Fast-Moving Consumer Goods

Fast-Moving Consumer Goods

          
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Fast-Moving Consumer Goods

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    Implications for FMCG Companies
    The shift in consumers’ spending behavior has already had a profound impact on the FMCG industry, and our research indicates that even more change is on the way.
    The Rise of Private Label

    Consumers will continue to look to private-label products as a way to save money. Although private-label sales tend to track the unemployment rate, the spike has been much sharper in this recession. According to Citigroup, U.S. dollar sales of private-label brands rose by 8 percent in October 2008, year over year, the largest dollar increase on record—and sales are continuing to grow. The growth is especially impressive in that it covers nearly all categories and every income group.

    The steady rise over the past few years in consumers’ opinion of private-label products set the stage for this growth. A Nielsen Company study conducted in July 2008—just before the downturn accelerated—revealed that 63 percent of consumers believe that “most store brands are as good as name brands,” an increase of 3 percentage points since 2005. BCG’s most recent research indicates that while price may be the main reason to try private labels, 49 percent of consumers go back and purchase these products again because of “superior taste or quality.” One consumer we spoke with summed it up this way: “My new favorite pizza is from Culinary Circle, one of Jewel-Osco’s store brands. I decided to give it a shot because it was cheaper, but now it’s really more about the taste.”

    This very shift is what is most troubling for FMCG players—that consumers’ newfound interest in private label just might stick. In our surveys, we did not detect a latent desire to stop using private-label products once economic conditions improve. In fact, 71 percent of cash counters and nervous savers said that even after their financial situation improves, they will continue to buy as many private-label products as they do today. Only 22 percent said they would move back to brands in some categories, and just 7 percent said they would return to their predownturn level of private-label purchasing.

    However, the private-label shift is not happening uniformly across all categories. The key to brand preference is product differentiation, and many branded players still hold that advantage. Consumers gave a number of reasons for continuing to choose brands:

    • Product Superiority: The branded product offers a pleasurable experience that private brands cannot replicate. This reason was cited by 39 percent of chocolate lovers and was frequently mentioned by purchasers of alcoholic beverages as well.

    • Loyalty: For some consumers, preference for a favorite brand trumps price. This is especially true of soft drinks, with 20 percent of users describing brand preference as their primary reason not to switch.

    • Health and Nutritional Benefits: The perceived benefits of organic and all-natural products are another important differentiator of brands, especially in child-related categories, such as milk and baby products.

    • Safety: In some categories, such as fresh foods and seafood, consumers have concerns about private-label manufacturers cutting corners on product quality and health standards.

       

    • Environmental Benefits: Products that tout environmental benefits (by using less packaging or producing less harmful waste, for example) also show good resistance to private-label alternatives. This reason was most often cited for home-cleaning products.

    Health and Wellness Holding Steady

    The financial balance sheet is not the only relevant scorecard for consumers—nutritional concerns also play a large role. Despite the new focus on price, health and wellness continue to climb the value ladder. A full 27 percent of the consumers we surveyed said that since the downturn, they are buying more healthy products.

    Some of the rise in healthy foods can be attributed to an absence of negatives. Survey respondents ranked chocolate, snack food, beer, and wine and spirits as the categories in which they most frequently attempt to “avoid buying at all.” But consumers also seem to be more acutely aware of what they are buying and are choosing on the basis of both financial and health considerations.

    Convenience Packaging on the Decline

    One of the most successful innovations in FMCG has been packaging designed for ease of use. Riding the wave of two megatrends—portable products for time-pressed consumers and portion control for those on a diet—convenience packaging has spread rapidly across a number of categories. But as fast as it has grown, it now seems poised for a rapid descent.

    Consumers newly sensitive to price and value and increasingly wishing to go green have targeted convenience packaging as the most logical place to start cutting costs. Instead of paying for wasteful convenience, our survey respondents told us, they are creating their own forms of environment-friendly convenience. They are doing this, for instance, by purchasing bulk boxes of cereal and dividing the contents into smaller containers (reusable, of course) or by refilling water bottles with tap water. In fact, U.S. sales of bottled water were down 11 percent in the first two months of 2009 over the same period in 2008. The United Kingdom reported a decline of 9 percent for all of last year.

    Shifts in Shopping Patterns

    Consumers are also changing where and when they shop. In the United States, trips to dollar stores in the fourth quarter of 2008 were up 6 percent compared with the same period last year, sales of online retailers were up 4 percent, and supercenters and club stores showed an increase of 1 to 2 percent. In the United Kingdom, retailers that consumers perceive to be low priced, including Asda, have picked up share from higher-priced retailers. And there’s more. Some consumers are traveling farther to stock up, and some are shopping around at several locations. In BCG’s survey of U.S. and European shoppers, we saw a sharp rise during the first quarter of 2009 in consumers using more than four shopping formats. Expect channel shifting to grow. (See exhibit 4)

    exhibit

    Taken together, these changes have profound implications: a rapid dislocation and share shift in retail formats, with significant effects on product mix, pricing strategy, and, most important, merchandising strategy, especially for manufacturers of products liable to impulse buys.

    Trading Up: Still an Option

    Every year, BCG tracks the prevalence of trading up and trading down across the major global markets. As expected, our recent surveys indicated a significant increase in trading-down activity in both Europe and the United States. Conversely, trading up was significantly off.

    This is not to say that consumers are not trading up at all. Rather, they are doing it more selectively. Our interviews across Asia, Europe, and Latin America indicate that consumers will continue to seek out products that are good for them and the environment or that offer extraordinary value. Surprisingly, even some premium-priced retail items in categories such as cooking ingredients, gravies, and ice cream are faring well, as more consumers opt for “restaurant quality” dining at home in lieu of going out to restaurants themselves.