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Will Sex Sell Sandwiches? Quiznos’ Edgy Campaign Sparks a Price War

April 7, 2009

Excerpted from Ad Age, “Quiznos Throws Subway Curve With ‘Sexy’ $4 Foot-Long” By Emily Bryson York, March 23, 2009

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Seeking to return to its identity as an edgy upstart, Quiznos is undercutting rival Subway’s $5 foot-long with a $4 version called the Toasty Torpedo, pitched as a product with “12 inches of flavor” by a smoky-voiced toaster that asks a chef to “Say it sexy” and “Put it in me.”

It’s the latest attention-grabbing bid by the nation’s second-largest sandwich chain, which has struggled in recent years because of problems with franchisee profitability and the perception that the food is expensive … “The reality is that we are a challenger brand,” CMO Rebecca Steinfort said … “Our main competition is Subway, which is an 800-pound gorilla. We may be 200 pounds, but they’re 800.”

Quiznos built a following with toasted, high-quality subs and envelope-pushing marketing … While the recession hit Quiznos hard, rival Subway has gone gangbusters with its $5-foot-long promotion, which helped to fuel double-digit increases in same-store sales. At Quiznos, marketing failed to drive traffic and closed stores …

Creative aside, the $4 price point might just be a magic bullet for Quiznos, undercutting its rival in a recessionary market where every dollar counts for consumers. “I think the right price point is very important in the sandwich business,” said Dennis Lombardi, exec VP-food service strategies … Subway’s foot-long “changed the paradigm. So the trick now is: How do you create a product that counters that? And a $4 sandwich sounds like a good start.”

Earlier this year, Quiznos revamped its menu to reduce prices and come closer to the critical $5 mark … This month, Quiznos offered a “Million Sub Giveaway” … While the promotion was an overwhelming success in terms of data collection, a few problems ensued. Quiznos had 1 million e-mails within three days, but some consumers didn’t get their coupons, and others couldn’t print them. A few flustered franchisees turned coupon holders away.

Mr. Lombardi said Quiznos will have to be careful of the promotions it uses to survive the recession, but “it’s much easier to go from premium product to bargain product than it is to go from bargain product to premium product” …

Ms. Steinfort said the chain’s recent marketing efforts have already begun to pay off. Quiznos’ consumer research shows that most customers come into Quiznos and notice the prices are lower, and 70% say they plan to come back. She described the results as being “significantly better,” or showing “hockey-stick-type improvement” over last year, when the chain’s prices were on the rise.

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Full Article:
http://adage.com/article?article_id=135435

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“Value” is the New “Green”

March 30, 2009

Excerpted from Wall Street Journal, “Value is the New Green”, by Mark Penn, March 13, 2009

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Until recently, being green was the best way for companies to demonstrate a sense of social responsibility, and for consumers to feel good about their purchases. Healthy food, hybrid cars, energy efficiency — these were the attributes that burnished brands.

But now green is taking a back seat to a new core value — value. Green hasn’t gone away, but companies are having to consider their “value” equation to try to serve the millions of consumers who either can’t afford premium experiences, or just don’t want them anymore.

Companies need to evaluate everything they are offering consumers to see how they can infuse the value of good value into their brands.  

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Starbucks is a great example of one of the world’s greatest success stories being upended by the new times.  Its guiding idea was to give consumers not just a cup of coffee but an integrated experience filled with intoxicating aromas that made customers feel great about paying extra for a grande latte.  McDonald’s emerged as a competitor by saying skip the experience and savor just the coffee and save your cash. Two years ago, Starbucks was flying high. Today it is struggling against the value-based competition.

In the airline industry, those who have been able to make money have offered more for less, not the opposite.  Flagship airlines like United went through bankruptcy emerging in 2006, while value carriers like JetBlue and Southwest have been far more successful.  They not only offer the same basic transportation, but actually offer more up-to-date services like satellite TV in every seat, more organized boarding processes and better customer service.

But beware of being regarded as simply cheap.  Target, while holding up well, isn’t reaping the same rewards as Wal-Mart.  The trick in setting a “value” proposition is that brands need to avoid the trap of simply being less expensive without providing the right level of quality.

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This certainly spells trouble for a wide swath of experience and luxury brands for what could be an extended period, unless these brands figure out how to adapt.  History shows these trends go in cycles, and luxury always comes back.  But we are in a new age of continually declining costs of technology and manufacturing, which could mean the price of luxury will keep declining.

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Full article:
http://online.wsj.com/article/SB123689912898512981.html?mod=djemMM

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Airlines’ Battle a Boon for Travelers

March 27, 2009

Excerpted from Washington Post, “Downturn Puts Air Travelers on Cloud Nine”, by Sholnn Freeman, March 14, 2009

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Airlines have rushed out coast-to-coast travel deals for as little as $99 each way for the spring and summer as the economic downturn has taken hold. Continental Airlines and United Airlines, fighting it out on routes between Washington and Los Angeles, have priced round-trip tickets under $200. Airlines in recent weeks have cut ticket prices as much as 50 percent from a year ago.

The fare war comes as American companies scale back business travel and skittish consumers put off vacation plans, putting new pressure on airlines that only a year ago were fighting high fuel costs.

Yet some travel analysts are skeptical that travelers will buy, even at those prices. “With 600,000 or 700,000 people losing their jobs every month, they are asking themselves, ‘Can I really afford this?’ “

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Airlines began the year thinking the passenger market wouldn’t be so bad. Many had spent 2008 cutting less profitable routes and scaling back the number of flights, giving them more room to boost prices on the seats that remained.

Operationally, flight cutbacks mean fewer planes stacking up at airports, alleviating congestion. The government has reported that airline on-time rates are at their best level in years, even at busy New York airports.

Airlines began offering discounted fares in October after Wall Street banks began to buckle, grounding bankers and other financial executives who paid top dollar for transatlantic tickets. The steady stream of price cuts continued over the winter holidays. Now the discounting is spreading into the spring and summer — historically the strongest profit period for airlines as travelers take vacations.

“This is a major war,” said Tom Parsons, chief executive of BestFares.com, a discount travel Web site. “We never expected airfares like this in June or July of last year. We would have expected air fares double this.”

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Full article:
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/13/AR2009031303564_pf.html

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Starbucks New Mission? Shed image as "poster child for excess"

March 24, 2009

Excerpted from Ad Age, “Starbucks: Not as Expensive as You Think”, By Emily Bryson York, March 18, 2009

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Distressed that Starbucks has become the “poster child for excess,” CEO Howard Schultz said the coffee company plans to run an ad campaign proving its coffee isn’t expensive.

“There’s a myth out there that there’s this $4 cup of coffee at Starbucks,” Mr. Schultz told shareholders … “For whatever reason, Starbucks has become the poster child for excess, and if you want to be really smart, you should cut out that $4 cup of coffee.”

Mr. Schultz, noting that half of the chain’s beverages cost less than $3 and one-third are priced less than $2, admitted that Starbucks has been defined by its competitors … “We’ve been silent about these issues, but I can assure you we’re not going to be silent for too long.” Starbucks has also launched “value pairings,” such as a breakfast sandwich or muffin and a drink, for $3.95.

Forthcoming advertising will attempt to convince consumers that Starbucks products aren’t as expensive as they are perceived. Mr. Schultz said to expect social-media efforts, internet advertising, and more and sporadic TV ad buys he refers to as “brand sparks” …

Mr. Schultz also gave some insight into Via, the company’s foray in instant coffee … Via, he hopes, will lure some people to convert from brewed coffee. Of the 65 billion cups of coffee brewed in the U.S. every year, Starbucks has only about 4% of the market. The company will attempt to change consumer behaviors at home, where 25% to 30% of coffee is wasted, and at work, where many people don’t like the coffee that is sometimes offered free of charge in company kitchens.

Starbucks is testing Via in Seattle, without advertising, and in Chicago, with TV ads, in-store displays, and an outdoor push … Via will launch nationwide this fall and internationally next year.

Starbucks is, of course, attempting a complicated turnaround. In January, the company reported earnings were down 69% to $74 million, due largely to restructuring charges and same-store sales down 10% in the U.S. alone. At the time, Mr. Schultz said the company was beginning to see improvement in its business. Starbucks reports earnings again next month.

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Full Article:
http://adage.com/article?article_id=135361

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Starbucks New Mission? Shed image as “poster child for excess”

March 24, 2009

Excerpted from Ad Age, “Starbucks: Not as Expensive as You Think”, By Emily Bryson York, March 18, 2009

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Distressed that Starbucks has become the “poster child for excess,” CEO Howard Schultz said the coffee company plans to run an ad campaign proving its coffee isn’t expensive.

“There’s a myth out there that there’s this $4 cup of coffee at Starbucks,” Mr. Schultz told shareholders … “For whatever reason, Starbucks has become the poster child for excess, and if you want to be really smart, you should cut out that $4 cup of coffee.”

Mr. Schultz, noting that half of the chain’s beverages cost less than $3 and one-third are priced less than $2, admitted that Starbucks has been defined by its competitors … “We’ve been silent about these issues, but I can assure you we’re not going to be silent for too long.” Starbucks has also launched “value pairings,” such as a breakfast sandwich or muffin and a drink, for $3.95.

