Channel Shifting in a Tough Economy

Channel Shifting in a Tough Economy

Todd Hale, Senior Vice President, Consumer & Shopper Insights, James Russo, Vice President of Marketing, Laura Marro, Client Director, The Nielsen Company

CI SUMMARY: What do Spam and Ramen noodle sales have in common? Both are leading indicators that it’s crunch time in the aisles of America’s retailers as consumers tighten belts and budgets in response to investment losses and economic uncertainty.

The economic signposts are everywhere—an increase in cheap “staycations”, a surge in filling low-cost foods like bulk rice, macaroni & cheese and dry pasta; an uptick in the misery index which hit 7.7% by year-end; a boost in price comparison web site visits; a 30% bump in TV viewing and a decline of 2.5% in all-outlet shopping trip frequency in 2008. Consumers are hunkering down for the long haul, marshalling their resources and using time-proven tactics for stretching their budgets.

An analysis of Nielsen data detected two major trends impacting 2008 unit sales…

In good times and bad, American consumers enjoy a rich and diverse portfolio of retail options, and these days, they are making full use of them. An analysis of Nielsen data detected two major trends impacting 2008 unit sales: shifting (shoppers shifting department purchases across channels) and contraction (shoppers buying less in the latest year versus the prior year).

Winners, losers

According to Nielsen, only one channel—supercenters—posted overall unit sales growth, which was a very modest 1% at that. While four channels recorded shifting gains (2.7% drug stores, 4.7% supercenters, 3.3% club stores and 1.7% dollar stores), these gains were more than offset by market contraction, for an overall net loss in unit sales.

Grocery gave up sales in the majority of its departments to supercenters, although fresh produce department losses often transferred into warehouse club gains. There were also some bright spots for grocery, which benefited from shifting patterns in the general merchandise, drug and gas departments, where gas promotions linked with in-store spending yielded incremental dollars.

Other channel shifting relationships included: drug stores capturing disproportionate shifting gains in dry grocery and non-food departments from grocery and gains from general merchandise, health & beauty and non-food from mass merchandisers, while forfeiting prescription drug sales to both of these retail channels; mass merchandisers forfeiting sales to supercenters; supercenters gaining across the board with the exception of gas sales, which fueled some convenience/gas channel growth; warehouse club stores attracting unit purchases from all channels with edible department shifts originating primarily at grocery; and dollar stores reporting mixed results, pulling from grocery and losing general merchandise and health & beauty aid sales to supercenters.

Edible departments took a bite out of the competition…

Hunger pains

With high gas prices impacting consumer spending patterns for the first eight months of the year and the financial crisis in mid-September, consumers switched gears into conservation mode, opting to meet basic vs. discretionary needs. As a result, edible departments took a bite out of the competition, driving the total 4.1% 2008 food/drug/mass merchandiser dollar sales growth. Because of inflationary pricing, however, as not all edible departments recorded unit sales gains.

Also telling was the fact that as non-food sales faltered, basic food categories and traditional “coping” categories like canning supplies, wine, vitamins and liquor made the list of the top 15 fastest-growing categories on a unit basis.

Global impact

A Nielsen analysis across 52 countries determined that eight in ten consumers believe they are in the midst of a recession. Retail fallout from bear market concerns included store closures for banners like Foot Locker, Home Depot, Ann Taylor, Disney Stores, Zales, Pier 1 Imports and Linens ‘N Things. Across the pond, vulnerable businesses like the U.K.’s Woolworths, Zavvi (music), MFI (furniture) and Whittard (tea and coffee) also succumbed to the pressure.

Traditionally, grocery has been viewed as recession-resistant, but the channel is not recession-proof. Chains with flawed business models or severe capital constraints may find themselves targets for acquisition-hungry competitors looking to expand their footprint in key markets.

The single most important factor in declining U.S. retail sales has been the marked decrease in the number of shopping trips…

Frequency failure

The single most important factor in declining U.S. retail sales has been the marked decrease in the number of shopping trips, not transaction size. Trip frequency declined by 1.5% on average in 2008, most notably in apparel, do-it-yourself, toy, office supply and department stores.

Instead of driving from store to store, consumers let their fingers do the walking at the keyboard. Nielsen determined from online discussions that 20% of shoppers are proactively managing grocery budgets, which has sparked increased traffic to price comparison web sites. But it’s all about value, not necessarily the absolute lowest price. In a separate Nielsen survey, almost half of all consumers said they preferred larger sizes with lower price per serving over downsized products.

Private label was also the beneficiary of financial worries, with both unit and dollar sales hitting an all-time high in 2008. Toward year-end, private label dollar sales jumped by about 10% over five consecutive four-week periods, averaging out to 4% dollar and 5% unit sales growth for the year. In the same period, branded offerings underperformed, realizing a 3% dollar sales increase and a 3% decline in unit sales.

Optimists believe that by the second half of 2009 the recovery will begin…

Silver lining

Optimists believe that by the second half of 2009 the recovery will begin—credit markets will loosen, labor markets will strengthen and gas prices will hold at levels 50% off the record-setting July 2008 highs. Perhaps the first glimmer of hope was seen at the 2009 Consumer Electronics Show (CES), where flagging attendance was balanced by a nearly tenfold increase in online buzz.

Headline-making categories included super-thin and bendable TV screens, digital cameras and camcorders, supersmart smartphones and tiny yet powerful computers. The whole concept of “convergence” dominated CES. It’s the idea that electronic products are converging to multi-task in multiple areas—phones as music players, handhelds that display TV content and cameras with GPS functionality.

Ideas for weathering the turbulent financial seas…

Bullet-proof strategies

Here are some ideas for weathering the turbulent financial seas. Home-based opportunities abound for sharp marketers with products that appeal or facilitate consumer nesting. Social network sites represent an under-utilized resource for leveraging brand loyalty and word-of-mouth.

Consumer trading-down behavior can prompt new product, packaging and promotion ideas. Organic and fair trade products may open the window again for more traditionally-sourced offerings based on a recession-driven value equation. An effort to reduce avoidable losses should enhance the attractiveness of frozen foods, single-serve prepared meals and smaller portions in food service.

And a word to those who may be tempted to reduce marketing spending in tough times. Although counterintuitive, now is actually the time to investment spend. During the 1980s, companies that maintained or increased advertising and marketing budgets generated higher revenue gains during the recovery period than companies that cut spending. Perhaps this proves the saying, “pennywise and pound foolish”.