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(originally published by Booz & Company)


A Breakaway Opportunity for “Inferior” Products

In the present day, fortunately, a switch to inferior goods has less devastating effects. But it does have a significant impact on the food business, which is being felt not only in restaurants but across the food and consumer product categories. Kraft Foods Inc., for example, has recently refocused the marketing message of several of its brands to emphasize relative value, thus targeting consumers who are trading down from casual dining, quick-service restaurants, and food delivery. For Kraft’s DiGiorno brand, the marketing message emphasizes that it costs half the price of a pizza delivered from a restaurant.

Similarly, the new normal is bad news for restaurants and bars that sell liquor, but good news for off-premise liquor retailers. Although consumers are not doing as much drinking in public, they are still buying premium brands in liquor and grocery stores. With cocktails at home being turned into an inferior good, these retailers can increase sales by stocking an assortment of premium liquors, beers, and wines, continuing the alcoholic beverage industry’s past success in trading consumers up to more expensive brands.

The Scotts Miracle-Gro Company has found another way to succeed in this environment. In mid-2008, Scotts reported an interesting sales dichotomy: It was showing continued growth and increased market share in its premium segments (such as Miracle-Gro Moisture Control and Organic Choice potting soils and Nature Scapes mulches) and its lowest-priced lawn fertilizers (those without insect or weed control, selling for half the price of the premium line). Meanwhile, sales of Scotts’ mid-tier fertilizers and potting soils had recently declined.

These results demonstrate two important phenomena facing the branded lawn and garden category. First, there are new consumers for premium garden supplies. They are trading down from other categories, either by taking fewer vacations (and spending more time at home instead) or by giving up contracted lawn services and doing the work themselves. They are willing to take some of the money they have saved and spend it on a premium garden and lawn. It’s significant that the revenue gain from the high-end products more than compensated for the revenue loss from Scott’s midrange products.

Second, core lawn-product consumers are still loyal to brands such as Scotts Miracle-Gro. They are migrating to more affordable Scotts products, but not to private-label (such as supermarket brand) goods. Even if they have less purchasing power, they still seem to have an interest in status and quality, which can be satisfied only through brand-name products. Thus, the era of the new normal is not necessarily a boon to manufacturers of private-label products and value brands. Consumers may exit such manufacturers’ category altogether, and new entrants may want the benefits of a brand after trading down from a much more premium category.

Taking Advantage of the New Normal
In short, if you can attract consumers to your category from another, the era of inferior products may bring you superior opportunities. How, then, can companies maximize value in this kind of environment? Consumer-oriented companies should consider the following options when facing the current economic slowdown:

1. Don’t blindly lower prices to regain volume. Simply reducing prices could well be financially disastrous; it already has been for several casual-dining restaurant chains. Across-the-board price-cutting may lower the price of a $12 meal to $9 or $10, and thus affect the perceived value of, say, Boston Market versus Chipotle, but it will not have any effect on a consumer who is opting for a $5 meal by eating at home. For restaurants, it may make sense to add some value options. But sustained success will require attracting and retaining the smaller group of consumers who still dine in the casual segment, and fixing restaurants’ cost structures accordingly. Many of these chains will have to battle for survival, and success will require winning on this segment’s terms.

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  1. Nikhil Bahadur and John Jullens, “New Life for Tired Brands,” s+b, Spring 2008: Offers a step-by-step guide to determining whether a brand has enough equity to make it worth revitalizing.
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  5. Paul A. Samuelson and William D. Nordhaus, Economics, 18th ed. (Tata McGraw-Hill, 2006): A staple of economics education that has greatly influenced thinking on the subject.
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