10/02/08 The turmoil in the world’s financial markets—combined with unemployment and rising prices—is forcing consumers to change their buying habits. This shift, which started earlier this year, is still misunderstood. Consumers are not just spending less money. They’re shifting to different kinds of products and services: the kind that economists call “inferior” goods. Companies that recognize this shift are finding opportunities amidst the downturn.
A new Booz & Company report describes inferior goods as those that become more attractive when purchasing power declines, often because consumers make fundamental changes in their behavior. They shift from restaurants to eating at home; for example: Kraft’s DiGiorno frozen foods brand is succeeding with the marketing message that it costs half the price of a pizza delivered from a restaurant. Sales of wine, beer, and liquor from stores are similarly increasing, because it’s fundamentally less expensive to drink at home. Many mass-market premium products—custom-blended cosmetics, microbrewed beer, “casual dining” restaurants, and antibacterial throwaway wipes—are declining. In the past, consumers might have switched to a less expensive “private label” store brand for a product like wipes; now they’re buying paper towels instead, or washcloths instead of paper towels.
For companies that can attract consumers to one category from another, the era of inferior products brings superior opportunities, explains the Booz & Company article. The Scotts Miracle-Gro Company provides one example. In mid-2008, Scotts reported that sales of its mid-tier fertilizers and potting soils had recently declined, while products at the top and bottom price points had shown growth. The explanation: two types of “trading down” were taking place at once. Some customers were taking fewer vacations (and spending more time at home) or giving up contracted lawn services and doing the work themselves. They were willing to spend some of the money they saved and on premium garden and lawn supplies. Other consumers, the existing lawn-care customer base, were still loyal to the Miracle-Gro brand. They migrated to more affordable Scotts products, but not to private-label (such as supermarket brand) goods. Even with less purchasing power, consumers still seem to have an interest in brand-name status and quality.
How can companies succeed in a slowdown like this? First, Booz & Company recommends, they shouldn’t lower prices of a premium product to attract more customers; it won’t work. The customers they’ve lost have switched to another category entirely. For example, a premium restaurant might lower the price of an entrée from $12 to $9, but that won’t draw in customers who have switched to eating at home, and are paying $5 to do so.
Instead, companies need to cultivate the inferior products in their portfolios that will attract consumers as their purchasing power decreases. Retailers with distinctive products, such as Starbucks, will do more business in more non-premium channels in the next few years; they may sell proportionately more packaged coffee in groceries or value retailers.
Booz & Company also instructs companies to make the “new normal” seem better. Downturns represent breakaway growth opportunities for those clever enough to help consumers feel good about migrating to “inferior goods” by enabling them to justify their decisions in terms other than affordability. Status-conscious automobile owners don’t feel bad about trading in their BMW or Escalade on a less expensive Toyota Prius, because they can tell themselves they are doing their part for the environment.
Above all, companies need to cement consumers to their brand, and give them an experience that merits repurchase. The report advises companies to think about the products they can trade consumers up to when the economy starts to recover—for example, the health-conscious, convenient, or premium products that will make them remain brand loyal as their incomes increase. For sooner or later the economy will bounce back.
During the next few years, companies will need to be prepared to effectively compete under both the old and the new normal. Brand owners and companies that offer products or services to customers across a broad range of price points—from “inferior” to premium—will fare better. Because in an age when consumers feel pressured, the insight and understanding of marketers can make all the difference.