Todd Hale, SVP Consumer & Shopper Insights, The Nielsen Company

With insights from Adam Murphy, North American Shopper Practice Leader

SUMMARY: Store brands continue to outperform brands in most categories in the U.S. Retailers’ focus on cutting prices (for both brands and store brands) and increasing store brand assortment is positively impacting unit sales, but negatively impacting dollar sales. The most successful retailers are the ones who are collaborating with manufacturer partners to complement current pricing strategies with a strong commitment to other shopper needs and building a stronger platform for long-term success.

U.S.-based store brands are benefiting big time from the current economic downturn. As consumers continue to turn to better prices and value, retailers have clearly stepped up their game by enhancing their brands overall product quality and by adding strong marketing muscle behind store brand initiatives. But a Nielsen review of U.S. department-level price gaps between store brands and manufacturer brands shows that retailers may be hurting themselves in the long run—and missing out on opportunities to collaborate with manufacturer partners to drive stronger category sales.

Within food, drug and mass-merchandisers (including Walmart), Nielsen reports that the price gap between store brands and manufacturer brands is considerable—especially for non-edible departments such as health & beauty and general merchandise where gaps ranged from 74% and 63% respectively. Food departments have a smaller percentage gap—store brand prices in the deli department were 22% lower than branded and up to 50% lower in the dairy department. Since the same period in 2006, price gaps have widened in four of seven departments (deli, frozen foods, dry grocery, dairy, non-food, general merchandise, health & beauty).

Closing the Gap
Are retailers losing category dollars because of aggressive store brand pricing or greater focus on store brand versus brands? While it is recognized that that department-level price gaps can be driven by differences in category mix, brand and/or size mix (an examination of gaps on an individual category-by-category and product-by-product basis is recommended), these differences are significant and suggest that retailers are not maximizing category sales.

Consider this: an increase of just one cent in store brand prices translates to roughly $400 million dollars in sales across all departments measured by Nielsen. In departments and categories with extreme price gaps, the potential to enhance category sales can be significant. With the ongoing price compression in the industry causing declining category and same-store-sales, retailers would be wise to think about shifting focus on raising prices on some of their own brands.

Prices Alone Not Enough
Prices alone are not the key to shopper’s hearts. Price is top of mind for all retailers right now, but Nielsen’s annual Shopper Trends study reports that strong shopper relationships are built on at least four other factors that are equally important to driving commitment. When the purse-strings relax as the economy improves, those other factors will separate the strongest grocery retailers even further from the pack. Shopper Trends is an annual survey of Shopper Equity for the top retailers in the grocery channel*, conducted across more than 55 countries globally. The U.S. shopper survey included feedback from over 29,000 American shoppers across all 48 contiguous states.

The survey found that the most successful retailers are the ones who are complementing current pricing strategies with a strong commitment to other shopper needs and building a stronger platform for long-term success. The five over-arching areas that the study identified contributing relatively equally to shoppers’ emotive equity in the U.S. are:

1. Store accessibility
2. Store format and wide selection
3. Pricing and value for money
4. Stocking quality products
5. Efficiency and loyalty program

The importance of these other factors also explains why every shopper is not doing their weekly grocery stock-up in a discount chain, despite the pressure of a recession. Consumers still want to have a pleasant experience and there is tremendous value in making that process convenient and easy for them.

Do’s and Don’ts
Manufacturers who think that store brand success will fade when the economy improves are likely in for a rude awakening. Best-in-class retailers and manufacturers are those who collaborate on category and total store assortment, pricing, promotion, and advertising decisions.

Retailers:

• Don’t let price gaps get too large or risk declining category sales.
• Don’t de-list high-penetration, high-frequency or strong niche brands or risk driving shoppers to retailers who do carry them.
• Do promote store brands with brands where there is limited shopper overlap to drive category sales.
• Do promote store brands along with non-competitive or complimentary branded offerings to build larger baskets.
• Do select credible suppliers and hold them to high standards.

Manufacturers:

• Do branded versus store brand pricing analytics and show retail partners which branded offerings make good promotional partners.
• Do proactive assortment analytics to demonstrate why your brands align well with store brand assortment.
• Do take a collaborative approach to how you assess branded versus store brand risks and opportunities – retailer focus has never been greater.
• Do explore options for using excess capacity for store brand production.

*Retailer equity scores from the 2009 Shopper Trends study are available. Contact your Nielsen representative for details.

