Grocery price inflation in Great Britain has been steady at just 1-2% for several years but eventually went negative in April 2004.
A combination of effects has led to this trend. Prices of every day goods have been slowly falling largely due to the pricing philosophies of the leading retailers and the extreme level of competition in this highly concentrated market.
Working in the opposite direction, however, and keeping overall inflation positive, there is a consumer trend towards premium products ‘trading up’, and the introduction of new products which have been almost entirely at premium prices. No longer do manufacturers ‘take a price increase’ but find it necessary to use innovation as the reason to raise the average price point in a category. And while new brands are invariably launched at a premium to the category average, once established, their price is often reduced as well.
It is widely acknowledged that the success rate for new product launches is very low, as little as one in every ten can be considered ‘successful’. So why do manufacturers continue to produce them?
New products a-go-go
After more than a century of grocery manufacturing, true innovations are rare. The vast majority of ‘new’ products are now line extensions; that is to say, variations of existing products more often than not using at least part of an already well-known brand name to position the product in the consumer’s mind. When new products are successful, the rewards in sales, profits and future consumer loyalty can be huge. This is part of the appeal of continuing to make new products, no matter how risky the initial investment.
Once new products are launched, it is crucial to maintain and grow distribution as failure to do so will lead to the failure of the product. In Great Britain, the best performing new products gain distribution very quickly, with around 80% a good target for the first twelve weeks. For the really successful products distribution will often eventually reach 90% or more. Perhaps unsurprisingly given the success rate, almost three-quarters of all brands achieve less than 50% distribution. However, in other countries, the same guidelines cannot be applied.
In Spain where the retail concentration is not so high and stores are small, it can take as long as 18 months just to reach 60% and even then distribution can continue to grow.
As well as distribution, a number of other factors contribute to the success or otherwise of a new product. Trade promoting heavily and early is virtually the norm now and it is the better performing new products that continue to respond well to promotions over time. Meanwhile the less successful ones begin to see faltering sales even during periods of promotion.
Successful products demonstrate a high consumer demand from the start, something that the unsuccessful ones do not. But not matter how successful they are their price invariably falls, even those launched at a premium to the category average, while the price of the less successful ones falls but not as quickly.
Finally, as is often the case with new launches, a number of different skus or even an entire range is brought out together and where all of these lines sell well, the brand will do well. If even a few of the new skus underperform, then this can ultimately have a very damaging effect.
The continuing trend for launching new products has resulted in an increase in the number of products available in-store over the years, but recently this trend has slowed right down, perhaps indicating we are reaching saturation point. But while choice is increasing, this may not be what the consumer needs or even wants. In an average supermarket, around 50,000 products are on shelf. And current trends would suggest that grocery and snack products are losing shelf space to household and personal care items. Over the course of a year an average household will buy around 350 items, which leaves more than 49,500 products ignored.
Promotions
In a study of 13 categories including cereals, shampoo, bar soap and canned vegetables, different types of trade promotions were assessed. The results revealed that 73% of promotions were run without any display activity and provided a sales increase of just over 50%. This may seem like an impressive uplift but in comparison to promotions with display, it pales into insignificance.
Incidences of display without accompanying print advertising (accounting for 26% of promotions) gave an uplift of more than 4.5 times the normal weekly volume sales. The remaining one per cent of promotions comprised display with print advertising, and this more holistic approach to promoting created a massive increase in sales of nearly 11 times.
Where display mechanics are used, the price cuts tend to be deeper, although on average price reductions have been getting smaller over the last 18 months, down from 21% to 18%. This would suggest that displays and multibuys are being used less frequently, which, given the uplifts achievable appears to be a mistake, but may be a reaction to the high cost of trade promotions both in terms of display fees and reduced price product.
For more information contact:
Tim Eales
E-mail: tim.eales@infores.com
Phone: +44 (0)1344 746038