on the economic recession in the U.S., it’s easy to underestimate the major trends currently reshaping the consumer packaged goods (CPG) industry. According to The Nielsen Company’s Retail 2015 Forecast, the pace of change is only accelerating as technology, marketing trends and retail formats converge to redefine how CPG retailers and manufacturers interact with consumers.

Big Winners
By 2015, we predict mass supercenters and e-commerce to be the big winners by dollar share gains, growing by a combined five share points between 2009 and 2015. Warehouse club, dollar store and pet store share will also grow share positions. Nielsen forecasts that supermarkets will continue to lose share, but at a declining rate. While both high-end and low-end niche grocers will grow share, overall share positions will remain fairly low given lower per-store sales compared to larger formats. Other key CPG channels, including drug stores, mass merchandisers and convenience stores, will grow dollar sales but will suffer share losses.

Nielsen expects to see further CPG retail consolidation as retailers look for scale and opportunities to expand their footprint into existing and new areas. Retail consolidation will be most active within the supermarket and convenience channels in the race for scale. Today’s big players will only grow bigger. Industry change will grow faster and more intense in the next five years, requiring advanced, future-focused change management skills among CPG professionals.

Out with the Paper Shopping List, in with the Smartphone
One of the biggest CPG shifts by 2015 is already underway: the use of smartphones to engage consumers and help them make better shopping choices. According to Nielsen, smartphone penetration stands at 23% of all mobile subscribers and is expected to overtake feature phones in the U.S. by the end of 2011. Nielsen predicts that by 2015, smart phones will be the primary enabler of consumer shopping engagements and new technology innovations will generate additional opportunities for retailers and manufacturers.

Coming to a Smartphone Near You: a Personalized Shopping Experience
Driving the rapid adoption of smartphones is the seemingly endless variety of apps, which take full advantage of the smart phone’s geographic location and interactive capabilities. Retailers are already using smartphones as a replacement for frequent shopper cards, sending store coupons and deals directly to a shopper’s phone. Nielsen expects CPG companies to further leverage the smartphone’s location tracking abilities to target communications and promotions to shoppers both in and out of stores, and up sell consumers on other items based on prior purchases. In addition, consumers will have the ability to locate the best available price for a given item, access real-time product reviews and promotions and manage everything from household budgets and pantry inventory to tax preparation and filing.

Prepare for the Future
Consumer packaged goods retailers and manufacturers should focus on the following initiatives now to position their businesses for future success:

• Develop or buy online/digital/social marketing expertise. If you don’t have this expertise today, get it.
• Plan for diminishing returns from traditional media. Newspaper feature ads and free standing insert (paper-based) coupons dominate today, but for how long?
• Nurture retailer/supplier relationships. Have contingency plans dealing with consolidation impact.
• Get more flexible with format planning. Consumers today are flexible and completely mobile, which means we need to get more flexible about how and where we sell our products. Study emerging economies to understand flexible markets. Think about future format planning for your next one to three generations of formats.
• Demand forecasting by category and consumer segment. Understand how changes in demand at the category and consumer level will provide risks or opportunities
• Expand via regional or global opportunities. With slowing domestic population growth impacting sales growth, seek opportunities outside traditional geographies to reach more households.
• Make future management a company strength. Given the pace of change that we will experience over the next five years, future management needs to be a core competency or the chances of your stores or brands being a part of the future will be in serious jeopardy.
• Understand the new faces of opportunity. With an increasingly aging and ethnic population, you can’t afford to ignore generational and multi-cultural consumers. It is critical for marketers to adapt in order to gain the attention and brand/shopper loyalty of diverse generations and multi-cultural families of the future.

Gone are the days when online marketing was led solely by the dotcoms of the world. Today, many CPG companies have embraced online and social marketing and are pushing the envelope further each day. In the midst of considerable consolidation and change, the future will be owned by those companies that harness technology to the make the consumer shopping experience easy, efficient and fun.