The economic downturn continues to put stress on consumers, resulting in accelerating changes in basic purchasing patterns. An important part of the overall equation for consumers is the relationship between price and value. As consumers develop new value systems, how should manufacturers and retailers view and manage the other side of the equation-price?

If your business models and pricing strategies pre-date recent changes in the economy and consumer behavior, you could be headed for trouble. Perhaps now more than ever, pricing can serve as marketing’s most powerful lever to drive performance. We all realize we’re dealing with unprecedented circumstances, and need to act, but what are the guiding principles for successful price planning? These Six Keys for Successful Price Planning provide a roadmap for marketers to navigate through our new pricing environment.

Download the complete Price Planning whitepaper.

At the Consumer 360 Conference yesterday Malcolm Gladwell gave some fascinating remarks on compensatory learning. I thought it was a perfect frame for what Nielsen is doing in the area of Shopper Management. The basic message is that some people, or businesses or processes, achieve greatness through continuous and iterative improvement. That is precisely the path we are in Shopper Management at Nielsen.

Today’s shopper has access to more choice and convenience than ever before with a typical grocery retail outlet having over 40,000 skus to choose from. In addition, channels have doubled over the past 50 years. In my neighborhood in San Clemente, California there are seven different channels available for certain categories. Shoppers are bombarded with ads throughout their day. This environment creates a major challenge for our manufacturing and retailing clients, as it results in a shopper who is highly impulsive and largely disloyal.

Thus the importance of understanding shoppers and shopper behavior has never been more critical. With the advent of access to granular forms of shopper data including frequent shopper data, tlog and even better access to panel data we have seen an evolution from legacy Category Management to Shopper Management.

Thank you to the outstanding panelists – - Melissa Zip, Food Lion, Rob Colarossi, Dr. Pepper Snapple Group, Amanda Kelly, Unilever, David Newman, PepsiCo and Diane Harper, Kraft — who joined me for our discussion earlier this week, “The Continued Rise of Customer Centricity.” Many of the videos of the sessions at Consumer 360 are available on demand at Consumer360.com.

Sales of store brands, or private label products, began to spike in 2007 just as we were seeing the first signs of an economic downturn. At first, these private label sales were driven by higher commodity prices, but volume growth began to catch up with dollar growth in mid-2008. As the economy continues to struggle, more and more consumers are replacing their branded products with private label equivalents. Store brands are up 10% to $84.4 billion in annual sales across categories reported by The Nielsen Company. Talking to Consumer Packaged Goods marketing professionals across the country, there is a consensus that these private label switchers won’t be coming back when the economy improves – at least not without some incentive.

Winning back these shoppers will not be easy for branded manufacturers.  Although many will be tempted to cut back on new product development, now is the time to innovate.

What To Expect From Name Brands

• More products with new health and wellness claims like “now with more calcium,” or “no trans fats.”
• New package designs with claims like “re-sealable” or “renewable.”
• New package sizes and shapes that will make it more difficult for store brands to copy.
• Innovative new flavor profiles with more line extensions.
• New advertising in new places to get the message across to consumers.

Retailers aren’t just sitting back waiting for new brands to copy; over the past several years, we’ve seen store brands evolve from inexpensive national brand alternatives to exclusive destinations that allow retailers to differentiate themselves. Many store brands achieve premium pricing while strengthening retail banner equity with more upscale offerings. Retailers are investing in their own brands more than ever as their efforts are paying off. The battle between national brands and store brands is about to get interesting.

• Same category, different market: often requires a different shopper strategy — While some universal truths exist within categories across borders, success of activation strategies relate to a variety of factors such as local culture, evolving retailer dynamics, pre-store/in-store decision-making, historical promotion strategy, etc. Nielsen’s cross market and cross-category Shopper Modality studies reveal significant differences in levels of category involvement, experimentation and choice drivers.
• In-store is usually not the best place to start selling — A huge amount of shopper decision-making is made on auto-pilot. Nielsen DeltaQual^TM tells us that shoppers don’t evaluate all products in-store to make the “perfect” choice-they accept the acceptable, according to sub-conscious choice rules which become ingrained over time to form habitual shopping behavior.
• The best shopper activation strategy is to meet consumer needs – Success is more about meeting consumer needs rather than hitting price points. Ensure an appropriate consumer fit for pack size/count/variety/range through understanding occasionality and/or needs-and as those needs change overtime, build in flexibility to adapt.
• Too many promotions are detrimental to brand and category health in the longer term — Scale and frequency of promotions will set up shopper expectations and create a behavior in shoppers which encourages deal-seeking. Empirical data shows that the more shoppers get used to the deals offered by sales and promotions, the more resistant they are to paying full price.
• Siting matters as much as depth of discount for in-store promotions — On average, feature and display alone provides 66% of sales uplift regardless of discounts offered. Focus investments on securing site rather than diluting price point, and shift the discussion and quantify the opportunity with a discount versus no discount.
• Shopper perceptions do not always equal reality — It’s not always about reality, but what consumers believe. Align in-store execution with consumer perceptions-or address the root cause of perceptions: deeply-held beliefs can be hard to overcome.

