ROI is a killer.
How can a company embrace long-term brand building when shareholders will start selling off their stock if quarterly earnings aren’t met? One of the first lessons every brand manager learns is that the easiest way to make your profit number is to go right to the mother lode, that big variable expense on the spreadsheet with an immediate impact on the bottom. That would be marketing spend.
Still, the facts seem to belie this tempting and oft used tactic, employed up and down the org chart in most organizations to appease Wall Street. Advertising spending is not only holding its own, it’s growing, increasing “3.2 percent year-over-year to $557 billion,” according to Nielsen’s quarterly Global AdView Pulse report.
So what’s up with this recent report in the New York Times, Groceries Are Cleaning Up in Store-Brand Aisles? The article tells us:
“Over the last three years, sales of store brands grew 18.2 percent, accounting for $111 billion in sales, according to Nielsen. That is more than twice the rate of growth for national brands — 7.9 percent to $529 billion — over the same period.”
Store brands, also known as “generics,” and once called “off-brands” by consumers, now account for 17% of all grocery sales!
This statistic was unimaginable 25 years ago. While there has always been low-end competition from discount and store brands, P&G, Kraft, General Foods and the other big package goods companies of the day were far more concerned with each other than with consumers who bought on price.
Today, they should be in a total panic. Yet with the possible exception of P&G, most of the old line packaged goods manufacturers continue to undermine their own efforts, marching in lock step toward obsolescence.
Do brands still matter? I would argue strongly that they do. The usual Mega-Brand suspects – Apple, Nike, Starbucks, Google and others – generate fierce consumer loyalty. It may be difficult to imagine today, but until sometime in the late 1980’s or early 1990’s, packaged goods products used to do the same. You were a Coke or a Pepsi person. Bud or Miller. Colgate or Crest. Maxwell House or Folgers. Now you buy what’s on sale, loading up at Costco or filling in with smaller quantities at your supermarket.
An exchange I had with a consumer in a focus group earlier this year, one included in my May 23, 2013 post, The Schlock Factor And The Inevitable Decline of The Ad Agency, says it all. The client was a global packaged goods company and respondents were recruited to be “highly involved,” fanatics, if you will, in a high emotion category:
Q. Do you use this kind of product?
A. Of course!
Q. When did you last buy it?
A. Yesterday.
Q. What brand did you buy?
A. I don’t know.
Q. Really?
A. I think it was the blue one. Maybe the red one. I don’t know.
This was not an isolated incident. We hear things like this all the time in our qualitative research. And it didn’t happen by accident. While several variables figure into this equation, a search for the guilty party here ultimately leads to one group of primary suspects. That would be the packaged goods companies, themselves.
It is entirely reasonable to question this assumption based on the marketing investment data cited earlier. If advertising to consumers, generally considered to be a long-term brand building effort, is increasing, how can name brands be losing share? Perhaps spending needs to be significantly higher now than it has been historically, but it cannot be singled out as the culprit.
More likely, the erosion of name brands is a function of three critical factors, only one of which is addressed in the New York Times piece.
First, as The Times notes, many store brands now behave like name brands of old. They innovate continuously, strive to improve quality, and even advertise.
50 years ago, companies could make rational claims that really mattered. The typical slice of life commercial would generally feature an animated cut-in that revealed just how a certain brand of laundry detergent did in fact give you “whiter whites and brighter brights.” Store brands couldn’t come close to the taste of “The Real Thing.”
That’s just not true anymore. Most of the products on your supermarket shelf work pretty well. Do you really think you can notice a difference between laundry washed in Tide as compared to a load washed with Kirkland, Costco’s house brand?
At Walgreen’s, Extra Strength Tylenol will set you back $9.99 for a bottle of 100 caplets. But Walgreen’s Extra Strength Pain Reliever costs $6.99 for the same quantity. Exactly the same dose of the very same ingredient. People are figuring out that Tylenol does not work 43% better, the premium you pay for this name brand.
Obvious yet still profound shifts in society and consumer values provide the second reason behind store brand growth. Mothers, of course, still want to be great moms and take care of their families as best they can. But we no longer live in the 1950’s, when “Homemaker” was the life-path of choice (or more likely default) for most women. “Keeping a nice home” was paramount, and the grocery and drug store brands chosen by women, at least according to advertisers at the time, said a lot about how well they were doing their jobs.
Moms have far more pressing concerns now, not the least of which is to make a living and provide for their families. With nearly 60% of women over the age of 16 working full or part-time, accounting for 47% of the entire workforce, they are less likely to be worried about what anyone else thinks about their choice of floor cleaners.
Equally important is how the meaning of “packaged foods” has evolved and the baggage it now carries. Once the epitome of modernity, convenience and quality, “packaged” now connotes processed, artificial and inauthentic in many cases. So if you’re buying food in a box like breakfast cereal, does Kellogg’s versus General Mills really matter? The less expensive Trader Joe’s equivalents to the big cereal brands, with their down-to-earth aura, almost seem more prestigious.
The third reason, and perhaps most important, concerns how marketing budgets are allocated.
In the 1960’s about two-thirds of marketing budgets were allocated to advertising campaigns. These were thought to build brand image over the long-term and generate consumer pull. The remaining third of the budget was dedicated to promotions, short-term tactics such as couponing and discounting designed to move product off the shelves quickly.
This ratio is now completely reversed. The bulk of marketing budgets for packaged goods, about two-thirds or more, is now allocated to push tactics.
With store brands stepping up marketing and innovation efforts, and changes in society working against name brands, packaged goods companies have made a conscious effort to sacrifice brand imagery for short-term sales. Not only are they underinvesting in the critical task of communicating relevant, emotional reasons for consumers to buy their brands, they have succeeded in training people to buy their products only when they’re on deal.
This trend shows no signs of reversing itself anytime soon. The dominance of marketing departments has been replaced by finance and procurement. The currency of ideas and innovation is limited, at best. Companies no longer choose advertising agencies or marketing partners based on personal chemistry, their ideas, or even their track records. Procurement departments need to weigh in on “value,” often gutting compensation levels to the point where “vendors” can’t possibly provide the quality manpower needed to be effective.
Advertising budgets may be up, but are they up enough? With CFO’s insisting on ROI justification for every dollar, brand managers can only push so far. The path of much less resistance is promotion, which can be predicted and measured in the short-term with far more predictability.
Finally, there seems to be a dearth of meaningful innovation on the part of packaged goods companies. Growth is not coming not from truly new products, but from an array of mind-numbing line extensions and acquisitions.
My friend, Dr. Anne Marie Knott, Professor of Strategy at The Olin School of Business at Washington University, has just published “The RQ50,” a list of the 50 publicly traded companies whose investment creates the greatest value for their shareholders. As she states on her AMK Analytics website, “this ranking is not a beauty contest based on surveyed opinion. Rather it utilizes the RQ measure featured in the May 2012 Harvard Business Review article, “The Trillion Dollar R&D Fix”—the measure of R&D productivity in theoretical models linking R&D investment to revenue growth and market value.”
There’s not a packaged goods company on the list.
So I’ll see you next time at Costco when I’m loading up on a six-pack of toothpaste, a three-pack of shaving cream, a big double-pack of chunky peanut butter, a mega jar of vitamins and the other goodies that will get me through the next six months or so. Which brands? The least expensive ones, of course.