Cornell noted that while everything around us is changing, we’re also dealing with the tough realities of the current economy. Consumers’ expectations have changed dramatically and they have recognized the need to change their behavior.

“For the first time in my 20-year CPG career, consumers have aligned their attitudes and actions. They are absolutely harmonized,” he said.

Cornell outlined two major consumer trends important to retailing success today, the first being a shifting consumer landscape, including aging baby boomers and young multicultural families. Understanding today’s consumer requires the realization that dad is just as important as mom in the shopper decision trip, that many consumers are likely thinking about making healthy lifestyle adjustments and that consumers are connected. A big part of today’s consumer’s recreation is tied to a keyboard or smartphone.

The second major consumer trend retailers are thinking about a lot today is the return to basics, or home economics. Cornell noted that today’s consumer is forced to become much more disciplined. Consumers are trying to simplify their lives by decluttering their homes, giving things away, downsizing to smaller spaces and opting to refresh instead of replace.

As part of this trend, Cornell predicts that consumers’ focus on thrifty or smart shopping is here to stay. Consumers are cooking again, some learning to cook at home for the first time in years and entertaining at home — “home is my castle.”

Cornell stressed the need to learn about the consumer and take advantage of these broader trends to the audience of retailers, manufacturers and media companies in attendance. In the case of Sam’s Club, the retailer understands the world through the eyes of its members and developed its strategy around the insights it has learned from them.

“Value means very different things to the consumer depending on the category,” Cornell said. “We have many categories where our members expect great, everyday value, but we also know that we have members that shop categories looking for a ‘wow’ experience in categories like fresh food. It’s a different definition of value.”

Cornell went on to explain that Sam’s Club members look for newness in entertainment categories, but in other categories, they look for simple solutions, leading brands, and knowledgeable service.

Communication is another key area where it’s important to know your consumer and Cornell described the importance of moving from mass communication to targeted, relevant, individualized communication. Sam’s Club focuses on talking to the right member, delivering a particular message that is interesting to him in a medium they want to receive. Loyalty starts with the needs of that consumer, knowing what drives their demand, what they are looking for and then meeting their needs, he said.

Stuart Taylor, Vice President, Custom Analytics
Kristin Chaudoir, Manager, Price Promo Modeling

SUMMARY: The CPG industry has been abuzz over assortment downsizing. Yet, despite all the talk of major SKU reductions, the average food channel store decreased variety by just 1% in 2009. The majority of grocery retailers plan to either maintain current levels or continue slimming SKU count in 2010. It’s a tricky balancing act, feeding consumer hunger for personal variety while bulking up margins through operational efficiency and store brand sales. The key is determining which products deliver true incremental category sales.

What size is the right size to downsize? Assortment challenges vary by format, region, category and brand, but the objective is the same: satisfy the shopper need for choice and innovation without drowning in an unmanageable sea of SKUs. In 2009, four out of ten food retailers surveyed claimed to have decreased assortment roughly five percent on average. One-third of retailers claimed to have maintained the assortment status quo, while 22% claimed to increase assortment options an average of 3%.

There were many reasons fueling the frenzy. Sixty percent of retailers indicated they downsized to alleviate shopper confusion. The other reasons cited were mostly internally-driven operating decisions including: gives better facings/merchandising (75%), provides better inventory control (71%), high profitability/cost savings (52%), makes more room for store brand products (48%), shrinks shelf space so other areas of the store can be larger (33%) and keeps up with other retailers who are doing it (4%).

Despite media hype anticipating double-digit assortment decreases, the actual total percent of item changes for the year across major categories in the grocery channel averaged a very reasonable 1%.

When More is Too Much
The old school assortment philosophy summed up by one retail executive was simple: “bigger, bigger—how much money can I get for new items?” This “more-is-better” approach eventually evolved into a “more-is-too-much” outcome. In the midst of our economic malaise, retailers found an overwhelming number of consumer product choices at odds with delivering customer value and profits. Many began aggressive SKU rationalization efforts to decrease overhead costs and reduce in-store clutter.

