2008 was a stellar year for store brands in the U.S., with both dollar and unit growth outpacing branded offerings across consumer packaged goods (CPG) categories. Store brand dollar sales within food, drug and mass merchandisers grew 10.2% for the year, while branded dollar sales grew by just 2.6%. Although the gap in unit sales was not as wide, indicative of how store brand dollar growth resulted from inflationary pricing across a number of commodity-based categories, store brand units grew 2.6% for the year, but branded units were off 2.2%. And what should be keeping many branded marketers and sales execs up at night is how store brand unit sales performance was better in the last quarter of 2008 and even better in the last period of the year. This is a pattern which has continued for the first quarter of 2009 and should continue throughout 2009 as our economy continues to struggle with high unemployment and a tough housing market.
Client questions we are frequently being asked these days concern the current and future performance of store brands. The most prominent questions are:
Store brand growth during 2008 is very similar to the gap in sales growth during the 2001 recession. However, with the additional efforts retailers are making to improve store brand packaging, quality and on-shelf presence, we do see store brands being better positioned for growth when the economy improves than they were at the end of previous economic downturns. What may be even more indicative of future performance is the marketing brains and muscle many retailers are putting behind their store brand go-to-market efforts. So consumers forced or enticed to purchase store brands during this recessionary period may be more likely to add store brands to their preferred set of brand choices on a go-forward basis—particularly given how complete and absolute loyalty to a brand is a rarity, usually coming from a small percentage of infrequent brand and category buyers. Most households trade off across a select number of brands depending on their propensities toward flavor, form or size mix and/or the importance they place on promotions and price specials over brand choice.
Now more than ever, marketing to the average consumer or shopper will yield little benefit, as understanding the extremes provide real insights for action. With that in mind, we created a store brand segmentation scheme among our Nielsen Homescan consumer panel. The scheme used actual brand and store brand buying behavior; actual behavior regarding retail channel and retailer shopping preferences; and consumer attitudes towards store brands to identify six unique store brand segments. Understanding which of the segments are drivers of store brand share growth, and the attitudes of those consumers, can help predict the degree of longer-term impact (at a macro and individual category and brand level) and should weigh heavily into plans for how both manufacturers and retailers should plan future growth.
The above graphic lists the six store brand segments our modeling efforts identified. The first two segments, downscale value committed and downscale price committed, are very similar in terms of the volume they devote to store brands; the type of store brand offerings they purchase; the retail channels and retailers they shop; and their demographics. However, they are very different attitudinally in terms of how high they rate store brand quality versus branded products. For example, 80% and 77%, respectively, of the downscale-value-committed consumers agree or agree strongly with the statements that store brands are a good alternative to name brands and store brands offer extreme value. This compares to response levels of 67% and 63% for the downscale-price-committed segment. The biggest difference between these segments is how 64% of the value-committed segment stated a willingness to pay more for store brands, while only 5% of the price-committed segment made this claim.
While grocers might see these two groups as important to their store brand business, these two segments make fewer trips to the grocery channel. They are extremely frequent shoppers to limited assortment deep discount grocers like Aldi and Save-A-Lot. Also, these two groups are big fans of supercenters, as 37% of their total outlet sales are allocated to that channel. These segments devote about 80% of their store brand purchases to low-end or value tier store brands and because of their low income skew, they may have no choice but to spend disproportionately on lower-priced products.
The third segment, mainstream loyals, is the most important segment when it comes to shopping and store brand spending within traditional U.S. grocers. Almost half (45%) of their all-outlet dollar spending is allocated to the grocery channel, and across most categories we see the highest relative levels of annual store brand household penetration and dollar buying rates (versus brands) among this group. Almost three-fourths of their store brand volume is in the mid-tier segment. They hold high regard for store brands and are more likely to be a little older and also from mid- and low-income households.
Consumer in the fourth segment, upscale premium, spend over half (53%) of their store brand dollars on premium tier store brands, are more likely to shop upscale retailers and are big fans of the warehouse club channel. Not surprisingly, this segment has attractive demographics, as they tend to be larger, more affluent households. Our research shows how retailers like Costco, with their Kirkland Signature brand, can yield strong store brand buying behaviors among these consumers.
The last two segments we labeled low spend potentials and low spend rejecters. These two groups don’t spend a lot on store brands, but they do have attractive demographics, shopping habits and spending levels across a number of retail channels. The low spend potentials have very high regard for store brands from an attitudinal perspective, while the low spend rejecters have very negative attitudes toward store brands. Both groups spend a disproportionate amount of store brand dollars on mid-tier store brands. Retailers should look to entice the low spend potentials with trial programs and with premium-tier store brands and ignore the rejecter group. Manufacturers should continue to innovate to win the lion’s share of spending from both groups and do all they can to understand who these households are, where they shop, their brand preferences and what media vehicles can be used to reach them.
Brand marketers, don't panic; brand offerings still drive 83% of CPG dollar sales and 79% of CPG unit sales. But now is not the time to sit on the sidelines and think your brands will not be impacted by store brand initiatives. Be proactive in defense of your shelf space and collaborate with your retail partners on how to maximize both branded and store brand assortment in your categories.
Retailers should not get too far out over their skis with store brands; new product innovation is a space owned by manufacturers. Don’t drive your shoppers to shop a competitor because you de-listed a brand or branded item with a strong niche connection to an important contingent of your shoppers.
For further information or to arrange a comprehensive presentation on consumer shopping patterns, please contact Todd Hale.