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How brands can survive as price-conscious consumers ‘trade down’

Article-How brands can survive as price-conscious consumers ‘trade down’

With prices going up, consumers are trading down, switching to cheaper products to save money, meaning food and drink manufacturers must build a strong brand value to stay relevant. “It’s the only way to future-proof your brand from market fluctuations,” says one market expert.

For several months, food producers, suppliers and manufacturers have been weathering a storm of rising prices, inflation, supply chain bottlenecks, commodity shortages and export bans and, before, the disruptions caused by the Covid-19 pandemic.

Rising prices are currently the top source of concern for most Europeans, according to a survey and report by consultancy McKinsey, published last month.

Sixty percent of British respondents said the price crisis was their main source of worry, followed by 40% of Spaniards, 44% of French respondents, 40% of Germans and 32% of Italians. (All respondents put price increases ahead of other issues such as the invasion of Ukraine – the second highest concern for all surveyed countries – Covid-19, unemployment and extreme weather events.)

Over one-third of consumers are switching to cheaper brands

In response to rising prices, two-thirds of UK consumers have adapted their shopping behaviour by “significantly” trading down in stores and products, according to the McKinsey survey. Over one-quarter (28%) have switched from their usual supermarket to a hard discounter while 34% have switched from branded products to low-priced and private label products.

Snacks & confectionery and frozen foods are the hardest hit, according to the McKinsey survey, with 70% of consumers saying they have switched to cheaper brands within those categories, followed by 62% of consumers who did so for bread & bakery products.

So, how damaging is this situation for CPG brands which find themselves forced to either absorb rising costs or pass prices onto consumers – with the risk of losing their custom? According to Peter Wennström, founder and president of the Healthy Marketing Team (HMT), price elasticity needs to be seen in relation to a brand’s target consumer.

Determine which consumer group your brand targets

The Malmö, Sweden-headquartered consultancy has developed a methodology called FourFactors that identifies four distinct consumer audiences and their needs.

The first consumer group, so-called ‘Technology Stakeholders’, have a specific medical need and are willing to pay a premium price for a brand that addresses their condition. The second group, ‘Lifestyle Stakeholders’, is made up of early adopters who love to be seen with the latest brand innovations that fit their lifestyle. The third group, ‘Early Mass Market’, is characterized by people who look up to early adopters but are not willing to pay a premium price, while the fourth group, comprised of ‘Mass Market’ consumers, look for the cheapest price and convenience.

“If you are a mass market brand with no clear differentiation, I think the forecast is not a positive one: you will probably end up losing. It is now more important than ever for brands to stay relevant and offer clear benefits and clear differentiation,” Wennström told Fi Global Insights.

Brands must know their target audience, working to build the right messages to engage with them and justify the brand value so that, when the price increase comes, consumers know what they are paying for, he added.

Creating a sense of value is the only way to future-proof your brand

“Building a strong brand value is the only way to future-proof your brand from market fluctuations such as the ones we are currently experiencing. We also need to be realistic, and we know that in the current situation with supply shortages, those who have guaranteed supply will win. Those who cannot secure supply may have to go out of business. It can be a tough period for many startups but it can represent opportunities for others,” Wennström said.

Stretched household budgets could mean opportunities for discount and budget brands that are targeting so-called ‘mass market’ consumers, as indicated by the McKinsey survey, and could see consumers reduce their spending on unhealthy treats.

“Additionally, our experience is that in a time of economic hardship consumers will make an evaluation of how much nutrition you get for your money, meaning consumers will cut back on less nutritionally relevant categories,” Wennström added.

Assessing the impact on new product development & research

As manufacturers & suppliers feel the pinch and are forced to cut costs, could we see a reduction in the amount of new product development (NPD) and research & development (R&D)?

Wennström believes food manufacturers and suppliers may respond with more targeted innovations both for consumer-facing products and ingredient launches.

He said the Healthy Marketing Team, which helps brands design and develop new product launches, has noticed a rise in its clients asking to align their brands with long-term trends, rather than fleeting ones, as they choose to focus on high-impact investments.

“It is more important than ever to make conscious strategic decisions and focus on what really matters. It’s ok to launch [fewer] innovations as long as they are the right ones. From our contacts in the industry and the type of discussions that we are having, this is what I see: manufacturers and suppliers are prioritizing their innovations and are being more targeted.”

With economic and political uncertainty the watchwords for the short- to medium-term, if not longer, is there any light at the end of the tunnel for the food industry?

“Adversity often breeds opportunity and we have seen this in the last 15 years that we have been around with the HMT,” Wennström said. “We also see that business needs to step up on societal issues. According to the 2022 Edelman Trust Barometer, their annual trust and credibility survey, people want more business engagement, not less,” he said.

“The role and expectation for business has never been clearer. Especially for the food and supplements industry, it is the time to be pioneers, address burning consumer issues – climate anxiety, mental wellbeing – and win in the marketplace.”