Todd Hale, SVP, Consumer & Shopper Insights, and James Russo, VP, Marketing, The Nielsen Company
SUMMARY: Credit markets freeze. Financial institutions implode. Economic benchmarks plummet. Consumer spending plunges. Unemployment skyrockets. Bail out plans are unveiled. Global markets fall like dominoes and consumers tighten their hold on wallets. What are a retailer and manufacturer to do? Read on for strategies on how to manage the economic downturn.
The September 2008 “misery index”, a combination of unemployment and inflation rates, suggests that if misery loves company, consumers had lots of company in recent months. Who can blame them, given the perfect storm of worsening recession, corporate scandals, ongoing wars, volatile gas prices, housing troughs and energy crunch? Retail sales stalled out during 2008, hitting an eight-year low point in October with a 3.1% monthly drop driven by big declines in gasoline, apparel, department store and specialty sales.
While declines in discretionary expenditures have been taking a toll on low-, mid-, and high-end department stores like Kohl’s, Macy’s and Nordstrom, select retailers within grocery, dollar, club and drug stores fared better. Retailers carrying more “need-to-have”, not “nice-to-have” assortment have registered positive same store sales growth. Similar patterns were seen overseas with retailers like Carrefour and Delhaize.
Tracking shopping trips across outlets, Nielsen showed that total Q3 shopping trips were down overall on a year-to-year basis. However, there were bright spots in the retail landscape despite the generally depressing economic news, particularly in value channels and those with food. Online, supercenters, dollar, club, drug and pet stores all posted an uptick in trip count. Hardest hit on the trip count measure were mass merchandisers, office supply and department stores.
Offsetting negative trip count news was the general trend of higher basket rings per trip, with convenience/gas, pet and toy stores recording the largest percentage increases in register rings per trip.
However, since the start of the U.S. financial crisis that commenced mid-September, most retail channels showing growth in shopping trips in the third quarter experienced slower growth in the last four weeks of the quarter. And those retailers showing declines in shopping trips saw even greater declines. As these trends are examined for the first four-week period of the fourth quarter, some surprising shifts in these metrics are being evidenced. Online trips took a big hit, and growth in shopping trips came only from those channels associated with value or food.
|Consumers learned to trade down to value channels|
Consumers—protective of their spending power—learned to trade down to value channels, reduce purchase frequency, move from on-premise consumption to off-premise purchasing and downscale from premium to mid-tier or value brands. A big winner in the battle to sustain lifestyle even as purchase power waned: wine.
Wine posted the greatest unit sales growth of any category over the prior year and achieved that result by aggressively pursuing innovation strategies like finding new distribution outlets. Chief among them was Walmart, which expanded the number of stores selling wine by 24%. Growth also was fueled by an influx of new drinkers who discovered wine, a growing social acceptance of wine drinking spurred in part by movie placements and celebrity labels, and a preference for wine among higher-income consumers less affected by economic tremors.
The economic squeeze play at retail includes lower prices due to discounting activity, private label growth, value retail expansion and a strengthening dollar. On the other side of the equation, commodities are beginning to back off an all-time high, while fuel prices finally showed some weakening, impacting both transportation costs and consumer perceptions of buying clout.
A sign of the times is the dramatic action taken by some retailers. The Winn-Dixie “Good ‘Til” program reduced prices on over 1,000 items through January 7. Sam’s Club offered a limited membership costing $10 for 10 weeks. And Hy-Vee offered ways to feed a family of four for just $8 a day.
Manufacturers also weighed in with their own value programs. Campbell’s leveraged its legacy with a 10 cans for $10 offer. Kraft comparison ads touted the Kool-Aid value proposition, with four pitchers costing the same as a two liter bottle of soda. ConAgra advertised Banquet frozen dinners for the first time in more than a decade.
|Gainers almost offset losers by media type|
The ad game
Despite the nearly 2% decline in total ad spending that Nielsen has reported for the first half of 2008, gainers almost offset losers by media type. Cable TV made a strong showing with sales increases of almost 8%, followed by syndicated TV, Spanish language TV, free standing inserts, network radio, outdoor advertising and local magazines.
Print, ethnic and electronic outlets suffered the most, with local newspapers posting more than a 7% decline, followed by network TV and Internet ads, African-American TV and national magazines. Yet many major consumer packaged goods firms remain committed. Kraft advertising was expected to top $1.55 billion. Sara Lee announced a multi-million dollar ad campaign. Hormel Foods planned to expand both its budget and the number of brands supported. Heinz tagged an 8-12% marketing spend increase as an integral element in its two-year growth plan.
