Brands on a margin call

In previous slowdowns, the grocery trade was sometimes referred to as "recession proof" or immune from cutbacks to the family budget. The theory went that as consumers made sacrifices in discretionary spending, household expenditures on groceries remained intact and, in some instances, actually increased. Indeed, there are examples of categories that benefit during belt-tightening periods. While some consumers may sacrifice going to the movies, ordering takeout, or enjoying a chai latte, they still look for small moments of indulgence. Chocolate biscuits and ground coffee are good examples of categories that have previously benefited from tighter household budgets.

It’s not so simple any longer. The challenge for manufacturers in the current economic slowdown includes pressure from the national retailers to provide higher margins for the goods they offer in a bid to justify a space on supermarket shelves. This situation is further compounded by retailers also expecting branded-goods companies to regularly have their products on promotion and to pay for any off-location space that may drive incremental volume.

In the past two years, more complexity has been added to the equation with the increased presence of the private label. Despite paying higher margins, giving greater discounts, and contributing more for off-location space, branded goods are being relegated to less attractive parts of the shelf in order to make way for private-label offers. The ramification of this is that branded goods now need to work even harder to activate awareness in the retail environment. For example, consumers may still gravitate to a chocolate biscuit and freshly ground coffee at home in order to have an indulgent moment during tough economic times, but they may now be indulging with a private-label offer instead of a Tim Tam or a Mint Slice.

How branded-goods marketers respond to increasing pressures on household budgets will determine their success over the next year. Great brands share three core attributes: distinctiveness, desirability, and trust. The first two are typically leading indicators, whereas trust is a lagging indicator. In times of economic hardship or national insecurity, trust becomes a primary attribute in the decision-making hierarchy of the consumer. Trust is often reflected in the knowledge and esteem a consumer holds towards a brand, although trust can also be defined as stemming from character and competence.

Trust, although rational in many ways, has an overarching connection with one’s emotions. Great brands leverage emotional connectivity well and trust is a component that is about to become more significant in driving such connectivity. Private-label offers from Select, Aldi, and Coles may be providing consumers with cheaper products, but given their recent arrival on the grocery scene, consumers do not really know that much about their core values. However, this situation may change as consumer awareness of private-label offers increases.

The opportunity for branded-goods manufacturers facing margin pressure from Woolworths and Coles is to dial up the attributes, beliefs, and values of their brands in order to induce levels of trust that private labels are not currently attaining. Some great examples of brands achieving this are Coke, with its latest iteration of the red can; Hovis in the United Kingdom, with its traditionally inspired hallmark; and Dairy Farmers, with its clean and crisp milk range. Victoria Bitter has also done a remarkable job of keeping all of the values that its core following hold dear while bringing the brand into the twenty-first century.

Innovation of product will continue to be a key aspect in building a brand’s relevance and distinction. However, with the forecast changes to the economy, and the relative newness of private labels, branded-goods manufacturers have a unique opportunity to leverage the trust that consumers hold toward their brands—and encourage them to trade away (and up) from price-driven retail equivalents.

© 2008 Retail World. All rights reserved.

This article was first published in Retail World (24 November 2008), the voice of the $80 billion+ Australian grocery sector for more than 60 years. Reprinted with permission of Retail World.