These and other shopper truths will be explored in greater detail in the April edition of Consumer Insight.

Look for convenience stores to take the lead on cash discounts, as many already offer lower gas prices for cash purchases.

As other retail channels offer cash discounts, the credit card companies may get enough pressure to reduce fees for retailers.

Read Nielsen’s complete 2009 Industry Outlook in “Consumer Insight.”

View the latest issue of “Consumer Insight.”

With the holiday shopping season about to begin, Nielsen offers U.S. retailers and marketers five key insights to aid in attracting and retaining the loyalty of increasingly value-conscious American consumers.

1. Stick To The Basics

Necessities — rather than novelties and luxuries — are expected to drive holiday sales this year.  Practical apparel, like socks and fleece jackets, and basic household products, such as diapers, household cleaners, pet care products, and food items, are all expected to see strong sales.

2. Staying In Is The New Going Out

Items that are well-suited for in-home consumption — food, beverages, DVDs, books, and games — are also expected to sell well during the holidays and into 2009, as consumers increasingly seek out less expensive entertainment at home.

3. Value Brands, Coupon Clipping Gain Mass Appeal

Consumers are increasingly “trading down” from higher-end retailers and brands to retailers and brands associated with greater value.  Some consumers may also replace more expensive fresh foods with canned and frozen varieties.  Look for coupon clipping to become a necessity for many families.

4. Where It’s At

Online retailers, dollar stores, grocery stores, supercenters, mass merchandisers, and club stores are expected to attract the lion’s share of holiday spending, as consumers seek to minimize the number of shopping trips they make — and find good values.  In contrast, department stores and retailers of electronics, toys, home improvement supplies, and office supplies are likely to feel the brunt of the economic slowdown as consumers shift their purchases to more value-oriented retailers.

5. Perceptive Marketing Is Essential

Marketing messages that acknowledge consumers’ financial challenges and clearly communicate a brand or retailer’s value proposition will build consumer loyalty now, in the short term, and for the longer term economic recovery.

Read Nielsen’s holiday sales forecast.

View in depth Nielsen data on consumer holiday spending projections.

Go behind the numbers: read NielsenWire’s Q&A with James Russo, co-author of Nielsen’s holiday retail forecast.

Submit questions about Nielsen’s holiday retail forecast co-authors, James Russo and Todd Hale, by commenting below.

NielsenWire recently spoke with the co-author of Nielsen’s holiday retail forecast, James Russo, Vice President of Food Sector Marketing, Nielsen.

NielsenWire: What is the forecast for 2008 holiday shopping season*?

James Russo:
All consumer, economic, and trade indications point to a flat-to-declining holiday selling season across the core consumer packaged goods (CPG) categories that Nielsen tracks. While we forecast, in dollar sales, a gain of 4.7% vs. a year ago, we also predict a decline of -0.8% in unit sales. This is directly tied to the current volatile economic environment, during which close to 33% of households across all income levels are projected to spend less this holiday season, according to a Nielsen Consumer Household survey conducted during the third quarter of 2008.  But despite this tough economic climate and slowing sales, there are opportunities for growth. Segmentation of consumers, channels, and categories will be critical to uncovering those opportunities.

NielsenWire: What might take marketers and retailers by surprise this season?

James Russo:
In the past nine months, consumers have found ways to cope with the current economic situation, as indicated by the following trends:

-”Trading Down,” whether from higher-end retailers and brands to value-retailers and brands, or from vacations to “staycations,” is the new norm.

-Consumer decisions are failing into either “necessary” or “discretionary” spending.

-At-home entertainment is resurgent.

-Consumers are seeking and responding to value solutions, as evidenced by the reemergence of coupon activity as an effective promotional tool.

