demandtec whitepaper: keeping brands on course

DemandTec Industry Perspective

Keeping Brands on Course in a Down Economy September 2008 Armen Najarian Sr. Director, Product Marketing DemandTec, Inc.

DemandTec Industry Perspective 1

Copyright ©2008, DemandTec, Inc. All rights reserved.

Keeping Brands on Course in a Down Economy Consumers are in an economic vise. Confidence finally fell to the lowest point in 26 years after the

constant drubbing by energy and food cost surges, housing value slumps, and a teetering Wall Street.

They are conserving aggressively, and worrying about the future. Travel, dining out and car sales

are down.

When shopping for day-to-day essentials, they are eliminating trips to conserve gas, consuming more

private label and liking it, buying with coupons and ‘on sale,’ stocking up when prices are favorable, and

abandoning categories.

The high frequency of these shopping behaviors puts CP (consumer products) brands in uncharted

territory when it comes to predicting demand – and implementing the right prices and promotions that

will keep demand strong, brands vital and shelf space intact.

Procter & Gamble may not have been severely punished for the recent 16% price hikes it imposed

because product innovations drive the health of so many categories. But do consumers feel slighted by

the incredible shrinking package strategy used by so many CP manufacturers? Would Heinz and

Campbell be talked about as potential merger candidates if these were ordinary business times?

Would the Libby’s brand from Seneca Foods institute a national “Get Back to the Table Month”

campaign in September because it’s an eat-at-home savings strategy that resonates today, rather than

just being right for families to do? There’s no quick end in sight to the consumer imbalances in today’s

North American grocery marketplace. As a result, it could get worse for CP manufacturers before it

gets better.

Brand sell-through, market share and consumer loyalty are at risk when shoppers lack confidence in

their earnings prospects, and pare back to the point of saving on household essentials. What are your

brands doing to justify their purchase in tough times? Certainly innovation, supply chain efficiencies

and smart marketing earn respect from retailers and consumers. At least as vital is the ability to meet

fast-shifting consumer demand patterns. By optimizing price and promotion to keep CP brands in sync

with consumers, manufacturers can insulate against losses, and possibly emerge stronger from this

period of shopping turmoil.



Consumer-Centricity is Key to Trade Effectiveness

There’s no single formula for CP success because of the new dynamics in today’s economy. For

example, consumer demand shifts differently by category: A recent Unilever study cited cookies, wine,

frozen dinners and soda as some categories where people will spend less if the economy continues to

worsen. Nielsen added that eggs, tobacco and cups and plates have been historically vulnerable in

downturns, although seafood, candy, dry pasta and pasta sauces have largely withstood such

economic pressures.

Where a CP manufacturer competes in the store means a great deal to optimization because that’s the

context in which shoppers view the brand – and some categories and brands are more expendable

than others.

Another new wrinkle today is retailers’ and consumers’ increasing willingness to turn to secondary

brands and private label particularly if a CP brand prices itself beyond the store’s desired “value” image

or the household budget. The U.S. inflation rate is the highest it’s been in 17 years. Retail prices of

cereal and bakery staples have soared 12% over a year ago, the Consumer Price Index showed. With

such hikes, shopper decisions at the shelf will include price as a greater factor. Most vulnerable:

brands on which price climbs are the steepest, and categories which people regard as least essential to

their daily needs. Simplistic approaches no longer suffice.

For these reasons, CP manufacturers that step up trade effectiveness strategies and adopt optimization

tools – for predictive analysis and better decision-making – will more successfully keep brands

compelling through the crunch and beyond. By applying item-level demand elasticities to critical on-

shelf decisions, CP manufacturers’ pricing and promotion strategies will more readily influence the right

consumers at the first moment of truth.

A maximally effective trade planning process – enabled by data-driven insights – can often yield

winning plans with retail customers. Put simply, a trade plan that incorporates total category volume

and profit metrics is a lot easier to sell into a retailer. For all the effort and investment it takes to pull off

successful events and sustain shopper loyalty, why not seek out plans that achieve shared business

objectives?



Manufacturers have attempted to reconcile their own higher costs with consumers’ desire to save by

implementing a variety of sales and marketing tactics, such as price increases, “downsized” smaller

packages, money back guarantees, paperless coupons online with retailers, and campaigns to promote

families eating together at home. Which tactic or set of tactics will best sustain the brand? Only a data-

driven answer based on the most recent consumption insights can determine that.

Retailers Emphasize Private Label at Expense of CP Brands

There’s a steady drumbeat of competition for shelf space and wallet share that’s also driving trade

marketing effectiveness for CP brands: the forward march of private label. Retailers want the higher

margins, exclusivity and value image. Shoppers want the savings. As a result, CP brands are under

more pressure than in recent memory to remain price-relevant to their users, even as their own

costs rise.