More than half of those retailers surveyed in the 2010 Nielsen Retail Assortment Survey claim to have, or plan reductions of up to 10% of all SKUs on the shelf. Even as redundant products were eliminated, certain segments saw their product counts increase. Store brands enjoyed a 2% expansion over the prior year, while premium national brands held their own, avoiding cutbacks.

The Assortment Reality
When it comes to downsizing, not all categories are created equal; some added SKUs and some lost items. According to the Nielsen study, of the 32 categories analyzed, 23 experienced an average decrease of 2% in the number of items offered. The biggest losers were the cookie (-8%), water (-6%) and shampoo (-4%) categories, which saw the highest number of items removed from the shelf.

Concurrently, the biggest winner categories expanding SKU count included carbonated soft drinks (up 3%), shower gel and yogurt, each growing its product roster by 6%.

Working Smarter
Assortment downsizing is a difficult puzzle, weighing competing pressures from consumers, manufacturers and retailers. The major question faced by retailers is simple: how do we cut assortment smartly? More than 90% of retailers who claimed to have reduced assortment made their decisions through simple reductions in variety, by getting rid of flavors, pack sizes and the like within brands, while almost 70% targeted third and fourth tier brands. One executive described these moves as “one big draconian flow-through” designed to get “rid of low hanging fruit.”

While retailers cite cleaner shelves and easier assortment management activities as the stated reasons for such downsizing tactics, the often unstated objective of many retailers is the desire to increase store brand sales and profit margins. However, Nielsen analyses show that not all categories actually benefit from store brand expansion. It is essential to trim SKU counts by eliminating non-incremental items.

Incrementality is the concept that no single product action (addition or elimination) occurs in a vacuum. Taking products off a shelf might impact category or aisle sales positively or negatively and the interaction of products on the shelf must be taken into account when choosing where to delist, and where to add.

Shopper Reaction
Assortment is a complicated, interlinked chain of decisions balancing manufacturer and store goals with consumer needs. One of the major pitfalls to overly aggressive de-listing is consumer response. On one hand, shopper attrition is a major retail concern (indicated by 77% of retail respondents in Nielsen’s 2010 Retailer Survey). And retailers should be concerned: over half of the respondents (in our 2010 Consumer Shopping Survey) said they are less likely to shop a retailer if they perceive a decrease in assortment.

If assortment downsizing is necessary to not only reduce retailer costs, but to also provide a cleaner shelf for consumers without creating customer frustration, then it is essential to trim SKU counts by eliminating non-incremental items. And a well thought-out assortment strategy can make a big impact. Achieving even a one-half percent improvement in shopper closure across the grocery channel translates into an additional $1.5 billion in sales.

Success Strategies
For 2010, expect to see a continued SKU rationalization effort targeting economy brands, as well as a closer analysis of store brand offerings with an eye on possible expansion and a revamping across categories that have suffered sales losses as a result of overly drastic changes. To achieve these objectives, retailers will have to step back from the historical approach examining SKU rankings up to a category and focus on a more strategic, ongoing approach of balancing incrementality opportunities across departments, categories, segments and brands

Success lies with offering the right mix of products, not the greatest or fewest number of products. Winning retailers will be those who better leverage the concept of incrementality when designing their assortment strategy.

SUMMARY: Trade promotions are the 800 pound gorilla of marketing spending, representing 60% of the marketing budget and accounting for more than $100 billion per year. Getting the right mix of pricing and promotion for each channel can be like playing five-dimensional chess, with all the parts moving at once: price elasticity, price gap elasticity, promotion type, frequency and discount level. What consumers buy, where and when can be influenced with the right game plan.

Ever wish your favorite team could know in advance if a critical play would work? Unfortunately, not possible. How would you like to run your next trade promotion in advance to determine the right temporary price reduction and duration? Fortunately, very possible, thanks to predictive analytics that enable marketers & sales teams to simulate consumer sales and project the impact on manufacturer and retailer financials before committing dollars in the real world.