Surprisingly, consumers are continuing to purchase Health and Wellness items, as evidenced by double-digit gains across products with antioxidant, organic, or whole grain claims.  Note, however, that consumers are increasingly purchasing these products from value oriented grocery stores, supercenters, and club stores.

Look also for a strong year from online sites (especially on Cyber Monday), superstores, and club and dollar stores.  Consumers are increasingly shopping at these retailers as they stock up and pursue value.

And although it is shrinking, there is still a consumer market for “affordable luxuries” and premium based consumption.  In this climate, “trading up” behavior will be less extensive, however consumers, especially during the holiday season, may opt to buy nicer bottles of wine, serve premium candy, or even purchase that new mobile phone. The challenge is to understand consumers’ motivations and shopping patterns at an increasingly local level. 

NielsenWire: What trends should consumers be on the look-out for this season?

James Russo:
CPG manufactures and retailers recognize the strategies that resonate with consumers – but, execution will be the challenge. We anticipate heavy promotional activity to drive traffic in a slowing economy, however, look for organizations to also tap into the increasing consumer desire for “at home” experiences.  This, more traditional holiday message will be delivered through advertising and marketing messages where retailers and manufacturers will push their value solution for consumers. It’s an opportunity for manufacturers and retailers to engage with shoppers, communicate their understanding of current financial pressures, and deliver their value propositions — all while securing brand and/or retailer loyalty. With over 2.5 billion customers ready to shop this season, according to Nielsen In-Store, manufacturers and retailers need to prepare for the challenges that accompany increasingly savvy consumers.

NielsenWire: How did you assemble this year’s forecast – what data did you look at and how did you analyze it to arrive at your final conclusions/predictions?

James Russo:
The Nielsen Consumer Industry forecast is different from any other industry forecast, as it is perhaps the most comprehensive. Our Business Consulting Group conducted an extensive analysis of 125 core CPG categories, in order to understand their current and historical trends during previous holiday seasons.  Then, they analyzed existing trends, along with current and expected economic conditions, to arrive at a macro-level result that delivers foresights to support our clients’ holiday and 2009 planning efforts.

NielsenWire: How accurate is this year’s holiday sales forecast?

James Russo:
It’s too early to gauge our forecast, but we are firm in our commitment to the findings and will be delivering mid-holiday period updates of our forecast, as well as insights in what consumers really think about holiday advertising.  Nielsen IAG, which measures consumer engagement with television programs, national commercials, and product placements, will also deliver an exclusive real-time summary of the most effective holiday commercials, with a focus on CPG categories and retailers.  Stay tuned on NielsenWire for these forecast updates.

NielsenWire: Looking beyond the key holiday selling season, what insights can you share that will assist marketers as they plan for 2009?

James Russo:
Millions of consumers are set to enter stores and shop online this season – they do so while grappling with historic levels of household financial pressures. The tactics and strategies CPG companies develop now, to weather the holiday retail season, will not only provide benefits in the short term, but also during the long term, as consumer behavior in the U.S. undergoes fundamental changes. It is our recommendation to utilize the economic slowdown as a time to build competitive advantage and secure your position going forward.  A few key points to keep in mind:

-Value is clearly the main motivator for consumer purchase decisions — whether it’s channel selection, product choice, functionality, or price. 

-Necessary vs. Discretionary spending will drive consumer decision-making.  Food, personal care and household basics – not nice-to-haves – will drive strong sales.

-Expect widespread “Trading Down”: consumers will move from higher-end retailers and brands to value-retailers and brands; from fresh segments to canned & frozen varieties.

-As manufacturers and retailers look to control shipping costs, a local sourcing trend will continue.

-Look for increased levels of at home consumption — whether in food or entertainment.  Products and Services that deliver on this messaging will succeed.

-New Usage patterns are emerging: skipping meals, washing clothes less often, watering down cleaning solutions, skipping medications or taking half doses.

These are unprecedented economic times, with unique challenges and opportunities.  Now, perhaps more than ever, the ability to understand your consumers and specifically what is driving their behavior will ensure success during the coming holiday season and beyond. The steps you take now will not only assure success in the short term but, more importantly, position your organization for long term growth.

Read Nielsen’s holiday retail sales forecast.

*Nielsen’s Holiday Sales Forecast includes sales during the eight weeks in November and December in food stores, drug stores, mass merchandisers, and convenience stores. 

Submit questions about the report to Nielsen forecast co-authors, James Russo and Todd Hale, by commenting below.