Forthcoming advertising will attempt to convince consumers that Starbucks products aren’t as expensive as they are perceived. Mr. Schultz said to expect social-media efforts, internet advertising, and more and sporadic TV ad buys he refers to as “brand sparks” …

Mr. Schultz also gave some insight into Via, the company’s foray in instant coffee … Via, he hopes, will lure some people to convert from brewed coffee. Of the 65 billion cups of coffee brewed in the U.S. every year, Starbucks has only about 4% of the market. The company will attempt to change consumer behaviors at home, where 25% to 30% of coffee is wasted, and at work, where many people don’t like the coffee that is sometimes offered free of charge in company kitchens.

Starbucks is testing Via in Seattle, without advertising, and in Chicago, with TV ads, in-store displays, and an outdoor push … Via will launch nationwide this fall and internationally next year.

Starbucks is, of course, attempting a complicated turnaround. In January, the company reported earnings were down 69% to $74 million, due largely to restructuring charges and same-store sales down 10% in the U.S. alone. At the time, Mr. Schultz said the company was beginning to see improvement in its business. Starbucks reports earnings again next month.

Edit by SAC

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Full Article:
http://adage.com/article?article_id=135361

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Remember when getting upgraded to a bigger rental car was, well, an upgrade?

March 13, 2009

Excerpted from Direct, “Thrifty Marketing for Thrifty Times: A Car rental case history” By Ken Magill, Dec 1, 2008

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When gas prices skyrocketed this summer, Dollar Thrifty Automotive Group — along with the rest of the car-rental industry — faced a tough marketing challenge: What to do when customers’ demand for economy cars soars and the fleet simply isn’t built to meet that demand.

“Consumer behavior has really changed a lot for us with high gas prices,” says Chris Payne of Dollar Thrifty … “There are road warriors who like to get the best deal they can. [Before gas prices went up] they would reserve a smaller car than they really needed knowing we’d probably sell out and they’d get a bigger car at no extra cost. Now people are saying, ‘Wait a minute — I reserved a smaller car and you want to give me that gas guzzler? Forget it, I don’t want it.’ Four-dollar gas definitely was a tipping point.”

As a result, the company found itself in a rough spot. “You just can’t change your fleet overnight … It’s the same issue the manufacturers have had, where for a while Detroit was pumping out all these SUVs and minivans and everybody thought bigger was better.” Moreover, he says, the cost of cars to rental companies has gone way up, so these firms have been forced to keep their vehicles longer, making fleet changes even more difficult.

“Think about running a business where the cost of your commodity has gone up by 50% twice in the last two years … All the companies have been holding on to cars for from 12 to 14 months. It used to be we’d hold on to them for about nine …”

To overcome the challenge, Dollar Thrifty began running regular e-mail promotions on larger and luxury vehicles … the company’s two brands — Thrifty Car Rental and Dollar Rent a Car — have 1.8 million and 1.3 million opted-in e-mail subscribers, respectively … The average opt-out rate for a Dollar Thrifty mailing is .12% — “which is amazingly low … we’re reaching a very targeted audience … ” Also, he says, the average mailing generates most of its activity within 72 hours and brings in over $1 million in revenue.

“Dollar Thrifty is a perfect example of a company that’s built a successful permission-based marketing program … By providing subscribers with content that’s directly relevant and valuable to them, Dollar Thrifty is able to increase revenue while keeping opt-outs incredibly low” … 

Dollar Thrifty also created a chart to be given to customers at rental counters. With it, customers can cross-reference the gas consumption of smaller vehicles against larger ones and figure out how much more they’d end up spending on an upgrade.

“What we’ve found is that consumers’ perceptions are way out of whack on the gas thing … families of five are showing up having rented an economy car because it was the best price they could find online … They’re forgoing comfort to save a few bucks, but they’re not saving as much as they think. In some cases, they’re literally spending a dollar or two more for the entire rental.”

Anecdotally at least, Payne says the program is working … As of this writing in October when gas prices had dropped, Dollar Thrifty customers remained cost conscious and the chart was still being used.

“It’s still helpful,” Payne says. “People are getting hit in a lot of areas and anything they can do to cut costs, they’ll do …”

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Full Article:
http://directmag.com/email/1201-thrifty-email-promotions/

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Avoiding the Chardonnay tax & other restaurant price gotchas …

March 13, 2009

Excerpted from WSJ, “10 Ways to Save Money Ordering Wine”, March 7, 2009

Here are 10 insider tactics for not overpaying for wine at restaurants:

1. Skip wine by the glass. Restaurateurs like to make enough on a single glass to pay for a whole bottle … many wines by the glass are poured from bottles that have been open for too long and mistreated after opening … wine bars that specialize in wines by the glass, and keep them well, are a major exception.)

2.  Make sure the wine is from a very recent vintage. Most wines are meant to drink young and fresh and many restaurants, especially informal restaurants, don’t keep their wines in perfect conditions. .

3. Bypass the second-cheapest wine on the list. Restaurateurs know that diners don’t want to appear cheap by ordering the least expensive wine on the list, so they’ll hose you for ordering the second-cheapest. The least expensive is actually a pretty good deal at many places.

4. Scope out the owner’s passion for value. If there are, say, a dozen wines from South Africa on the list and no more than a handful from anywhere else, chances are the owner knows and cares about South African wine — and therefore is more likely to know good values from there.

5. Avoid the Chardonnay tax. Chardonnay is America’s favorite wine. Just about everybody loves it and feels comfortable with it, which is why the Chardonnays on so many lists are grossly overpriced compared to other wines.

6. Never order Santa Margherita Pinot Grigio.  Because so many people like it, it is routinely one of the most outrageously priced wines on the list.  If you stay within your comfort zone, ordering only wines you already know, you will be punished for it, price-wise.  There is value in tasting something new.

7. Don’t ignore house wines, by the bottle or in carafes … more often than not, we have found these lusty and fun.

8. Look for half-price deals.  This trend is sweeping the nation. Look around and you are likely to find a deal like that in your neighborhood.

9. BYOB. Check around for restaurants that allow you to bring your own wine.   More restaurants than ever, eager for business, are relaxing their rules on BYOB and lowering corkage fees. Even some fancy places now are offering special BYOB nights.

10. Check online before you dine to see a  restaurant’s wine list . This will give you more time to study the list to find good values.

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No wine is going to seem like a good value to you when you know you could buy it at a local store for half the price or less.

And while personally we wouldn’t do it, we know there are people out there who enjoy bargaining and we’d guess that at least some restaurants would be willing to dicker on the price of more-expensive wines these days.

Full column:
http://online.wsj.com/article/SB123638925101858707.html?mod=djemtastings 

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Unilver Plays Hardball and Gets Axe’d …

March 12, 2009

Excerpted from WSJ, “Big Grocer Pulls Unilever Items Over Pricing” By C. Rohwedder, A. Patrick, and T. Martin, Feb 11, 2009

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A big grocery chain has removed from its Belgian stores about 300 Unilever products that it says are priced too high, a sign of mounting tension between retailers and suppliers as the recession grinds on. The move by Brussles-based Delhaize SA comes just days after Unilever reported strong fourth-quarter profit that was driven in large part by its ability to command big price increases despite the ailing economy.

The banished products include everything from Dove soap and Axe deodorant to a jam brand called Effi … The stare-down shows how fraught relations between retailers and their suppliers are becoming amid the severe slump in consumer spending. Grocery stores across the globe are putting growing pressure on food and drink companies to lower prices or to offer other more favorable terms … Meanwhile, consumer-goods companies such as Unilever are struggling with a drop in demand from stores whose customers are trading down to cheaper private-label brands …

Delhaize says its conflict with Unilever is rooted in the supplier’s effort to push a broad range of goods into its stores, including some that the grocer says it would prefer not to stock because they are unpopular. If the supermarket doesn’t buy the whole range of products Unilever has threatened to raise prices by an average of 30% for the remaining items …

Unilever wants Delhaize to promise it won’t stop selling Unilever products without consulting the company first, Unilever spokeswoman says. The Anglo-Dutch consumer-goods giant wants to increase prices for Delhaize by an average 2.5% … Delhaize is the only large retailer in Belgium that hasn’t agreed to a price rise this year, she says.

Unilever managed to push through steep price increases in 2008 even though the economic crisis drove down the prices of many commodities. In the fourth quarter, its prices rose more than 9% world-wide. But the company could be about to change strategy. A new chief executive, Paul Polman, said that Unilever will now concentrate on increasing the volume of items it sells, suggesting he may moderate future price increases.

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Last month, the chief executive of British retailer Tesco PLC, urged suppliers to pass on to stores the recent drops in commodity and oil prices. “These lower prices need to be fed into the supply chain and passed on to consumers who are under growing financial pressure” … 

Deborah Weinswig, an analyst for Citi believes Wal-Mart’s plans to freshen up its Great Value brand will trigger more price cutting on the national brands sold at Wal-Mart. And if Wal-Mart reduces its national-brand prices, “I think the food retailers will have to follow or they will be at risk of losing market share,” she says.

SuperValu Chairman said during an earnings call last month that the 2009 first half would be a “battle ground” with manufacturers over price. Kroger declined to comment, but Chairman David Dillon said in a conference call on third-quarter earnings that Kroger’s strong private-label program, which accounted for 27% of third-quarter sales, gives the grocer leverage when suppliers approach it about a cost increase.

If national brands won’t lower prices, he added, the store’s private labels “will just pick up even more market share than we have already” …

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Full Article:
http://online.wsj.com/article/SB123430797027570341.html

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Unilver Plays Hardball and Gets Axe'd …

March 12, 2009

Excerpted from WSJ, “Big Grocer Pulls Unilever Items Over Pricing” By C. Rohwedder, A. Patrick, and T. Martin, Feb 11, 2009

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A big grocery chain has removed from its Belgian stores about 300 Unilever products that it says are priced too high, a sign of mounting tension between retailers and suppliers as the recession grinds on. The move by Brussles-based Delhaize SA comes just days after Unilever reported strong fourth-quarter profit that was driven in large part by its ability to command big price increases despite the ailing economy.

