Table of Contents
“There’s a crack in everything — that’s how the light gets in”
— Leonard Cohen
The last three years have witnessed a dramatic and to some degree unprecedented (and therefore unmodel-able) shift in shopping behavior. Much has been made of habit disruption due to COVID, and a thoroughly overrated assessment of the impact of COVID on consumer e-commerce shopping behavior (adjusted for COVID acceleration and the growth slowdown of 2022, e-commerce growth 2018-2023 is remarkably consistent with e-commerce growth rates at any five-year interval prior to 2018). The pandemic shifted business attitudes to e-commerce more dramatically than consumer ones.
Bryan Gildenberg i
The underrated shift has been in the last 12 to 18 months, where a combination of supply chain outages and shortages and a significant shift in consumer prices has introduced a level of “switchiness” into U.S. consumer behavior, which brands today should be capitalizing on more effectively.
In particular, the inflationary pressure on categories is a deeply understudied feature of this new landscape. Perhaps the focus on e-commerce has led to an overindulgence in item-level activity and thinking? So much of the work in the “digital shelf” is product-centric — description pages, content, ratings and reviews and keywords … as well as the mechanics of advertising online, which are overwhelmingly item-centric. Online behaves in many ways more like a limited-assortment shopping environment than a shelf does … even though the online shelf is theoretically “endless.”
What inflation has done over the last 18 months is reset the historic, well-established and elasticity-proven relationships between “opening price point,” “good,” “better” and “best” in a category. This change has manifested in four ways … critically, all of these counterintuitively suggest that inflation creates more opportunities for premium solutions than low-cost ones:
• Relative price gap reduction — If good in a category used to be $3 and better was $4, better was 33% more expensive. If today good is $5 and better is $6, both went up by $2, but the price gap has dropped to 20%.
• Specifically unequal price gap changes — Often the price of mainstream brands increased more quickly than the price of niche or premium brands. Whether that is due to manufacturer pricing power or specific attributes of the costs attached to these products … coupled with the above relative gap reduction a number of categories have seen real price compression between “everyday” and “premium.” This is why when brands as different as Diageo and Nestlé in their financial reports discuss growth in the U.S. market they are pointing to the premium end of the category as their primary growth driver.
• Private label price increases — In many categories, the predicted rise of private label has been dulled — data from MPG via NielsenIQ, for instance, reveals that in most categories in the U.S. over the 52 weeks to early July 2023 household penetration in private label stayed flat or decreased. Some of this is due to upward pressure on private label pricing — either because private label manufacturers have struggled with supply chain issues more than brands or because retailers have been raising private label pricing to recoup margin in categories. Generally speaking this period has seen a number of shoppers switching back to brand with availability issues resolved, and in many categories this outweighs the trade-down to private label, especially at a household level. Growth in private label is largely being driven by existing private label shoppers — for retailers trying to improve basket profitability private label bundle promotions might be an effective way to drive trial and margin.
• Weakness in discount channel — Dollar General in particular has shown some competitive weakness versus other retailers in the market … if the world were truly trading down, this format would be expected to benefit disproportionately. Instead, a reduction in SNAP benefits and an economic model more susceptible to labor cost/availability issues has resulted in executional, pricing and consumer wallet challenges deflating growth in this channel.
So what are the specific implications of these cracks?
• Redo elasticities using real and real-time data — The single most critical thing any brand can do is understand where its shoppers’ new trade-offs are between their own brand and the premium and discounted solution in its category. There is almost no chance this relationship is the same as pre-COVID relationships, and any studies done during the pandemic should probably be retired. A variety of strategies and solutions exist in the marketplace today for relatively fast, directional and sales-data-based elasticity work … find one.
• Rethink promotional strategy — Especially if you are a premium solution. One of the best examples of this comes from Vialife taking its plant-based cream cheese at a slightly smaller pack size than the core mainstream SKU and promoting the price point down below it to encourage trial. With habits disrupted and price reference points jumbled, there’s a chance Vialife can convert more new-to-brand shoppers with this targeted price point than normal — winning both for them and for the retailer, who wins a shopper switched to a more profitable brand over time. In general, “promotional strategy” needs to be exactly that — rather than “promotional tactics,” or even worse, “promotional repetition based on anniversarying the plan.”
• Go back to thinking category growth stories — Stop the CRAPpy thinking — with profitable growth at a premium today brands need to help retailers achieve both and break out of the “Amazon CRAP” (Amazon slang for Cannot Realize a Profit — the criteria that initiates discussions around discontinuation/margin relief there) mindset that every individual item needs to accomplish both on its own merits. The single biggest competitive advantage omnichannel retailers have over Amazon is the ability to think beyond an item well — this thinking today is being underleveraged, as most of the mental energy of U.S. businesses is focused on the digital, item-centric shelf.
• “Innovate to the light” — If the cracks in categories are truly letting light in, that light should guide innovation strategy. Where have price gaps emerged between opening price point and good, or good and better, or better and best? Is there white space opened for an innovation to capitalize on that newfound space?
Hopefully this guide provides direction and energy to capture the light of growth through these newfound cracks.
Bryan Gildenberg is founder and chief executive officer of Confluencer Commerce.