Displays and Deals
All promotions are not created equal. Nor do they have equal impact. Consider the effect of a display on the following four categories: beer, toilet paper, toothpaste and yogurt. Will the same size and located display generate the same lift? No—not by a long shot. Toilet tissue wipes up the competition with an 82% display-driven lift, with yogurt a distant second at 28%, beer at 15% and toothbrushes at 14%. Further analysis reveals that display-sensitive categories tend to be “must have” products or “easy-to-eat” meals that are stockable and traditionally demonstrate above average sensitivity to promoted price changes.

Another factor influencing the ability of displays to drive sales is unit price. Consumer shopping patterns expose the fact that shoppers are less likely to purchase expensive items on display or with a temporary price reduction (TPR). Products typically less than $5 per unit enjoy significantly more lift from both promotional options. Nielsen simulation capabilities can take the guesswork out of promotion planning, pumping up sales volume and stretching available dollars.

Multiple Effects
Offering multiples is a popular promotional technique, but one with a distinct success profile. Multiples work for items with expandable consumption, that are easily stored, where the multiple number makes sense (e.g. a five-pack lunch item that corresponds to a five-day work week). The total price should come in under $10 with a unit price no greater than $1.00, such as a 10 for $10 offer.

Channeling Value
Channel differences can dictate promotional success. On the pricing front, food shoppers like deals and are highly responsive to promotions. Drug channel consumers, on the other hand, value convenience over price and mass merchandiser patrons expect lower regular prices, rendering TPRs less valuable for these segments.

On the display front, food shoppers prove to be high impulse/unplanned utility item buyers. Drug channel consumers plan their purchases and look for features, but are less responsive to displays, and mass merchandiser patrons exhibit an average response to displays, seeking overall value from the channel on the regular price.

Consumer Views
When considering the promotional mix, factor in some salient shopper facts:

• Consumers demonstrate lower price sensitivity for products with high brand loyalty that are infrequently purchased or niche offerings with few competitive options.
• Display-based promotions work for stockable, must-have and easy-to-eat products.
• When placed on feature, utility products like paper goods and detergents can draw shoppers to the store.
• Food store shoppers tend to be impulse-driven, drug store shoppers come with a purpose and mass merchandiser patrons seek everyday value.

Case in Point
Manufacturer X noted a decline in base volume for its premium product, while private label value brand sales continued to grow. Assessing promotional options, the company articulated four objectives:

1. Maintain or grow category sales
2. Build base sales for its premium product line
3. Maintain or grow retail profit
4. Maintain or decrease trade spending

Historically, TPRs were the most common promotion type in the category, usually featuring a 20% discount. The standard category TPR ran for three weeks, and at the 20% discount level, generated about the same lift as a one week feature at a 30% discount. Manufacturer X typically opted for eight weeks of TPRs each year and four weeks of feature advertising.

Assessing Options
To stir things up in the category and drive sales to its premium offering, manufacturer X considered three alternative promotional schedules. Option 1—eliminate two weeks of feature activity and replace them with two TPR periods of three weeks each. Option 2—increase the private label base price and raise promo prices by $0.10. Option 3—increase the private label base price, but hold promoted prices at current levels.

Running the simulation, manufacturer X discovered a clear winner. Only Option 1 delivered against every objective: growing unit and category sales by 0.9%, increasing CPG profit margins by 2.4%, boosting retailer profits by 0.8% and decreasing trade spending by 3.1%.

Predictable Success
Price and promotion simulations succeed because they begin with the consumer behavior needed to shape an outcome. Knowing that consumers shop products and channels very differently, simulations should be preceded by an analysis of sales tendencies by product and retailer. This will enable the composition of a plan that leverages product strengths and minimizes weaknesses in different retail environments. While tactical, event-by-event simulation and planning is a requirement, take the time to simulate entire planning periods with different combinations of price and promotion activities to decide the approach that best fits your objectives. The definition of a truly successful promotion plan is one that delivers results for retailers and manufacturers alike. By looking at sales from a consumer perspective, you’ll be able to do just that.