The banished products include everything from Dove soap and Axe deodorant to a jam brand called Effi … The stare-down shows how fraught relations between retailers and their suppliers are becoming amid the severe slump in consumer spending. Grocery stores across the globe are putting growing pressure on food and drink companies to lower prices or to offer other more favorable terms … Meanwhile, consumer-goods companies such as Unilever are struggling with a drop in demand from stores whose customers are trading down to cheaper private-label brands …

Delhaize says its conflict with Unilever is rooted in the supplier’s effort to push a broad range of goods into its stores, including some that the grocer says it would prefer not to stock because they are unpopular. If the supermarket doesn’t buy the whole range of products Unilever has threatened to raise prices by an average of 30% for the remaining items …

Unilever wants Delhaize to promise it won’t stop selling Unilever products without consulting the company first, Unilever spokeswoman says. The Anglo-Dutch consumer-goods giant wants to increase prices for Delhaize by an average 2.5% … Delhaize is the only large retailer in Belgium that hasn’t agreed to a price rise this year, she says.

Unilever managed to push through steep price increases in 2008 even though the economic crisis drove down the prices of many commodities. In the fourth quarter, its prices rose more than 9% world-wide. But the company could be about to change strategy. A new chief executive, Paul Polman, said that Unilever will now concentrate on increasing the volume of items it sells, suggesting he may moderate future price increases.

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Last month, the chief executive of British retailer Tesco PLC, urged suppliers to pass on to stores the recent drops in commodity and oil prices. “These lower prices need to be fed into the supply chain and passed on to consumers who are under growing financial pressure” … 

Deborah Weinswig, an analyst for Citi believes Wal-Mart’s plans to freshen up its Great Value brand will trigger more price cutting on the national brands sold at Wal-Mart. And if Wal-Mart reduces its national-brand prices, “I think the food retailers will have to follow or they will be at risk of losing market share,” she says.

SuperValu Chairman said during an earnings call last month that the 2009 first half would be a “battle ground” with manufacturers over price. Kroger declined to comment, but Chairman David Dillon said in a conference call on third-quarter earnings that Kroger’s strong private-label program, which accounted for 27% of third-quarter sales, gives the grocer leverage when suppliers approach it about a cost increase.

If national brands won’t lower prices, he added, the store’s private labels “will just pick up even more market share than we have already” …

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Full Article:
http://online.wsj.com/article/SB123430797027570341.html

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Raising prices? … Put the spotlight on value

March 9, 2009

Excerpted from WSJ, “P&G, Others Are Confident Higher Prices Will Stick” By E. Byron and A. Cordeiro, Feb 20, 2009

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Chief executives from several big household-products makers voiced confidence they could make higher prices stick, even as the recession ratchets up pressure on retailers and consumers to cut costs.

“Our products don’t deliver value [just] because the prices on the shelves are lower,” A.G. Lafley, chief executive of Procter & Gamble Co., told analysts and investors … Like several other industry executives … Mr. Lafley said his company doesn’t plan to roll back the significant price increases it has made over the past several months.

Pricing has become a contentious issue between retailers and their suppliers, as retailers — desperate to lower prices as consumer spending weakens — want their suppliers to help them foot the bill. But manufacturers such as P&G … argue they need to maintain prices to offset stubbornly high commodity costs, currency fluctuations and lower sales volumes …

Clorox Co. CEO Don Knauss told the conference his company had succeeded recently in imposing additional price increases … Nestlé SA, whose brands include Gerber and Purina, cited higher prices as a factor in the 70% increase in net profit it reported for 2008. And Kimberly-Clark Corp., known for its Scott, Kleenex and Huggies brands, said it would maintain its prices, at least for now, after hefty increases in 2008.

P&G’s Mr. Lafley described the promising sales performance of several new products that command significantly higher prices than established ones in the same P&G product lines … Newly launched Tide Total Care, which claims to make clothes last longer, is priced 60% above the base Tide detergent. Clairol’s Perfect 10 hair color, which touts better color quality and faster results, is 70% pricier than P&G’s basic Clairol Nice ‘N Easy, but aims to tempt women trying to cut back on even costlier hair-salon appointments.

Rather than broadly lowering prices, many household-product manufacturers plan to emphasize the extra benefits they say make their premium-priced products worth the money. In ads for its Charmin brand, P&G focuses on the toilet paper’s durability, saying that means users require fewer sheets. It also advertises … that Olay skin cream outperforms products costing hundreds of dollars …

Continually adding product features — and then advertising heavily to advise shoppers why they should pay more for them — is a critical way manufacturers of branded products drive higher profits and fend off increasing competition from private-label goods.

Indeed, P&G is the world’s biggest spender on advertising, constantly telling consumers that paying more for the company’s paper towels, mouthwash or diapers is worth it … Still, as more consumers cut spending — even on staples such as food — some industry watchers fear the time will come when they are unable or unwilling to pay for product features they can do without. Some observers also worry about the prospect of another “Marlboro Friday,” the day in 1993 when Philip Morris said it would sharply reduce the price of its Marlboro cigarettes to better compete with bargain brands.

The dramatic price cut, in addition to launching a tobacco price war, unleashed a wave of doubt about the value of big brands and their ability to sway consumers to pay more for them …

Mr. Lafley tried to calm concerns about drastic price cutting, arguing that P&G’s brands are still increasing their market share. “I don’t think you are going to see a return to irrational price wars,” he said.

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Full Article:
http://online.wsj.com/article/SB123508966388628145.html?mod=testMod

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Retailers Fashion Ways to Cut Costs

March 2, 2009

Excerpted from WSJ “Fashioning Ways to Hold Down Prices,” February 3, 2009, By Nicholas Casey

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After steep discounting on its tops, khakis and jeans ate into its margins last year, American Eagle Outfitters  is trying to reengineer the way it produces clothes.

It hopes to recalibrate its costs with moves that involve everything from changing where a garment is made (fewer Chinese factories and more Indian villages) to how it’s shipped (less use of air freight) to how it looks (no patterned pockets in many jeans).

Many retailers fear they will be forced into still more rounds of price cuts as the economy continues to sputter. “Eighty percent off is the new normal” …

Other teen chain stores are also growing wary of slipping prices. Abercrombie & Fitch which has tried markdowns since the holidays, says its brand would be harmed if it tarnished its high-end image with more price cutting. And Aéropostale says it’s looking to timed promotions to drive traffic rather than lowering price tags for good …

American Eagle hopes to cut its manufacturing costs significantly. Recently, the company began moving some production out of China, where wages are on the rise, and into cheaper labor markets in Cambodia and Vietnam … But shifting to less costly production carries its own risks … China is still tops in manufacturing talent and “there are definitely quality issues that are coming up” in places like Vietnam and Cambodia …

Even the way stores get their merchandise is evolving. In past years, distribution centers replenished each store’s clothes garment by garment. This year, the company is bundling many of its lines in prepackaged kits that include a small, two mediums, two larges and an extra large — a set that can go directly from the delivery truck to a display table.

American Eagle plans to entice its customers with brighter colors, hipper silhouettes and ruffles on women’s tops for spring. But it’s cutting out a few things it hopes its teen customers won’t miss: the ribbon that lines the waistband of its khakis, for example, and the color pattern on the material used for its jean pockets.

Changing pockets and eliminating ribbon saves only eight to 10 cents a garment, the company says. But eliminating relatively invisible features allows designers to add hip, visible details — like embroidery on the back pockets of denim jeans — that are more likely to lead to sales.

While it seeks savings, American Eagle has to be careful not to cut too much. Swamped by low-end competitors like Old Navy, the specialty retailer realizes “we can’t be the cheapest in the mall … If they wash it twice and it falls apart, they’ll say it’s not a good shirt,” he says. “There’s a fine line between price and value” … 

Edit by SAC

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Full Article:
http://online.wsj.com/article/SB123362245399041753.html?mg=com-wsj

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Listen Up … Better Yet – Watch Those Cell Phone Bills

February 25, 2009

Excerpted from Marketing Daily, “Group Cautions on Cell Phone Contracts,” by Aaron Barr, Jan 30, 2009

* * * * *

As family budgets tighten and the recession deepens, watchdog group Consumer Action is encouraging consumers to watch out for hidden fees and penalties when it comes to cell phone contracts.

“As more and more Americans shift their phone use to cell phones, the costs and pitfalls associated with contract-based cell phones become clearer and clearer … In this new year, consumers … need to be more careful than ever about avoiding paying more than is necessary for cell phone service.”

According to the group, consumers should watch out for five issues in particular over the course of 2009. At the top of the list are early termination fees that occur when someone tries to break a pre-determined contract … 

A second issue comes from mandatory contract extensions that come when one tries to replace a lost or broken phone, which can be an increasingly significant issue as teen and tween cell phone use continues to rise. “Many consumers learn the hard way that there’s a catch when you try to replace a lost or broken cell phone–your contract may start all over again from scratch on the phone–even if you’ve been paying faithfully each month for replacement insurance” …

The group also advised consumers to watch out for overage fees when exceeding monthly limits on contracts and texting fees associated with their cell phone accounts. And the group warned immigrants to pay close attention to the rules on international calling cards. Many of the fees are not disclosed or are only disclosed in very small print on the back of the card.

