DemandTec Whitepaper: Keeping Brands On Course


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DemandTec Whitepaper: Keeping Brands On Course

  1. 1. DemandTec Industry PerspectiveKeeping Brands on Course in a Down EconomySeptember 2008Armen NajarianSr. Director, Product MarketingDemandTec, Inc.
  2. 2. DemandTec Industry Perspective 1Keeping Brands on Course in a Down EconomyConsumers are in an economic vise. Confidence finally fell to the lowest point in 26 years after theconstant drubbing by energy and food cost surges, housing value slumps, and a teetering Wall Street.They are conserving aggressively, and worrying about the future. Travel, dining out and car salesare down.When shopping for day-to-day essentials, they are eliminating trips to conserve gas, consuming moreprivate label and liking it, buying with coupons and ‘on sale,’ stocking up when prices are favorable, andabandoning categories.The high frequency of these shopping behaviors puts CP (consumer products) brands in unchartedterritory when it comes to predicting demand – and implementing the right prices and promotions thatwill keep demand strong, brands vital and shelf space intact.Procter & Gamble may not have been severely punished for the recent 16% price hikes it imposedbecause product innovations drive the health of so many categories. But do consumers feel slighted bythe incredible shrinking package strategy used by so many CP manufacturers? Would Heinz andCampbell be talked about as potential merger candidates if these were ordinary business times?Would the Libby’s brand from Seneca Foods institute a national “Get Back to the Table Month”campaign in September because it’s an eat-at-home savings strategy that resonates today, rather thanjust being right for families to do? There’s no quick end in sight to the consumer imbalances in today’sNorth American grocery marketplace. As a result, it could get worse for CP manufacturers before itgets better.Brand sell-through, market share and consumer loyalty are at risk when shoppers lack confidence intheir earnings prospects, and pare back to the point of saving on household essentials. What are yourbrands doing to justify their purchase in tough times? Certainly innovation, supply chain efficienciesand smart marketing earn respect from retailers and consumers. At least as vital is the ability to meetfast-shifting consumer demand patterns. By optimizing price and promotion to keep CP brands in syncwith consumers, manufacturers can insulate against losses, and possibly emerge stronger from thisperiod of shopping turmoil. Copyright ©2008, DemandTec, Inc. All rights reserved.
  3. 3. DemandTec Industry Perspective 2Consumer-Centricity is Key to Trade EffectivenessThere’s no single formula for CP success because of the new dynamics in today’s economy. Forexample, consumer demand shifts differently by category: A recent Unilever study cited cookies, wine,frozen dinners and soda as some categories where people will spend less if the economy continues toworsen. Nielsen added that eggs, tobacco and cups and plates have been historically vulnerable indownturns, although seafood, candy, dry pasta and pasta sauces have largely withstood sucheconomic pressures.Where a CP manufacturer competes in the store means a great deal to optimization because that’s thecontext in which shoppers view the brand – and some categories and brands are more expendablethan others.Another new wrinkle today is retailers’ and consumers’ increasing willingness to turn to secondarybrands and private label particularly if a CP brand prices itself beyond the store’s desired “value” imageor the household budget. The U.S. inflation rate is the highest it’s been in 17 years. Retail prices ofcereal and bakery staples have soared 12% over a year ago, the Consumer Price Index showed. Withsuch hikes, shopper decisions at the shelf will include price as a greater factor. Most vulnerable:brands on which price climbs are the steepest, and categories which people regard as least essential totheir daily needs. Simplistic approaches no longer suffice.For these reasons, CP manufacturers that step up trade effectiveness strategies and adopt optimizationtools – for predictive analysis and better decision-making – will more successfully keep brandscompelling through the crunch and beyond. By applying item-level demand elasticities to critical on-shelf decisions, CP manufacturers’ pricing and promotion strategies will more readily influence the rightconsumers at the first moment of truth.A maximally effective trade planning process – enabled by data-driven insights – can often yieldwinning plans with retail customers. Put simply, a trade plan that incorporates total category volumeand profit metrics is a lot easier to sell into a retailer. For all the effort and investment it takes to pull offsuccessful events and sustain shopper loyalty, why not seek out plans that achieve shared businessobjectives? Copyright ©2008, DemandTec, Inc. All rights reserved.
