Consumers opting for less expensive store brand products over their name brand competition may seem like a given in a recession.
But new research has found that even when the economy is flush, store brands – or private labels like Wal-Mart’s Great Value and Target’s Up & Up – are growing their market share.
Why? Because during harsh economic climates some national brand managers at companies like Procter & Gamble, Kraft Foods, Kellogg, and Campbell Soup make critical mistakes that drive customers to buy private label brands, notes Jan-Benedict E.M. Steenkamp. Steenkamp is Knox Massey Distinguished Professor of Marketing and area chair of marketing at UNC's Kenan-Flagler Business School.
For example, after studying private label market share in the United States from 1985-2005, he found that during a recession when many consumers are tightening their budgets, national brands did not offer price cuts. Instead, they are more likely to offer price discounts when economic times are good.
“Each time a consumer enters the supermarket you have to capture their attention. Each time you have to fight,” he notes. “The national brands make it easy to switch to private labels.”
While dropping prices contributes to the stampede toward private labels, major innovation – coming up with really different and new products – on the part of the national brands seems to stymie if not stop private label growth, the research found.
But instead, name brands scale back product innovation in a recession because of costs.
“Many people who switch to a private label notice that the quality is good,” he adds. “When good times come back they don’t switch anymore.”
Brand managers need to realize what a formidable competitor they have in the private label Steenkamp has found:
- 66% of U.S. consumers say they strongly agree that many store brands are excellent quality
- 60% of buyers strongly agree that private labels are an excellent value
- 43% of consumers agree strongly or somewhat that private labels are just as good as name brands
- 40% of consumers say they often by store brands instead of national brands
National brand managers also cut back on advertising when the economy contracts, which is a critical misstep. Instead, those companies that do the best are the ones who go against the market trend and advertise during a down economy, Steenkamp asserts.
Steenkamp also analyzed how much 26 of the largest advertisers in the world – companies like Procter & Gamble and L’Oreal – spent on advertising for a two-year span.
He found that companies that do not tie advertising investment to changing economic cycles have a 1.3% better average yearly percentage growth in their stock price than those that exhibit strong cyclical advertising behavior.
“Advertising is effective in fighting private labels in the short run and the long run. Advertising gives something extra to the product.” And maintaining advertising in recessions builds shareholder value.
Other mistakes that national brand managers have made, giving a boost to the foothold of the private labels include:
- Increasing the number of promotional displays, which actually can be cut in a recession without much impact
- Increasing promotional features, which can be cut in a recession
National brand managers do cut back on incremental product innovation during a recession, which Steenkamp found to be the correct move, because these smaller changes don’t provide a good return.
Perhaps upping the ante for national brand managers in the battle against private labels is what Steenkamp has uncovered about the permanent scars that consumers leave on national brands when they switch to private labels during a recession.
While national brands lose a total of 2.56% market share to private labels during a recession, almost 1% of that is a permanent loss. In addition, private labels are stealing market share from national brands during good economic times as well.