“Even though limited progress has been made on some contract-based cell phone billing and disclosure issues, there are still many problems that will continue to confuse and mislead consumers in 2009 … Our goal here is to help shine a spotlight on some of the least understood problem areas” … 

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Full Article:
http://www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=99369

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Retailers racing to the bottom with discount prices …

February 24, 2009

Excerpted from Reuters, “”Full price” to take on new meaning in 2009″, by Martinne Geller, January 16, 2009

* * * * *

Department stores and apparel retailers may have bid farewell to the idea of selling merchandise at full price after taking brutal markdowns during the U.S. 2008 holiday season.

In November and December, consumers were treated to unprecedented discounts on even the most prestigious brands to spur purchases in the recession.

Retail executives now fear they have trained consumers to shop only when there are discounts, prolonging the squeeze on their profit margins. With no major buying holidays between now and the back-to-school season, analysts say consumers could even put off shopping for six months or more.

* * * * *

A likely strategy is for retailers to lower initial prices to lure shoppers. That could decrease the need to later mark down unsold goods dramatically, analysts said.

Industry analysts expect clothes will come on the market in 2009 about 20 percent lower in price than they did last year, and in some cases, as much as 40 to 50 percent lower.

A smart pricing strategy is key to preserving brand cachet this year.  “I don’t think retailers can survive with a 50-percent-off sign,” he said.

* * * * *
Retailers are engaging in a “race to the bottom” in terms of pricing, and the economic downturn pits high-end store chains against a growing cadre of lower-cost rivals.  Though higher-end chain J Crew, for example, is striving to sell its clothes at full price, they are “adjusting prices right now” in certain lines, admitting that opening prices were “too high.”

Edit by DAF

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Full Article:
http://www.guardian.co.uk/business/feedarticle/8271675

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Coca-Cola: Repackaging and Repricing to Increase Value

February 23, 2009

Excerpted from Dow Jones Newswire, “Coke To Push New 99-Cent, 16-Ounce Bottle” by Anjali Cordeiro, January 21, 2009

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Coca-Cola Co. (KO) will widen distribution of a new 16- ounce bottle priced at 99 cents in conjunction with the launch of a new marketing campaign called “Open Happiness.”

Coke executives said the new bottle size was launched about three months ago in the Southeast U.S. and is now being rolled out nationwide.

Sales of carbonated soft drinks have weakened in the U.S. as the economy has slowed, pushing beverage makers to test new package sizes and pricing.

The price of 99 cents also highlights the pressure on consumer companies to offer consumers better value for their money.

The company’s new ad campaign for its namesake brand launches this week and will have TV spots on “American Idol” and the upcoming Super Bowl. The campaign will include a focus on packaging and pricing.

Edit by DAF

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Full article:
http://money.cnn.com/news/newsfeeds/articles/djf500/200901211404DOWJONESDJONLINE000813_FORTUNE5.htm

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As economy falters, upscale wines cut prices (a little)

February 17, 2009

Excerpted from San Francisco Chronicle, “Suddenly, Those Rare Wines Aren’t So Rare”, by Jon Bonne, January 30, 2009

* * * * *

Industry experts estimate most of us are shrinking what we’ll spend on a bottle of wine by 20 to 50 percent for anything more than $10, with the occasional splurge. The thirst for $25 has dwindled to $15; $8 is the new $12.

That perilous midrange above $30 and below, say, $100? That’s where the real fear lies if you make wine.

Wine auctions struggled through the latter half of 2008, slashing their projected hammer figures, and lot prices have dropped between 10 and 30 percent since last summer, in part a correction of a runaway bull (wine) market in the past three years.

San Francisco’s Vinfolio, which specializes in locating high-end wines, has a different worry. Its average bottle price remains around $170, but with fewer sales.

In other words, it’s a buyer’s market. If you have the money, now is the best time in perhaps a decade to start a collection or taste the unattainable.

* * * * *

Wines once nowhere to be found on store shelves have for months been making quiet appearances there, often because restaurants’ allocations have been left adrift. Retailers are suddenly scoring bottles of a litany of impressive California names.

All of this should give pause to wineries still playing in that realm over $30. (Beyond $100, you’re either betting on a track record or blindly ambitious.) Brand loyalty? In a recession it has the life span of a housefly. Uniqueness sells wine, but there are oceans of not-so-unique wine around. Plus foreign currencies have weakened just enough to let us all drink astoundingly well from overseas. 

Part of survival is pricing to the market.  It’s going to get interesting when the inevitable price correction for all those overblown $50 Syrahs and $80 Cabernets bump up against California’s fixed labor and grape costs.

There is opportunity here. For a while, more California winemakers have needed to fill the gap between cheap table wines (we have plenty of those) and fancy bottles (plenty of those too) with honest under-$20 wine that looks and tastes sophisticated while speaking honestly of its origins.

Edit by DAF

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Full article:
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/01/30/FD5L15EMGG.DTL&type=printable

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Sprint offers unlimited calls, no contracts … for half the price

February 16, 2009

Excerpted from the Wall Street Journal, “Sprint Prepay Plan Pressures Cell Rivals”, by Roger Cheng, January 16, 2009

* * * * *

Sprint Nextel’s Boost Mobile plans to offer an unlimited nationwide calling plan for $50 a month, a bid by the youth-oriented wireless service to severely undercut rivals.

With the cheaper plan, which is half the cost of the $99 unlimited plans offered by the major carriers and $10 cheaper than similar unlimited plans offered by local competitors, Boost is hoping to go after budget-conscious consumers.  It represents an aggressive move by Sprint to attract customers even as its own core wireless service continues to lose subscribers.

In addition to unlimited calling, customers will get unlimited text messages, mobile Web surfing, and a walkie-talkie feature. Customers aren’t locked into a contract, and can leave at any time.

* * * * *

Industry watchers speculate whether the move could spark a price war in the cut-throat wireless industry.

The major carriers offer unlimited calling for $99, but those plans typically require a one or two year contract.

* * * * *

People looking to join Boost Mobile will have to switch to the Nextel network which means buying a new phone not compatible with other. Phones run between $20 and $100, and there are a limited number of choices, all from Motorola. Because there are no contracts, there are no subsidies for the handsets.

Edit by DAF

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Note: It is not mentioned in this article, but Sprint’s Boost network is an older network, significantly slower than Sprint’s current network, and does not allow for any of the new 3G features like GPS navigation.  For a customer concerned only with making/receiving calls and even texting, though, though, this could be an interesting proposition.

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Full article:
http://online.wsj.com/article/SB123199251112984943.html

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Uh-oh: Girl Scouts cut number of cookies in the box …

February 12, 2009

Excerpted from The Dallas Morning News, “Rising costs bite into Girl Scout Cookie portions” , Dan X. McGraw, January 22, 2009

* * * * *

If you seem to be tearing through those Girl Scout Thin Mints a little faster this year, you aren’t imagining things.

Fewer cookies were packaged into Thin Mints, Do-si-dos and Tagalongs boxes this year, and the Lemon Chalet Crème cookies were resized to compensate for the rising cost of baking staples. No changes were made to other cookies, according to the Girl Scouts of the USA.

Alternatives to the changes were to raise cookie prices or use cheaper ingredients – two options that were rejected, said Natalie Martin, marketing director for the Girl Scouts of Northeast Texas.

A box of cookies costs $3.50.

“We aren’t talking about a drastic change. We are just talking about a couple cookies,” Martin said, adding that the boxes shrunk by only a centimeter. “People understand that we are all taking hits.”

The Girls Scouts certainly aren’t the first organization to alter product size and portions because of higher food costs.

Products on grocery-store shelves throughout the nation have been reshaped, resized and repackaged in response to new marketing ideas, jumps in food and gas prices and the economic downturn,

“It is a reflection of them needing to keep the price in line with other products, but they also need to keep in mind the rising baking cost. You’ve got to balance it the best way you can.”

The Girl Scouts faced spikes in ingredient costs from 2007. Flour rose in cost by more than 30 percent, various cooking oils by 40 percent to 187 percent, and cocoa by at least 20 percent.

A Girl Scout mom, says the changes haven’t stopped people from ordering.

Edit by NRV

Full article:
http://www.dallasnews.com/sharedcontent/dws/fea/taste/stories/012309dnmetgirlscoutcookies.1c01e735.html

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Quiznos gets sandwiched … in a price war

February 11, 2009

Excerpted from Marketing Daily, “Quiznos Launches Lower-Priced Menu,” By Karlene Lukovitz, Jan 14, 2009

* * * * *

First there were the burger wars. Now, we have the sub wars. Quiznos has unveiled a new, lower-priced menu, including 20 subs priced under $5, backed by a national TV ad campaign.

Subway’s popular $5, foot-long subs turned up the heat on the pricing front. Just last week, Togo’s launched a limited-run promotion featuring one 6-inch sub selection per day at a special $1.99 price.

The new Quiznos menu includes price reductions spanning more than 37 of the chain’s most popular sandwiches and other items.

The campaign, which will air nationally for several weeks, drives home the point that the same quality sandwiches for which the chain is known can now be purchased at lower prices … Quiznos is also introducing new menu boards designed to highlight the “improved price/quality value equation.” …

“The redesigned menu and lower prices … allow us to compete on our terms–meaning quality–while still offering a price benefit to consumers seeking a premium product” …

Edit by SAC

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Our Take: Quiznos price cuts are in direct response to its competitors’ actions.  Rather than choosing to introduce new lower cost menu items, offering additional bundled price options(combo/value meals) or choosing a nonprice response such as competing on quality Quiznos is reacting to its competitors by taking a simple price action emphasizing the value equation – same product, lower price, more value.  As the price war continues the real winner is the consumer. 