SUMMARY: Purchasing decisions in 2010 will be affected by factors such as brand innovation, retailer assortment, proliferation of store brands, and healthy eating preferences. Walmart’s “Project Impact” strategy and other similar retailer initiatives will test consumer preferences for clean aisles and lower prices vs. broader product selection. In the first few months of 2010, sales of healthier eating alternatives should be a good indicator of consumer confidence. As 2009 brought an increase in coupon activity, CPG manufacturers will look for more efficient and effective ways to reach consumers vs. traditional trade spending. Time will tell if new product innovation will be enough to drive shoppers back to traditional brands.

Throughout the recession, retailers and manufacturers have stepped up efforts to bring about innovation that seize the moment and “drive the recession wave” rather than “ride the recession wave”. Winners in 2010 will continue to innovate in the form of new formats, service offerings and differentiated products—a list of best bets for 2010 is described below.

Winning Brands Will Innovate and Differentiate
Sales of store brands have grown by $12 billion (up 17%) vs. two years ago as shoppers focus on value. As the economy improves, value is still important, but smart marketers are differentiating brands through innovation—with new products, new flavors, new packaging and with marketing/media campaigns with a heavy emphasis on social media to build rapid awareness and product trial. Brands that fail to innovate may also fail to win buyers back from store brands.

Product Assortment is a Point of Differentiation
Some retailers have followed the lead of Walmart’s “Project Impact” with cleaner aisles and limited assortment. Others have an opportunity to set themselves apart with a wider selection of products. Supermarkets that struggle to compete with Walmart’s prices will find an advantage with shoppers looking for variety. The trick is finding which categories require the broadest selection.

Healthy Eating Is a Solid Measure of Consumer Confidence
As the economy improves, consumers will focus on health and wellness priorities. An increase in sales of foods labeled “organic”, “natural” and “high fiber” as well as diet aids and reduced calorie/fat frozen dinners and entrees will be an indicator that consumer confidence is growing. Look for the first signs after the holidays, when consumers tend to start those New Year diets.

Manufacturers Get Stingy with Trade Promotion Spending
A whopping 50 million products each year—43% of supermarket purchases—are sold with a feature ad, display or price reduction funded primarily by manufacturers. An increase in coupon activity and new advertising opportunities such as cell phone apps and in-store TV networks will stretch promotion budgets. Retailers need to demonstrate sales performance to get their fair share of trade funds.

Direct to Consumer Options Thrive
Online price wars and the squeeze on in-store assortment will fuel large and small manufacturers to give consumers options to buy direct from manufacturers or from online services from the likes of Amazon, Drugstore.com and Alice.com.

2010 U.S. Outlook

Part 1: Cross Media

• Big Screen, Smart Screen, Small Screen: Top 5 Cross-Media Trends
• You Can Take It With You: Future Trends In Media

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Part 2: Consumer

• Winner Winner Chicken Dinner – Top 5 Consumer Goods Spending Trends
• Innovation Creates Opportunities for CPG Growth
• Aging Puts a Wrinkle in U.S. Marketplace

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Part 3: Advertising

• Talking Back – Top Five Advertising Trends
• Get Ready for the Audience-Centric Web
• What Would John Wanamaker Say Today?

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Part 4: Entertainment

• There’s No Business Like Show Business – Top Five Entertainment Trends
• Game On – The World is Watching More Than Ever
• Video Games in Play

Ken Cassar, VP Industry Insights,  Online Division and
Maya Swedowsky, Associate Director, Industry Insights, Online Division

SUMMARY: Expect to see flat holiday sales this season. Retailers have an opportunity to boost revenues by taking advantage of online activities and social media outlets, which have changed the way consumers seek and share online and offline holiday deals.

Economic conditions in the U.S. may be stabilizing, but the grim reality is that jobless claims are still high, unemployment is in the double digits, foreclosures for August 2009 were 18% higher than a year ago, and credit markets are still tight. This, of course, translates to weak holiday sales. Nielsen reports that 42% of U.S. consumers plan to spend less on holiday gifts in 2009—up from 35% last year.