  4. 4. DemandTec Industry Perspective 3Manufacturers have attempted to reconcile their own higher costs with consumers’ desire to save byimplementing a variety of sales and marketing tactics, such as price increases, “downsized” smallerpackages, money back guarantees, paperless coupons online with retailers, and campaigns to promotefamilies eating together at home. Which tactic or set of tactics will best sustain the brand? Only a data-driven answer based on the most recent consumption insights can determine that.Retailers Emphasize Private Label at Expense of CP BrandsThere’s a steady drumbeat of competition for shelf space and wallet share that’s also driving trademarketing effectiveness for CP brands: the forward march of private label. Retailers want the highermargins, exclusivity and value image. Shoppers want the savings. As a result, CP brands are undermore pressure than in recent memory to remain price-relevant to their users, even as their owncosts rise.A new reality in the relationship between retailers and manufacturers: CP brands are judgedincreasingly against the benefit to stores that Private Label programs bring. If price and promotionsaren’t right, they lose facings and the opportunity for consistent growth and profitability.How rapidly are these dynamics advancing?Nearly two out of three chains are sophisticated enough to market store brands in tiers. The FoodMarketing Institute reports that 99% percent offer store-brand products and 65% carry multiple tiers,from basic to premium offerings. These figures have expanded significantly from 95% percent and47%, respectively, in 2007. At Wegmans, store brands outsell any other brands in yogurt, cereals, salsa, frozen self-rising pizza, ice cream, and basic frozen vegetables. At Publix, shoppers who bought any of four specified brand items were given a free store-brand equivalent in a recent summertime promotion. At Safeway, CEO Steve Burd said “corporate brands…are what consumers want to stick with.” Starting this autumn, the chain will market its organic house brand, O Organics, and health and wellness brand, Eating Right, to grocery chains nationwide through its Lucerne Foods subsidiary, a member of the Better Living Brands Alliance. Copyright ©2008, DemandTec, Inc. All rights reserved.
  5. 5. DemandTec Industry Perspective 4Private label unit volume share has risen to 21.5% from 20.6% a year ago, and the greatest gains werein staples such as cooking oil, flour, butter and cheese, said a Citigroup Global Markets report for the12 weeks ended July 12, 2008.Considering the combined force of the inner threat (Private Label) and the outer threat (economy)affecting retailer and shopper decisions, the time is now for CP manufacturers to aggressively supporttheir brands with consumer-centric price and promotion optimization down to brand and item levels, andrefined to individual markets.Experts Validate Need to Manage Demand through Intelligent Pricing and PromotionAccording to category management expert Raymond D. Jones, Managing Director, Dechert-Hampe &Co., a CP manufacturer’s “ability to optimize price and promotion has become more critical than ever.Evaluation of price increases is an even more difficult task, since it is based on historical patterns thatmust be extrapolated into new territory.” In his words to DemandTec, he added that CP manufacturersmust “recognize market realities and consumer sensitivities….Gouge consumers with heavy-handedprice increases [and] ultimately fail. But those who try to absorb the pain hurt their own viability.”His feel for today’s pain felt by North American consumers and the entire supply chain adds to theurgency of the vision expressed by two high-profile industry analysts, Dale Hagemeyer of Gartner Inc.,and Lora Cecere of AMR Research, with whom we also covered the topic.“It is always important to optimize price. It is just as important in an economic upswing. CP needs todevelop this into a core capability and be able to do it all the time, not episodically as a result of somestudy or consulting engagement,” said Hagemeyer, Gartner’s Research Vice President, ConsumerProducts. He emphasized that “only through collaboration and understanding demand can companiesmanage the risk associated with volatility. CP needs to understand elasticities in near real-time.Everything else is just poking around the edges of the problem.”Keenly aware of today’s shift in trade thinking from account/category to item/store rationalization ofprice, promotion and marketing programs, Ms. Cecere, the Research Director for Consumer Productsat AMR, urged manufacturers to become “demand orchestrators.” Copyright ©2008, DemandTec, Inc. All rights reserved.
  6. 6. DemandTec Industry Perspective 5“Sense and shape demand, and drive a profitable demand response,” she expressed this summer.“Refine price management skills, understand market elasticity and margin options… .Knowing what isprofitable has never been more important… .This is not the supply chain of yesteryear. The companythat can perform best in the long term has strong brands, builds strong collaborative relationships, andadapts to market and supply options.”It is clear to these experts, and it is clear to DemandTec, that CP manufacturers face an urgent need totransform their use of trade dollars to maximize business effectiveness. The ones that introduceconsumer-centric pricing and promotion optimization as a business priority gain competitive advantageover other brands and drive consumer loyalty. Bottom line: invest wisely during these challenging timesto deliver win-win plans for retail customers, and be better able to succeed in all businessenvironments.About DemandTecDemandTec (NASDAQ: DMAN) enables retailers and consumer products companies to optimizemerchandising and marketing decisions, individually or collaboratively, to achieve their sales volume,revenue, and profitability objectives. DemandTec software services utilize DemandTec’s science-based software platform to model and understand consumer behavior. DemandTec customers includemore than 140 leading retail and consumer products manufacturers such as Advance Auto Parts, BestBuy, Circle K Stores, ConAgra Foods, Delhaize America, Dr Pepper Snapple Group, General Mills,Giant-Carlisle, H-E-B Grocery Co., Hormel Foods, Monoprix, Safeway, Sara Lee and Tyson Foods.Connected via the DemandTec TradePoint Network™, DemandTec customers have collaboratedonline on more than 1.5 million trade deals.DemandTec1 Circle Star WaySan Carlos, CA 94070USAInquiries:Phone: +1.650.226.4600www.demandtec.comCopyright (c) 2008 DemandTecAll rights reserved. Copyright ©2008, DemandTec, Inc. All rights reserved.