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Luxury brands get Sak'ed …

February 10, 2009

Excerpted from WSJ, “Saks Upends Luxury Market With Strategy to Slash Prices” By V. O’Connell and R. Dodes, Feb 9, 2009

* * * * *
When Saks Fifth Avenue slashed prices by 70% on designer clothes before the holiday season even began, shoppers stampeded … Saks’s deep, mid-November markdowns were the first tug on a thread that’s now unraveling long-established rules of the luxury-goods industry. The changes are bankrupting some firms, toppling longstanding agreements on pricing and distribution, and destroying the very air of exclusivity that designers are trying to sell.

The problem Saks faced last November is one that haunts the U.S. economy as a whole: From car makers to home builders, companies are stuck with inventories that are far too fat.  Saks’s risky price-cut strategy was to be one of the first to discount deeply, rather than one of the last. Managing high-fashion inventory is tricky. Clothing can go out of style in just months, so stores don’t want to keep it around. But cut prices too soon or too deeply, and shoppers start to expect it …

Pressured by Saks, and hit by the worst holiday season in almost 40 years, rivals including Neiman Marcus Group Inc. and Barneys New York slashed prices, too. They cut much more deeply and aggressively than usual … That, in turn, clobbered smaller boutiques …

Saks’s maneuver marked an open abandonment of the longstanding unwritten pact between retailers and designers over when, and to what extent, to cut prices. Those old rules boiled down to this: Leave the goods at full price at least two months, and don’t do markdowns until the very end of the season.

That worked fine in the good times. Demand was high, and so were everyone’s profit margins. But Saks’s surprise discounting forced companies and brands that have their own retail operations … to follow suit or forfeit sales. Giving designers a heads-up wasn’t an option, Saks says, without risking that rival department stores get wind of its strategy …

* * * * *

Perhaps the biggest consequence is that customers are now questioning the entire premise of luxury goods: Why pay top dollar today if big markdowns could be coming tomorrow? … Designers are starting to fight back … Some are thinking about splitting their product lines or withholding some top items from department stores in order to feature them in their own stores … Diane von Furstenberg says another solution might involve producers leasing space in department stores …

Mr. Sadove [Sak’s CEO] says he’s working on damage control with designers … Still, he and Mr. Frasch, defend their actions, saying they needed to swiftly fix a big problem that no one saw coming … The change happened “over as short a period of time as you can possibly imagine” … The result: a huge disconnect between Saks’s inventory and shoppers’ appetite …

So [Sadove] floated the idea of deep price cuts. Some colleagues urged drawing the line at 50%. But Mr. Frasch felt strongly that wouldn’t be enough … Their decision: A 70%-off sale would be used, but only in a worst-case scenario, if sales kept declining and shoppers remained bored by less eye-popping 40% rollbacks.

Extreme discounting of luxury goods is perilous. Not only does it potentially leave your best customers feeling duped for paying full price, it also erases fat profit margins of 50% or more … Part of the problem is the designers’ own fault. Over the past 15 years, their products have become so ubiquitous — Gucci is sold in airport, Hermes has mall shops — it’s undermining the image of exclusivity. In a January survey of rich shoppers … roughly half of high-net-worth consumers said luxury brands are becoming commoditized; 64% said they were overpriced …

In hindsight, Saks executives say they may have cut too much in some areas. “We didn’t need to do what we did in accessories” … High-end shoes and handbags would probably have sold out, even at higher prices, because shoppers see them as more practical wardrobe updates than another new outfit …

This year, Saks is spending about 20% less on merchandise to keep inventories lower, but Mr. Frasch acknowledges the number is only a guess. The luxury-goods business is “absolutely flying blind,” … Mr. Sadove, agrees. “One of the big questions that people are asking,” he says, is: “Will people ever buy at full price again?”

Edit by SAC

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Full Article:
http://online.wsj.com/article/SB123413532486761389.html?mod=testMod

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Luxury brands get Sak’ed …

February 10, 2009

Excerpted from WSJ, “Saks Upends Luxury Market With Strategy to Slash Prices” By V. O’Connell and R. Dodes, Feb 9, 2009

* * * * *
When Saks Fifth Avenue slashed prices by 70% on designer clothes before the holiday season even began, shoppers stampeded … Saks’s deep, mid-November markdowns were the first tug on a thread that’s now unraveling long-established rules of the luxury-goods industry. The changes are bankrupting some firms, toppling longstanding agreements on pricing and distribution, and destroying the very air of exclusivity that designers are trying to sell.

The problem Saks faced last November is one that haunts the U.S. economy as a whole: From car makers to home builders, companies are stuck with inventories that are far too fat.  Saks’s risky price-cut strategy was to be one of the first to discount deeply, rather than one of the last. Managing high-fashion inventory is tricky. Clothing can go out of style in just months, so stores don’t want to keep it around. But cut prices too soon or too deeply, and shoppers start to expect it …

Pressured by Saks, and hit by the worst holiday season in almost 40 years, rivals including Neiman Marcus Group Inc. and Barneys New York slashed prices, too. They cut much more deeply and aggressively than usual … That, in turn, clobbered smaller boutiques …

Saks’s maneuver marked an open abandonment of the longstanding unwritten pact between retailers and designers over when, and to what extent, to cut prices. Those old rules boiled down to this: Leave the goods at full price at least two months, and don’t do markdowns until the very end of the season.

That worked fine in the good times. Demand was high, and so were everyone’s profit margins. But Saks’s surprise discounting forced companies and brands that have their own retail operations … to follow suit or forfeit sales. Giving designers a heads-up wasn’t an option, Saks says, without risking that rival department stores get wind of its strategy …

* * * * *

Perhaps the biggest consequence is that customers are now questioning the entire premise of luxury goods: Why pay top dollar today if big markdowns could be coming tomorrow? … Designers are starting to fight back … Some are thinking about splitting their product lines or withholding some top items from department stores in order to feature them in their own stores … Diane von Furstenberg says another solution might involve producers leasing space in department stores …

Mr. Sadove [Sak’s CEO] says he’s working on damage control with designers … Still, he and Mr. Frasch, defend their actions, saying they needed to swiftly fix a big problem that no one saw coming … The change happened “over as short a period of time as you can possibly imagine” … The result: a huge disconnect between Saks’s inventory and shoppers’ appetite …

So [Sadove] floated the idea of deep price cuts. Some colleagues urged drawing the line at 50%. But Mr. Frasch felt strongly that wouldn’t be enough … Their decision: A 70%-off sale would be used, but only in a worst-case scenario, if sales kept declining and shoppers remained bored by less eye-popping 40% rollbacks.

Extreme discounting of luxury goods is perilous. Not only does it potentially leave your best customers feeling duped for paying full price, it also erases fat profit margins of 50% or more … Part of the problem is the designers’ own fault. Over the past 15 years, their products have become so ubiquitous — Gucci is sold in airport, Hermes has mall shops — it’s undermining the image of exclusivity. In a January survey of rich shoppers … roughly half of high-net-worth consumers said luxury brands are becoming commoditized; 64% said they were overpriced …

In hindsight, Saks executives say they may have cut too much in some areas. “We didn’t need to do what we did in accessories” … High-end shoes and handbags would probably have sold out, even at higher prices, because shoppers see them as more practical wardrobe updates than another new outfit …

This year, Saks is spending about 20% less on merchandise to keep inventories lower, but Mr. Frasch acknowledges the number is only a guess. The luxury-goods business is “absolutely flying blind,” … Mr. Sadove, agrees. “One of the big questions that people are asking,” he says, is: “Will people ever buy at full price again?”

Edit by SAC

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Full Article:
http://online.wsj.com/article/SB123413532486761389.html?mod=testMod

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Who says a cup of latte is 4 bucks? … Starbucks fights back.

February 9, 2009

Ken’s Take: Uh-oh. Premium brands shouldn’t try to shift focus to price … cheapens the brand and plays to the other guy’s advantages. Starbucks is flailing …

* * * * *

Excerpted from WSJ, “Starbucks Plays Common Joe”, Feb. 9, 2009

Starbucks — built a coffee empire on its premium image — wants to convince customers that its drinks aren’t that expensive.

Soon, it’ll be selling discounted pairings of coffee and breakfast food for $3.95, a type of promotion long used at fast-food chains. It’s the first move in an aggressive campaign to counter the widespread perception that Starbucks is the home of the $4 cup of coffee.

The Seattle-based company is training its baristas to tell customers that the average price of a Starbucks beverage is less than $3, and that 90% of Starbucks drinks cost under $4.

For Starbucks, the effort is also an attempt to fend off McDonald’s … whose advertising includes billboards saying “Four bucks is dumb.”

Few companies embody the consumer spending boom of the 1990s and 2000s like Starbucks … it  transformed  coffee from a commodity drink into what he billed as an affordable luxury … but sales have been in steep decline during the recessionary era of penny-pinching … so, executives began plotting a new strategy to portray the company as offering value.

Research uncovered what executives describe as a disconnect between the company’s actual prices and consumers’ perception of those prices.

“The myth of the $4 latte … is not true” … the average price of a Starbucks latte is $3.25 (before tax).

Pinning down the price of the drinks is more difficult than it may seem. The price tag climbs when customers add flavoring or additional shots of espresso, and sales tax also makes the tab higher. Prices also vary depending on the city.

