The prices on just about every commodity are going up and that could be good news for national brands and bad news for private label.
The rationale behind that assertion goes something like this: Rising commodity prices will drive up the cost of all consumer packaged goods. Large national brands with greater buying power will keep a tighter lid on rising costs while private label manufacturers that purchase in smaller quantities will see costs rise at a faster pace. The end result is that the price gap between national and store brands will close.
Under this scenario, Citi analyst David Driscoll sees little evidence that consumers will begin switching en masse to store brands should the much talked-about recession turn out to be real.
Ken Harris, managing director of Cannondale Associates, also believes that national brands will hold back store brands should the economy not deteriorate further. "On the face, this seems bad, but it has not yet dissipated consumer purchasing behavior in a material way," he told Brandweek. "We're a price increase or two away from this."
Jan Benedict E.M. Steenkamp, a professor of marketing at the University of North Carolina, Chapel Hill, doesn't see store brands losing any share even if the cost increases for these items are marginally higher than national brand competitors.
"Even when both manufacturer brands and private labels increase prices, private labels remain cheaper and offer the potential for price savings." After that, consumers who try private label often become fans after they find out the quality is decent, he told Brandweek.
Nirmalya Kumar, a professor of marketing at London Business School, added, "Part of the private label share increase over the coming recession will be 'permanent' because a significant proportion of consumers who moved their purchases from manufacturer brands to private labels will remain loyal to private labels even after the need to economize is over."
National brands are looking to deter consumers from switching to private label by increasing ad spending to communicate brand messages and overcome price objections.
"Cutting back on marketing is not a good strategy," said Connie Maneaty, analyst at BMO Capital Markets. "Brands have to keep [themselves] in front of the consumer; consumers have to believe what they are buying is better than the other choices out there."
Discussion Questions: Is the current economic environment different than trouble spots in the past and will it affect the traditional sales patterns of national and store brands? Do you see rising commodity prices benefiting national over store brands or vice versa? What is your strategy for, at the very least, maintaining sales share if you're a chief marketing officer for a national or store brand?