Cable TV may owe much of its success to the election year, since twice as many people dialed-in to cable news networks during 2008 as the prior year. Another significant factor for advertisers was the fact that cable attracted affluent households with incomes over $100,000. Financial news networks, another cable staple, enjoyed a 50% increase in viewing with a strong showing among households with incomes over $75,000 or those who have felt the greatest pain from a decline in financial markets spending more time watching programs to gauge how to minimize the impact of the stock market decline on their investments. Looking at the big picture, total U.S. HUT (households using television) levels actually increased 1% on a year-to-year basis.
By October 2008, one-third of all U.S. consumers in a Nielsen survey said they didn’t feel secure in their jobs, while half believed they were worse off financially than a year ago. As a result, consumers are taking steps to cut back spending, particularly on major purchases for the home (87%), carpeting (77%), automobiles (73%), major appliances (65%), and vacations (49%).
|Shoppers offered some ideas for coping|
Fully 40% of shoppers think that food and personal care prices have increased over the past three months. When offered some ideas for coping, consumers expressed a preference for larger sizes with a lower price per serving (47% of shoppers) over smaller pack sizes at lower prices (17%), modestly downsized packaging at the same price (9%), a proportionate price increase (8%), fewer sales (8%), the same number of sales but at less of a savings (7%) or slight reductions in quality with no price change (4%).
When cash-strapped consumers cut spending, it doesn’t happen equally across categories. While dairy, dry/canned goods, fresh produce and meats would suffer double-digit declines, deli (40%), beverages and health & beauty (30%) would take a much larger hit.
Categories with less price sensitivity in a challenging market include those with few alternatives—like diapers, occasion- or ingredient-based categories, low-price-point or low-promotion categories, or long-purchase-cycle categories. The more price sensitive categories are characterized by heavy promotion activity, a host of substitutes, discretionary or non-essential items, and stockable products.
|History shows a robust return on investment for companies that stay the course|
Rather than pull back from investment spending in recessionary times, history shows a robust return on investment for companies that stay the course. In the 1980s, companies that maintained aggressive sales and marketing efforts enjoyed more growth after the recession—some 275% in the first five years after the recession versus the 19% growth among companies that cut their sales and marketing budgets.
One alternative in a troubled economy is private label goods. With $82 billion in U.S. sales and a 16.4% dollar share within food, drug and mass merchandisers including Walmart for the year ending 11/02/08, private label goods appear on the shelves of virtually every home in America. Despite such a robust showing, the U.S. lags other, more developed private label markets in Switzerland (a 46% share), the U.K. (43%), Germany (30%), Belgium (29%) and Spain (26%), to name a few. Nevertheless, the trajectory is decidedly upward for private label dollar and unit sales, reaching a 21.4% unit and 17% dollar share for the latest four-week period.
Retailers have capitalized on the momentum, introducing house brands in the dairy case, deli department, frozen case, fresh meat and dry grocery areas, fresh produce and non-food, health & beauty and packaged meat. Even as private label expands its footprint in-store, national brand performance is worsening in just about every department, especially in commodity categories and those with little product differentiation.
|Shoppers are happy with private label products|
Nielsen research shows that shoppers are increasingly happy with private label products, calling them a good alternative to name brands, at parity with or better than national names on quality criteria, while offering good pricing and value. The social stigma is gone, along with boring generic-looking packaging. Many retailers treat private label and exclusive brands as an integral part of their corporate brand image.
To further elevate the private label positioning, retailers can offer product guarantee or quality assurance programs that underscore product confidence, or pursue a multi-tiered approach like Food Lion, Kroger, Safeway, SuperValu and Winn-Dixie. In addition to the core house brand, they’ve expanded into premium and natural/organic lines.
Forecasts call for continuing tough times and economic instability that filters throughout the economy. In short, we can brace for more of the same, and expect existing behaviors to intensify. Shoppers will first meet their basic needs and forego discretionary purchases. At-home opportunities will climb. Variety and convenience will take a back seat to value. Trading down will become an acceptable way to stretch budgets. Local sourcing gains traction, not as a green activity, but rather as a strategy for controlling costs, delivering value and maintaining product freshness.