Indeed, the price gap has narrowed  and some sizes and varieties of Starbucks are cheaper than Dunkin’ Donuts coffee when adjusted for size differences. McDonald’s is still cheaper than Starbucks.

Dunkin’ Donuts says, “We believe we are the faster and more affordable alternative” to Starbucks.

McDonald’s says “everyone’s looking to get more from a dollar … our customers know that’s what they’ll get at McDonald’s.”

Asked whether Starbucks is considering simply reducing drink prices: “Today, no. But never say never.”

Full article:
http://online.wsj.com/article/SB123413848760761577.html?mod=testMod#printMode 

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Value is the name of the game

February 9, 2009

Excerpted from the Progressive Grocer, “Nielsen Consumer Insight Report Offers Ways for Retailers to Navigate Rough Economic Seas“, January 8, 2009

* * * * *

How to Cope During Difficult Economic Times,” a Nielsen Consumer Insight report provides value programs and dramatic cost-reduction strategies to help retailers struggling to attract beleaguered shoppers.

While declines in discretionary expenditures have been taking a toll on low-, mid-, and high-end department stores, select retailers within grocery, dollar, club, and drug stores fared better. Retailers carrying more “need-to-have”, not “nice-to-have,” assortment have registered positive same-store sales growth. 

Consumers — protective of their spending power — learned to trade down to value channels, reduce purchase frequency, move from on-premise consumption to off-premise purchasing, and downscale from premium to mid-tier or value brands.

Fully 40 percent of shoppers think that food and personal care prices have increased over the past three months.

When offered some ideas for coping, consumers expressed a preference for larger sizes with a lower price per serving (47 percent of shoppers) over smaller pack sizes at lower prices (17 percent).

Nielsen research shows that shoppers are increasingly happy with private label products, calling them a good alternative to name brands, at parity with or better than national names on quality criteria, while offering good pricing and value. The social stigma is gone, along with boring generic-looking packaging. Many retailers treat private label and exclusive brands as an integral part of their corporate brand image.

Forecasts call for continuing tough times and economic instability that filters throughout the economy. In short, we can brace for more of the same, and expect existing behaviors to intensify. Shoppers will first meet their basic needs and forgo discretionary purchases.

At-home opportunities will climb. Variety and convenience will take a back seat to value. Trading down will become an acceptable way to stretch budgets. Local sourcing gains traction, not as a green activity, but rather as a strategy for controlling costs, delivering value, and maintaining product freshness.

Edit by NRV

Full article:
“http://www.progressivegrocer.com/progressivegrocer/content_display/features/center-store/e3i9953839003c11ce8daf4ca7117546a38?imw=Y 

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PVP: CPGs passing on higher food costs with smaller packaging

February 6, 2009

Excerpted from the Minneapolis Star Tribune, “Freshly squeezed: The ever shrinking box and carton” by Chris Serres, December 2, 2008

* * * * *

In the past year, thousands of small, almost imperceptible changes swept through the grocery aisles where American families shop each day.

The indented bottom of a Skippy peanut butter jar got more indented, turning an 18-ounce jar into a 16.3-ounce one. Ice cream containers shrank by one-quarter of a quart. And for breakfast, a jug of Tropicana orange juice got 7 ounces lighter while that box of Froot Loops lost more than 2 ounces.

Shoppers without a keen eye and a willingness to read the fine print on labels might have missed what has happened: Food manufacturers were downsizing packages, while keeping prices the same, as they passed on higher food costs to consumers.

According to a recent analysis by Nielsen Co., about 30 percent of all packaged goods have lost content over the past year. This at a time when U.S. grocery bills are rising — up 7.5 percent in October vs. the same month a year ago — at the fastest rate in 18 years.

What began as a response to rising fuel and ingredient costs has become institutionalized at many companies. At General Mills, for example, cost-cutting is so embedded that the company even has its own intimidating term for it: “Holistic Margin Management.”

It’s not always about shrinking packages, which can account for as much as 75 percent of a product’s cost. Even seemingly small changes in a package’s design can mean millions of dollars in annual savings — lessening pressure to raise prices to cover costs.

There is an entire science behind packaging reductions, enlightened by a long list of unsuccessful changes.

For instance, food manufacturers know consumers react more to changes in height than width, so cereal boxes often get thinner before they get shorter.

Once a product changes, buyers often forget the previous size, creating a new standard. Five years ago, ice cream tubs were a half-gallon, or 2 quarts; few noticed when it dwindled to 1.75 quarts and then, this past year, to 1.5 quarts.

When PepsiCo reduced the size of its Tropicana orange juice jug by 7 ounces, it touted the container’s “new ergonomic design” and easy-to-open snap cap. Yet consumer advocates argued the new features were really meant to distract from the reduced weight.

“This is the packaging equivalent of three-card monte,” said Ben Popken, editor of Consumerist.com, a website whose “Grocery Shrink Ray” tracks shrinking packages. “By changing several factors at the same time, food companies disguise the fact that you’re getting less for the same price.”  

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Full article:
http://www.startribune.com/business/35343634.html 

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PVP: Consumer Goods Rethink Price Hikes

February 2, 2009

Excerpted from BusinessWeek, “CEO: Clorox rolls back prices, more cuts possible”, by Vinnie Tong, January 9, 2009

* * * * *

Price hikes on some consumer staples may be hitting their limit.

As prices for oil, gas and plastics rose to unprecedented heights last year, most major consumer products companies raised prices for a range of staples, including pet food, toothpaste and toilet paper.

Now that commodity prices are easing up and consumers face a financial crisis, some companies are cutting prices to attract shoppers.

Clorox has rescinded a 10 percent price increase on Glad trash bags that took effect in October, for example. And many of the hikes Clorox had planned for the first half of 2009 have been abandoned.

“Competitors will definitely do the same. We’ll see that the people who took pricing aggressively are going to have to give it back aggressively. Companies that took more measured pricing will have less pressure.”

Edit by DAF

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Full article:
http://www.businessweek.com/ap/financialnews/D95JS7380.htm

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PVP: CVS Earnings Dive After Offering “Disciplined” Pricing

February 2, 2009

Excerpted from Dow jones Newswire, “Medco: Kept Pricing Discipline While Winning Business”, by Dina Wisenberg Brin, January 9, 2009

Ken’s Take: (1) “Discipline” is an interesting name for price cuts  (2) Pricing is somewhat of a  throttle on the hardship tough economy.  If folks have any $$$ in their wallets, they can find plenty of good deals

* * * * *

While a disappointing 2009 forecast from CVS Caremark Corp. has some worried about a pricing war among pharmacy-benefits managers (PBM’s), competitor Medco Health Solutions  has been able to keep “disciplined” in pricing its contracts.

Medco said in a statement: “Based on our ability to deliver considerable value to our clients and the power of our advanced clinical model, we have been able to both maintain our pricing discipline and win $7.2 billion in new business in 2008.”

CVS issued disappointing earnings guidance for the year, with repricing of pharmacy-benefit management contracts a major factor.

The company said more than half of its PBM business received “improved pricing” in 2009, part of an effort to lock in three-year contracts that become more profitable after the first year.

Wall Street analysts voiced concern about the price concessions.

Wachovia said it “stokes fears that the PBM business has become more price competitive or that CVS is in a weaker position vis a vis its peers. Pricing has become broadly more competitive. CVS sells a differentiated product and seems willing to accept lower margins in the PBM to boost returns in the retail business and gain traction for new offerings, arguing that returns in the consolidated business will improve.”

Edit by DAF

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Full article:
http://money.cnn.com/news/newsfeeds/articles/djf500/200901091705DOWJONESDJONLINE000836_FORTUNE5.htm

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Battling Private Label Rivals with Innovation …

January 28, 2009

Excerpted from BrandWeek,”OTC Drugmakers Seek Cures” by Elaine Wong, November 9, 2008

* * * * *

Makers of branded cold and flu remedies are seeking their own antidotes for flagging sales. But will cash-strapped consumers cough up more money for “innovation?”

Tylenol is launching Tylenol Warming Liquids … that treat cough, sore throat and other cold symptoms via a formulation that delivers a warming sensation…

P&G is introducing Dayquil Plus Vitamin C, which includes 150% of the daily dose of the vitamin in the mix…

Robitussin … is promoting its DM Max mucus relief formula…“Robitussin DM Max has a double dose of mucus-fighting medicine”…

The efforts come as sales of most major OTC brands have declined by low-to mid-single and double digits thanks to advances by private label competitors. Sales of Children’s Tylenol, fell 14.2%…Robitussin’s … medications dropped 8.8%. Private label also prevailed in the tablet and packet category, up 18%…

Meanwhile, retailers have stepped up marketing efforts for their brands. Unlike previous cold/flu seasons … the drugstore is experiencing significant private label growth. The uptick reflects a mix of savvier retail marketing efforts, combined with a smarter and cash-strapped consumer, according to industry analysts.

“It’s the one category where it’s very clear and easy to see that the active ingredients in both national and store brands are identical” … Efforts like these are nothing more than attempts to gain greater market share. Research on vitamin C, in particular, shows no real effect in fighting or preventing colds. “It’s a cheap and easy way to distinguish your product from someone else’s”…

Edit by SAC

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OTC drugmakers know the benefits of choosing a private label OTC product with the same ingredients is clear for cash strapped consumers and are using innovation to add value to their products.  The brands must give consumers a reason to purchase their brand over less-expensive labels. This is becoming increasingly difficult as a recent Neilsen study showed that 62% of consumers perceived private label brands to be equal to name brands. 