In consumable categories, Nielsen projects that holiday sales will be flat with a dollar sales gain of 0.03% and a unit sales decline of -0.11%. The National Retail Federation predicts sales will fall 1% this year compared to 2008.

Deals, deals and more deals
Consumers plan to use a wide array of tactics to save money this year—deal seeking is the predominant course of action:

• 53% of consumers will wait for sales
• 46% will buy lower priced gifts
• 42% will bargain hunt more extensively this year
• 39% plan to use coupons
• 37% plan to shop at less expensive retailers and more online
• 23% will give homemade gifts
• 22% will make fewer shopping trips

Online decline
For the first time since 1999, when the U.S. Commerce Department started tracking online sales, 2008 and 2009 reported quarter-to-quarter and year-to-year retail e-commerce sales decline. Additionally, a Nielsen survey reports that the online shopping population may shrink this year. In 2008, 71% people of people planned to do holiday shopping online. This year, that number drops to 63%.

Those determined to shop online expect to spend significantly less this holiday season.  In 2008, 42% of shoppers planned to spend more than $300 on their online holiday purchases, but this year only 31% intend to spend that amount. Not only are consumers spending less money online, but they are planning to spend a smaller amount of their total holiday budget online compared to brick and mortar stores.

Changed perceptions
The Internet may have lost its cache as a value channel. While consumers still shop online for money-saving reasons, the top two motivations for shopping online focus on convenience. Almost 70% of consumers enjoy the all day/all night benefit of shopping, whenever they like and 57% shop online to avoid holiday crowds in stores.

The top items consumers plan to shop for this holiday season include toys and video games (40%), clothes, shoes and accessories (39%), movies (38%), books (37%), gift cards/certificates (35%), music (29%), home electronics (23%), computer hardware and software (17%) and jewelry, health & beauty products, gourmet food/gift baskets (14%).

However, most product categories are expected to see lower levels of spending compared to 2008. Gift cards/certificates and movies are the only categories expected to grow this year. Movies are benefitting from the trend towards in-home entertainment and the dropping prices of Blu-ray technology. The growth of gift cards is likely attributed to the recession—gift givers are aware that needs, as opposed to wants, will be greater this season. In addition, more people (55%) would rather receive a gift card rather than a purchased gift.

Barriers to online success
While convenience and money savings factors are clear benefits to shopping online, the fact is, less than 4% of all purchases are made online. A Nielsen survey found shipping and handling charges are a major deterrent, with 53% of consumers stating they will not buy all their gifts online to avoid this fee. More than half (51%) of consumers cited that they need to see or touch the product. Consumers reported many of the physical benefits of in-store shopping—ease of return, instant gratification, access to sales people—as reasons they will not shop online for holiday gifts.

While the majority of purchases are made offline, the Internet is playing an important role in purchasing behavior. Deal-seeking activities—like comparing prices and finding coupons—drive consumers to go online first before ultimately making an in-store purchase. Deal-oriented websites attract a sizeable and varied audience—not just those with lower household incomes. In general, online deal-seekers tend to be female between the ages of 25–50 years old coming from a wide range of income levels.

Talk it up
Social media has changed the way consumers seek and share online and offline holiday deals. Frugal shoppers actively rely on these sites to learn about where to find the best deals, product recommendations, gift ideas and money saving tips. Retailers have an opportunity to go beyond traditional TV and printed circulars and use social media outlets to get shoppers excited about their holiday deals. Shoppers enjoy being the first to find out about a deal and share it with their network. Many retailers are using social media to drive traffic on Black Friday.

There’s still time
While Internet sales will not be the salvation for most multi-channel retailers this year, online announcements of deals through retailer websites and social media networks can improve share for their brick and mortar stores. Multi-channel retailers must use their websites and physical locations as differentiation, helping shoppers find the right product effectively, ensuring a simple purchase fulfillment and return policy and providing excellent follow-up support. The Internet may not be seen as a value channel, but it is seen as a value media.