A new reality in the relationship between retailers and manufacturers: CP brands are judged

increasingly against the benefit to stores that Private Label programs bring. If price and promotions

aren’t right, they lose facings and the opportunity for consistent growth and profitability.

How rapidly are these dynamics advancing?

Nearly two out of three chains are sophisticated enough to market store brands in tiers. The Food

Marketing Institute reports that 99% percent offer store-brand products and 65% carry multiple tiers,

from basic to premium offerings. These figures have expanded significantly from 95% percent and

47%, respectively, in 2007.

At Wegmans, store brands outsell any other brands in yogurt, cereals, salsa, frozen self-rising

pizza, ice cream, and basic frozen vegetables.

At Publix, shoppers who bought any of four specified brand items were given a free store-brand

equivalent in a recent summertime promotion.

At Safeway, CEO Steve Burd said “corporate brands…are what consumers want to stick with.”

Starting this autumn, the chain will market its organic house brand, O Organics, and health and

wellness brand, Eating Right, to grocery chains nationwide through its Lucerne Foods subsidiary, a

member of the Better Living Brands Alliance.



Private label unit volume share has risen to 21.5% from 20.6% a year ago, and the greatest gains were

in staples such as cooking oil, flour, butter and cheese, said a Citigroup Global Markets report for the

12 weeks ended July 12, 2008.

Considering the combined force of the inner threat (Private Label) and the outer threat (economy)

affecting retailer and shopper decisions, the time is now for CP manufacturers to aggressively support

their brands with consumer-centric price and promotion optimization down to brand and item levels, and

refined to individual markets.

Experts Validate Need to Manage Demand through Intelligent Pricing and Promotion

According to category management expert Raymond D. Jones, Managing Director, Dechert-Hampe &

Co., a CP manufacturer’s “ability to optimize price and promotion has become more critical than ever.

Evaluation of price increases is an even more difficult task, since it is based on historical patterns that

must be extrapolated into new territory.” In his words to DemandTec, he added that CP manufacturers

must “recognize market realities and consumer sensitivities….Gouge consumers with heavy-handed

price increases [and] ultimately fail. But those who try to absorb the pain hurt their own viability.”

His feel for today’s pain felt by North American consumers and the entire supply chain adds to the

urgency of the vision expressed by two high-profile industry analysts, Dale Hagemeyer of Gartner Inc.,

and Lora Cecere of AMR Research, with whom we also covered the topic.

“It is always important to optimize price. It is just as important in an economic upswing. CP needs to

develop this into a core capability and be able to do it all the time, not episodically as a result of some

study or consulting engagement,” said Hagemeyer, Gartner’s Research Vice President, Consumer

Products. He emphasized that “only through collaboration and understanding demand can companies

manage the risk associated with volatility. CP needs to understand elasticities in near real-time.

Everything else is just poking around the edges of the problem.”

Keenly aware of today’s shift in trade thinking from account/category to item/store rationalization of

price, promotion and marketing programs, Ms. Cecere, the Research Director for Consumer Products

at AMR, urged manufacturers to become “demand orchestrators.”



“Sense and shape demand, and drive a profitable demand response,” she expressed this summer.

“Refine price management skills, understand market elasticity and margin options… .Knowing what is

profitable has never been more important… .This is not the supply chain of yesteryear. The company

that can perform best in the long term has strong brands, builds strong collaborative relationships, and

adapts to market and supply options.”

It is clear to these experts, and it is clear to DemandTec, that CP manufacturers face an urgent need to

transform their use of trade dollars to maximize business effectiveness. The ones that introduce

consumer-centric pricing and promotion optimization as a business priority gain competitive advantage

over other brands and drive consumer loyalty. Bottom line: invest wisely during these challenging times

to deliver win-win plans for retail customers, and be better able to succeed in all business

environments.

About DemandTec

DemandTec (NASDAQ: DMAN) enables retailers and consumer products companies to optimize

merchandising and marketing decisions, individually or collaboratively, to achieve their sales volume,

revenue, and profitability objectives. DemandTec software services utilize DemandTec’s science-

based software platform to model and understand consumer behavior. DemandTec customers include

more than 140 leading retail and consumer products manufacturers such as Advance Auto Parts, Best

Buy, Circle K Stores, ConAgra Foods, Delhaize America, Dr Pepper Snapple Group, General Mills,

Giant-Carlisle, H-E-B Grocery Co., Hormel Foods, Monoprix, Safeway, Sara Lee and Tyson Foods.

Connected via the DemandTec TradePoint Network™, DemandTec customers have collaborated

online on more than 1.5 million trade deals.

DemandTec 1 Circle Star Way San Carlos, CA 94070 USA Inquiries: Phone: +1.650.226.4600 www.demandtec.com Copyright (c) 2008 DemandTec All rights reserved.

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