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Full Article:
http://www.brandweek.com/bw/content_display/news-and-features/shopper-marketing/e3i8a864b21b4f19fc5d31ca97a9df8da2f

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So, what happens when a luxury brand drops its prices ?

January 16, 2009

Excerpted from the WSJ, “In Rare Move, Luxury Goods Makers Trim Their Prices in the US”, by R. Dodes and C. Passariello, November 14, 2008

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For the first time in recent memory, luxury-goods makers are cutting prices on designer apparel, shoes and handbags in the U.S. market.

With even the biggest spenders starting to scrimp, luxury companies are reversing the industry’s maxim that luxury prices only move up. The cuts range from 8% to 10% on most products sold in the U.S.

But the move isn’t likely to dent the profit margins…because the value of the dollar has increased 28% against the euro since April. Luxury-goods companies don’t disclose margins, but Louis Vuitton is estimated to have a margin of 45 cents on every dollar…The strengthening of the dollar means luxury-goods companies are earning more than they had budgeted on every handbag or piece of clothing sold in dollars.

Luxury-goods executives must walk a fine line when cutting prices… if prices drop precipitously, the perception of a label’s value may also drop… During the recent years, luxury companies often assumed that money was no object for their fans…But luxury makers have acknowledged that a ceiling exists even for exclusive goods…

Edit by SAC

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This article is a follow-up to a previous post on marketing luxury brands in lean times. It confirms that even high-end consumers are cutting back spending and likely avoiding conspicuous consumption. As a result, marketers are faced with the challenge of maintaining their premiums and exclusivity while also making sure their brands are accessible and acceptable to purchase in the eyes of the high-end consumer.

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Full Article:
http://online.wsj.com/article/SB122662444379126865.html

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Consumer choice modeling … how people decide to buy

January 15, 2009

Excerpted from Strategy+Business, “Tracking the Elusive Consumer”, by John Jullens and Gregor Harter, Novermber 11, 2008

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Consumer choice modeling … offers a better understanding of consumer preferences: 
  • What does the consumer want?
  • Why do individuals prefer one product or service over another?
  • How, precisely, do most consumers make their purchasing decisions?

Recent work on the art and science of consumer behavior has refined, updated, and strengthened an analytical tool known as consumer choice modeling, initially developed in the 1960s by Daniel McFadden, a winner of the 2000 Nobel Prize in economics.

Simply put, this model examines the personal reasons for individual choices and provides techniques researchers can use to measure and predict those choices. By exploring why individuals make specific trade-offs among various product options, consumer choice modeling can determine the features that people in different economic and demographic strata are looking for and how much they are willing to pay.

* * * * *

Originally, this technique suffered from a lack of sophistication. A typical implementation involved asking respondents to react to lengthy paper-and-pencil surveys offering a series of preconfigured and static product or service possibilities. Although some insight about consumer preferences was typically evinced, it was often shallow, limited by researchers’ inability to dynamically change the direction of the questioning on the basis of the responses.

However, advances in experimental designs and information technology now allow researchers to better approximate the shopping experience when asking questions by adjusting product choices in reaction to a person’s answers. By analyzing the responses from a representative sample of consumers (or potential future customers), researchers can produce econometric models that depict the relative weighting of specific product features and price points.

* * * * *

Early in 2007, Booz & Co.applied consumer choice modeling to identify and measure the drivers of demand for mobile phones. One example::  Apple’s iPhone.

Long before the iPhone’s launch,  the Booz  model correctly predicted that it would be the most attractive overall offering to consumers despite its high price tag. 

Booz  surveyed more than 1,800 consumers by simulating the actual mobile phone purchasing process and asking people to compare their existing package with alternatives.

For example, owners of low-cost Sharp handsets running on pay-as-you-go carriers such as Virgin Mobile or Boost Mobile were offered a U$100-plus Samsung phone with Nextel service and a $250-plus LG phone with Verizon’s network. Respondents were asked, “If these two packages were your only alternatives, which one would you choose: Samsung/Nextel, LG/ Verizon, or neither?” and “If Samsung/Nextel were your only option, would you purchase it or continue to use your current package?”

The majority of the low-end and midlevel consumers were highly commodity driven. Other than by offering an attractive handset price, it is almost impossible to convince an individual to change his or her current mobile phone package. In fact, further analyses revealed that one-third of U.S. consumers are unwilling to change their wireless package, no matter how much the handset price is lowered.

* * * * *

Of all phone users, owners of low-end handsets made by the Nokia  value their phone package the least. Consequently, these consumers are the most willing to switch to another carrier and handset — an opportunity for competitors to attack Nokia’s base by producing a low-cost package with a function or two that outpaces the relatively plain Nokia product.

The consumer choice model also revealed that owners of handsets made by Sony Ericsson , which tend to be highly designed, full-featured products, care much more than Nokia users about functionality, usage range, and purchase location (they prefer to buy their packages at stores that offer personal attention, rather than at Costco or Circuit City, for example). And although these customers, too, are price conscious, they’re willing to pay a premium to have their preferences met. A service provider could use these findings to target Sony Ericsson owners with a slightly less expensive offering that in all other ways matches their current package.

* * * * *

Consumer choice modeling also has the ability to predict the impact of future products and services on the market. Booz  simulated the characteristics of “the ideal high-end phone” as consumers viewed it. From this, the survey gleaned that three primary factors — feature, design, and brand — are of paramount value to consumers considering a higher-priced model. These factors, of course, were exactly what Apple focused on in developing its blockbuster iPhone, launched in July 2007.

Significantly, as the model predicted, Apple stumbled when it came to price, which the survey showed matters at all levels of cell phone purchases.

At a price point of $599 for an eight-gigabyte phone, the research forecasted that Apple would have difficulty reaching a significant portion of the high-end market. But the same research suggested that performance would improve quickly as soon as Apple cut prices. In fact, that is precisely what happened: In September 2007, Apple discounted the phone by $200, and sales rose well over 1,000 percent in the succeeding quarter from sales in the prior three-month period. And in June 2008, CEO Steve Jobs announced a much faster eight-gigabyte iPhone — using AT&T’s state-of-the-art 3G network — for only $199, a move that further aligned Apple’s pricing with that of its peers and that will almost certainly improve the product’s market share.

* * * * *

Consumer choice modeling yields valuable insights for demand-driven strategy development by providing customer value segmentation maps, measuring market share impact of new product–service combinations, and assessing overall brand equity. Perhaps most important, choice modeling can reveal sa­lient differences between managers’ beliefs about customers’ needs and preferences and customers’ actual needs and preferences. For managers seeking reliable feedback on how customers view their products and services, consumer choice modeling provides a rigorous way to turn customer-driven feedback into profitable and sustainable tactics for retaining or capturing market share.

Edit by DAF

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Full article:
http://www.strategy-business.com/resiliencereport/resilience/rr00064?pg=2

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Uncertainty Fuels Airline Price Cuts

January 14, 2009

Excerpted from the Miami Herald, “Airlines cutting prices to stay aloft during recession, ” By Harry Weber, Jan 7, 2009


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A wave of fare sales has spread across the airline industry…as the weak economy continues to put pressure on carriers to fill seats even after they drastically reduced capacity and some expressed willingness to cut more.

Many experts and even executives at some airlines had expected that after deep capacity cuts went into effect starting in September, the number of fare sales going forward would be fewer and farther between. But fuel prices have come down significantly, and the weak economy has eroded demand for air travel…

It’s not unusual for airlines to announce fare sales in January…but what’s different for several carriers this year is that the discounts are for travel extending as late as April, May or June..The sales last January were typically for travel through March, he said.

Seaney said he believes uncertainty in the economy is the reason for the change…A handful of major carriers and discount carriers have launched fare sales since Dec. 31. Others are expected to follow with sales of their own, or to at least match discounts offered by rivals on competitive routes…

Discount carrier AirTran Airways said Tuesday it was offering a nationwide sale with one-way fares starting as low as $39…”We are uncertain about the economy and we are trying to build business on the books for the winter and spring,’

Edit by SAC


Full Article:
http://www.miamiherald.com/business/nation/story/840842.html
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Sony cuts consumers' stress by banning discounting … say, what ?

January 9, 2009

Excerpted from the New York Times, “For Sony, No Discounts Means Stress-Free Shopping”, by Saul Hansell, November 20, 2008

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Eliminating price competition among retailers for high-end cameras and TVs is a great benefit for consumers — so say Sony executives .

Sony bans retailers from discounting Sony’s Alpha digital camera line, its more expensive televisions and some other high-end products. They claim that by having the price for these products be the same at all retailers, they eliminate stress for buyers.

“Consumers don’t have to worry about whether I can get a better deal at retailer A or retailer B. Everybody gets the best deal.” Stores can now compete on other attributes, like education and support.

* * * * *

A quick scan of photography blogs does not find much gratitude for all the stress that Sony has saved camera buyers. On a blog dedicated to Sony’s cameras, some posters complain about the price of cameras and accessories increasing by hundreds of dollars. The program has been controversial, even among electronics dealers

* * * * *

Sony is increasing promotions in retail stores, but was not cutting the prices it planned for the holiday season. “There was value planned in the product,” said Sony execs, “That value is there. Whether consumers will take advantage of it is another question. But we don’t think that dropping the price alone will add traffic.”

Edit by DAF

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Sony cuts consumers’ stress by banning discounting … say, what ?

