Sent: 29-11-2011 10:32:05
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Innovation Threatened by Move to Home Brands
The Coles and Woolworths move to sell more home brands depends on being able to copy the brand innovation of others. What if the flow of innovation stops?
Coles and Woolworths have been more aggressively moving to home brands across a wide range of previously high profile branded products. Strategically, the retailers believe that the value of the shopping experience to consumers was being underpriced relative to the brand experience.
Brand managers disagree. Companies like H.J. Heinz, PepsiCo and, more locally, Foster's believe they deliver a package comprising product, quality and price point.
The branded consumer goods companies must continue to spend on research and development to meet changing tastes and to pursue innovation in packaging and product design to keep expanding the amount people spend to sustain their own attractiveness as investments. The brand companies also spend on marketing. Marketing creates demand and brings people through the aisles of the retailers. This benefits both.
PepsiCo, the world's largest snack food company, has established a global nutritional programme which is developing a liquid oats beverage, for example. In spending on activities such as these, PepsiCo is responding to the increased pressures to reduce sugar and salt content in its products as evidence of the cost of obesity in advanced economies continues to mount. To some degree, this is a defensive move but it is also responding to a range of market signals pointing to new profit opportunities.
The financial attractiveness of activities such as these depends on the brand managers getting a pricing premium so as to be able to deliver the required returns on capital.
In building home brands, the retailers are seeking to redistribute product revenues in their favour. To ensure consumer acceptance of a strategy designed to divert them from buying products they know and trust, the retailers are passing back to the shoppers a part of the value they are capturing from the brand managers.
In this way, retailers can offer consumers an improved value proposition but only as long as consumers regard the home brands as equivalent to the branded products.
The initial stages in persuading consumers about the underlying quality of the home brand products is critical. There is only one chance to make a first impression. Unfavourable impressions will create significant headwinds for the strategy.
Consequently, the first stage of the strategy is likely to show it at its best. The critical issue for the retailers going forward is how they continue to deliver against the expectations which are created. In particular, how quickly will they be able to move to cover changes in tastes? How much will they be prepared to spend to develop more innovative packaging to help expand the market as fickle consumers get bored? How will they react to the demands in Australia for food products that cater for a healthier lifestyle? How will they reconcile this with the needs of time constrained consumers facing reductions in their spending power in a tough economic environment?
In releasing the second quarter results for Heinz last week, chief executive William Johnson observed that the Australian end of the business was significantly weaker than business in other regions. Constant currency sales in the miracle economy were down 13% in the quarter.
For all its problems, Europe was a significantly better place to do business. One of the sources of the better European performance was the move to smaller packages across all categories.
Historically, in all the advanced economies, consumers had being showing a preference for larger volumes to get unit savings. There is now a clear tendency for downsizing to more compelling price points in Europe (eg one euro for a small serve of ketchup). The same tendency is also becoming evident in the USA with 99 cent and $1.99 price points.
These moves are an excellent example of the dynamic nature of the modern market for consumer goods. Successful brand managers will be able to respond to these signals speedily if they have the existing infrastructure to do so. It is not enough simply to notice they are happening.
Therein lies the challenge for the Australian retailers. In the short term, they might be able to reduce prices for shoppers by copying or threatening to copy the existing range of products on their shelves and capturing a part of the existing brand manager margin.
In the longer term, if they are to replicate the role of the brand managers, they will have to spend more on the infrastructure that is now funded by the brand managers for the benefit of the retailers.
The Heinz chief observed last week that the outlook for the Australian market had improved. After all, he said, there was no place to go but up. He also said that the Australian situation, notwithstanding signs of improvement, had got to the point where it was no longer material.
Next time there is a change in consumer preferences in Australia and Europe, it sounded like Heinz could just as easily ignore Australia and focus on Europe where the returns are potentially better.
This would be contrary to the best interests of Australian consumers and ultimately contrary to the best interests of the retailers who need people to come through their aisles looking for new products that are meeting their changing needs.
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