Is less more in grocery war?

In the past, packaged goods manufacturers could sustain a large portfolio of brands. Now, in a changing grocery market, producers and retailers are reassessing the return on brand investment.

The climate of retail consolidation and, inevitably, the “Wal-Mart effect” are focusing retailers’ minds on market share. According to a recent AC Nielsen study, more than 50 per cent of households are looking for lower priced brands more than before, so retailers are lowering prices. Multiple retail giants are flexing their financial muscle and passing the cost on to suppliers.

Manufacturers must continue to give shareholders value for money despite increasing pressure on margins. Companies such as Unilever, Nestlé and Procter & Gamble have recognised that 20 per cent of their brands drive 80 per cent of turnover, and 90 per cent of profits. So they are pinpointing efficient brands and divesting others.

A more focused portfolio offers production efficiency. Return on marketing investment improves when you concentrate a finite budget on fewer brands. AC Nielsen’s research shows brands with significant investment – such as Sunny Delight – break through in-store clutter.

Retailers and manufacturers become inter-dependent. Retailers expect makers to deliver at lower margins, while manufacturers streamline portfolios to make savings. It means less brands are available to the retailer.

Therefore retailers stock only big, household names – brands that benefit from above- and below-the-line advertising. Even in a sector as crowded with brands as the lager market, the top six premium products account for more than 50 per cent of sales, 60 per cent of above-the-line investment and almost two-thirds of in-store promotions. Multiple grocers devote most in-store activity, shelf space and prime positioning to the fastest-moving lines.

AC Nielsen believes not only powerful brands will survive, although those which do not qualify as “power brands” will have to fight harder to maintain an in-store presence. They need to improve production efficiency, clearly identify their target audience and work with retailers that have a common audience.

As the grocery market matures, strategies will diversify. There will be mass-market brands where customer loyalty generates profit through high volume sales and niche brands that have a limited target audience and generate profit through a price premium.

At present, price wars dominate the sector as multiple retailers battle it out. Some make price their distinguishing feature, aligned with mass-market brands. But other retail formats will continue to thrive, providing fertile ground for smaller brands.

According to AC Nielsen, there are many factors other than price that influence shopping behaviour. Twelve per cent of households are most concerned with store presentation and the quality of the goods sold, 12 per cent favour a good range of products, while 18 per cent prioritise location. For many shoppers, promotions remain a major influence on purchasing decisions: 57 per cent of shoppers admitted to buying a different brand to normal because it was on offer.

As retailers toy with a genuine everyday low price (EDLP) strategy, AC Nielsen says it does not necessarily work across the board. Many brands are sensitive to everyday price changes. A price reduction as part of an EDLP strategy appeals to the brand’s target consumer and genuinely increases volumes.

But some brands show little response to changes in everyday price and promotions are more effective. These brands are better suited to a high price and frequent promotions.

The key to maximising return on investment is finding synergy between the brand strategy and retail strategy. There is no simple way to deliver a healthy return to investors and, as brands disappear or change hands, there are likely to be some surprise developments in the ongoing contest.