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Tapping into Growth after the Initial Innovation Fades

Breaking through the crowded craft beer segment

By
Perspectives | 15-11-2018
Peter Shapiro

Have you ever strolled through a specific aisle of your favorite grocery store and noticed that there was more variety of a particular trendy product than your last visit? For example, perhaps you’ve wondered, "Since when did every condiment company start making a Sriracha sauce?"

Crowding is a phenomenon that tends to be created by burgeoning trends and can happen in any fast-moving consumer goods (FMCG) category or segment. Here’s how it often materializes:

  • Consumer tastes and preferences evolve and new trends emerge.
  • To win over shoppers, retailers and manufacturers innovate around these trends.
  • Sometimes the initial rush to innovate adds copy-cat items to the shelf.
  • As a result, consumers are faced with too many options that have the same benefit.

It’s scenarios like these that not only contribute to an increased number of items on the shelf, but also erode products’ pricing power and promotional efficiency. To justify their product’s role in the category, manufacturers sometimes go the quick route of slashing prices and putting their product on sale to trigger a rise in purchasing. When they take this approach and execute incorrectly, sales could decline.

We see this happening across categories. For example, sales growth has slowed in the craft beer segment in recent years, contrasting earlier periods of explosive growth.

During the 2008 downturn, consumers sought solace in affordable luxuries, such as craft beer. So much so, that retail sales soared and reached an eye-popping growth rate of 23% a mere five years ago. Today, however, sales are flat and share in this segment have declined to about 13%. And, even though innovative value adds such as sours and Imperial IPAs help to continue to drive sales at U.S. retail outlets, overall category growth is tougher to come by.

Stagnation of craft beer growth

At the same time, craft beer still has the most pricing power, with an average price that’s 79% higher than domestic premium beer.

Pricing power of craft beer

While there are a few ways to reverse segment-level crowding, let’s take a look at how building a more efficient approach to price and promotion can benefit the price-powerful craft beer segment (and other mature FMCG categories). Here are six steps that we recommend manufacturers take to jump-start stagnant sales and successfully sell into retailers.

Step 1: Validate Where Your Product Fits in the Market

Often the industry encourages manufacturers to optimize their pricing quarterly or yearly to help them reach their goals. But pricing should not be considered in such a one-way fashion. Instead, manufacturers must always be focused on what’s optimal for both their brand and their retail partners. As a starting point, consider what the market will bear—in addition to other factors, such as profitability, brand objectives, etc.—when setting price.

Step 2: Understand the Role that Pricing Sensitivities Play in Your Strategy

First, you need to understand how price changes impact sales and what the price threshold is for your product. This is where price elasticity comes in. Build a flexible strategy that accounts for price elasticity across all of the different channel types (e.g., high assortment) where your product is sold and its dynamics (e.g., premium packaging).

Step 3: “Be Yourself” When It Comes to Trade Promotion

Finding the right approach to price and promotion can be tricky. Here is a helpful framework that can help manufacturers build an effective pricing and trade strategy. Combining products’ everyday price sensitivity and their promoted sensitivity leads to different price-promotion implications (below).

4 Strategies for Price and Promotion

According to this framework, we recommend trying a “hybrid” approach for craft beer, as it has above-average everyday and promoted price sensitivities. No matter what strategy you use, it’s important to start with deep investigation instead of trying to provide a simple solution when competing in a crowded space.

Step 4: Strike a Balance between Price and Promotion Sensitivities

Companies look to quick promotions when growth slows, which can lead to unintended consequences. For example, craft beer’s promotional “efficiency”—or percentage of promoted sales that are incremental —is relatively low (about 33%). How a product responds to trade promotion depends on myriad factors, including:

  • Promotion expectations that have been set by the category or competition
  • The price and promotion sensitivity of the product
  • The product’s ability to bring in competitive buyers and those in adjacent categories, possibly inducing trial and hopefully repeat purchases

The key is to judiciously invest and look for the trade promotion sweet spot that maximizes profit, share, volume and retail partnerships, and considers product attributes such as pack size.

Step 5: Promote Your Product in the Most Effective Way Possible

An important part of strategizing is to fully evaluate what it costs to make, distribute and bring your product to market. Here are a couple of rules of thumb to keep in mind regarding retail promotional levers:

  • Sales of impulse products (e.g., craft beer) tend to be display driven. Displays help raise awareness to new products.
  • Planned and expensive purchases tend to benefit from ads.

In both cases, it’s important to consider the trade-offs between the value of the additional volume and the cost of the promotion itself.

Step 6:  Consider Seasonality in Your Approach

In trade planning, timing plays an important role, as it can be lucrative to align promotional events with seasonal ones. While seasonality typically doesn’t play a significant role for craft beer, craft sales do tend to be 24% above average during the week of Christmas*. But, it’s also important to consider the seasons where there are too many promotions, as it’s possible to lose opportunities to competitors who successfully promote their products in a lower seasonal time period.

To learn more about trade promotion seasonality, price elasticities, and where your product fits in the market, download our How to Drive Sales When Segment Growth Slows white paper.

*Source: Nielsen Total U.S. All Outlets (xAOC). Period ending Jan. 31, 2017.

Tagged:  SHOPPER  |  CPG AND RETAIL  |  INNOVATION  |  GROCERY

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