January 9, 2009

Excerpted from the New York Times, “For Sony, No Discounts Means Stress-Free Shopping”, by Saul Hansell, November 20, 2008

* * * * *

Eliminating price competition among retailers for high-end cameras and TVs is a great benefit for consumers — so say Sony executives .

Sony bans retailers from discounting Sony’s Alpha digital camera line, its more expensive televisions and some other high-end products. They claim that by having the price for these products be the same at all retailers, they eliminate stress for buyers.

“Consumers don’t have to worry about whether I can get a better deal at retailer A or retailer B. Everybody gets the best deal.” Stores can now compete on other attributes, like education and support.

* * * * *

A quick scan of photography blogs does not find much gratitude for all the stress that Sony has saved camera buyers. On a blog dedicated to Sony’s cameras, some posters complain about the price of cameras and accessories increasing by hundreds of dollars. The program has been controversial, even among electronics dealers

* * * * *

Sony is increasing promotions in retail stores, but was not cutting the prices it planned for the holiday season. “There was value planned in the product,” said Sony execs, “That value is there. Whether consumers will take advantage of it is another question. But we don’t think that dropping the price alone will add traffic.”

Edit by DAF

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Disguising price increases … Is it just me, or is that package smaller than it used to be ?

January 9, 2009

Excerpted from the Minneapolis Star Tribune, “Freshly squeezed: The ever shrinking box and carton” by Chris Serres, December 2, 2008

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In the past year, thousands of small, almost imperceptible changes swept through the grocery aisles where American families shop each day.

The indented bottom of a Skippy peanut butter jar got more indented, turning an 18-ounce jar into a 16.3-ounce one. Ice cream containers shrank by one-quarter of a quart. And for breakfast, a jug of Tropicana orange juice got 7 ounces lighter while that box of Froot Loops lost more than 2 ounces.

Shoppers without a keen eye and a willingness to read the fine print on labels might have missed what has happened: Food manufacturers were downsizing packages, while keeping prices the same, as they passed on higher food costs to consumers.

According to a recent analysis by Nielsen Co., about 30 percent of all packaged goods have “lost content” over the past year. This at a time when U.S. grocery bills are rising — up 7.5 percent in October vs. the same month a year ago — at the fastest rate in 18 years.

What began as a response to rising fuel and ingredient costs has become institutionalized at many companies. At General Mills, for example, cost-cutting is so embedded that the company even has its own intimidating term for it: “Holistic Margin Management.”

It’s not always about shrinking packages, which can account for as much as 75 percent of a product’s cost. Even seemingly small changes in a package’s design can mean millions of dollars in annual savings — lessening pressure to raise prices to cover costs.

There is an entire science behind packaging reductions, enlightened by a long list of unsuccessful changes.  

For instance, food manufacturers know consumers react more to changes in height than width, so cereal boxes often get thinner before they get shorter.

Once a product changes, buyers often forget the previous size, creating a new standard.

When PepsiCo reduced the size of its Tropicana orange juice jug by 7 ounces, it touted the container’s “new ergonomic design” and easy-to-open snap cap. Yet consumer advocates argued the new features were really meant to distract from the reduced weight.

“This is the packaging equivalent of three-card monte … by changing several factors at the same time, food companies disguise the fact that you’re getting less for the same price.”

One reason food companies have gotten away with downsizing without alienating shoppers is that over the decades fewer people are preparing meals at home. So they pay less attention to measurements on packages, said John Gourville, a marketing professor at Harvard Business School.

“The reality is, people pay more attention to prices than sizes … and the food companies know it.”

“You can take an ounce out here and an ounce out there, and maybe people won’t notice,” he said. “But if you do it repeatedly, and people are only getting three servings per cereal box, then people are much more likely to say, ‘What’s going on here?’ And it gets harder and harder to do.”  

Edit by NRV

Full article:
http://www.startribune.com/business/35343634.html 

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Ken’s Take: You have to sort this marketing approach into 3 parts: (1) more effective packaging — e.g. more merchandising impact, better ergonomics (2) cost-cutting — e.g. more efficient use of volume and space, and (3) higher prices — e.g. on a per ounce basis.  Re: the latter — it is usually easier to raise “unit prices”  by resizing than by changing the price “per package” 

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Price Wars on the Web

January 8, 2009

Excerpted from the New York Times, “Web Sites Wage Holiday Price Wars,” by Claire Cain Miller and Brad Stone, November 20, 2008

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Internet retailers, trying to navigate the first truly dreary holiday shopping season ever on the Web, are engaged in price-cutting and discounting so aggressive that it threatens their profit margins and, in some cases, their very survival.

Traditional retailers faced the same problem, of course, but the price-cutting is fiercest on the Web, where customers can easily shop for the best price with a quick search on Google or on specialized shopping engines like Shopping.com. Online, the competition is only a click away. For many Web sites, the discounts and price cuts are the only way to hold on to customers as online buying unexpectedly plummets.

The research firm comScore reported that sales growth on e-commerce sites slowed to a meager 1 percent in October compared with the previous year — the lowest rate ever for online retail and well down from the industry’s typical 20 percent gains.

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To preserve the sanctity of their brands and some level of pricing control, some Web companies are promoting discount sites separately from their main brands. Zappos.com, a shoe retailer never runs promotions on its site. Instead, it quietly moves shoes that do not sell in six months to 6pm.com, a clearance site it acquired last year, but runs separately. 

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Free shipping is also becoming a painful imperative for all e-commerce sites. Three-quarters of online shoppers say that they would shop elsewhere if a site did not offer free shipping. E-commerce giants like Amazon.com can easily absorb shipping costs, but small online vendors struggle. 

To exacerbate matters, a major expense for online retailers seems to be rising: the cost to advertise products on the search engine Google, the source of considerable traffic and visibility for most e-commerce sites.

Over the last year and a half, prices for text ads related to women’s fashion have quadrupled, say apparel retailers. In the popular gifts category, the price to advertise alongside results for common search queries like “gift baskets” jumped 50 percent from the 2006 holidays to 2007 and is expected to climb again this year.

Edit by DAF

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Full article:
http://www.nytimes.com/2008/11/20/technology/internet/20slashing.html?ref=technology

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Hey, Mr. Retailer: Don't even think about discounting that hot product !

January 7, 2009

Manufacturers Set Price Minimums That Retailers Must Follow or Risk Getting Cut Off

Excerpted from  WSJ, “Why Some Toys Don’t Get Discounted”, Dec. 24, 2008 

At a time when retailers are slashing prices to attract last-minute Christmas shoppers, many stores aren’t marking down certain popular gift items at all.

That’s because of little-known manufacturer agreements that require retailers to refrain from discounting, especially in any advertising. If retailers don’t comply, manufacturers sometimes stop subsidizing ads or cut off supplies altogether.

The companies say that they enforce MAPs (minimum advertised prices)To maintain the company’s “integrity and high standards of manufacturing, we must maintain the price integrity of our products,” the letter said.

This season’s products affected by pricing agreements include The latest James Bond game and Guitar Hero World Tour Band Kit from Activision.

Minimum-price agreements between manufacturers and retailers were once deemed automatically anticompetitive and thus illegal under a 1911 Supreme Court ruling. Pricing agreements related to advertising — which critics say are used to discourage any discounting at all — also have run into legal trouble in the past when federal officials found they resulted in higher prices for consumers.

But in a controversial decision last year, the Supreme Court opened the door for manufacturers to set minimum prices as a means to enhance a brand’s image and for retailers to make enough profit on their merchandise to provide better customer service. The 5-4 ruling reversed a 96-year-old precedent and said cases should now be considered on a case-by-case basis, weighing the impact of pricing policies against free-market principles. In the wake of the decision, many manufacturers have instituted pricing minimums for advertising or sales.

Opponents of the ruling, including eBay Inc. and Costco Wholesale Corp., are hoping the decision will be reversed … arguing  that minimum-pricing agreements violate the Sherman Act, the law that prohibits price fixing and bid rigging.

“However you want to dress up these policies with fancy legal language, these policies are obviously in the interest of business and not the consumer.”

Many traditional retailers favor minimum-pricing agreements because they help put a stop to what the stores view as unfair competition from online sellers, which can charge less because they have lower overhead costs.

* * * * *

Markups are the difference in percentage between the wholesale price a retailer pays to a manufacturer and the retail price charged to consumers.

Retail markups generally have been around 50% “for the last 10 to 15 years, but recently they’ve fallen to about 42%.”  Catalog companies “like their markups at about 50%” because of their added expense of printing, postage and shipping.

Markup percentages among toy mass merchants are generally in the high 30s to low 40s.”Minimum-pricing policies level the playing field” by keeping every retailer’s markups the same.

* * * * *
Sony Computer sets minimum-advertised prices for nearly two dozen products, including $499 for the PlayStation 3 with 80 gigabytes of memory and $49 for a wireless keypad, a PS3 accessory.

A survey stores — online and offline —  that sell Sony videogame products found that nearly all of them were advertising and charging the minimum prices.

Full article:
http://online.wsj.com/article/SB123007559680631543.html

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Adding Value to Value-Brands

September 25, 2008

Excerpted from The Boston Consulting Group, “Premium Margins from Value Brands”, by  Rolf Bixner, Holger Gottstein, Sharon Marcil, and Just Schurmann, September 2007

* * * * *

Most companies have found that succeeding with brands in both the value and premium segments without inviting cannibalization can be a tricky balancing act.

To increase sales of their value brands, some companies add features without increasing price–tempting consumers of the premium brand to trade down to the value brand.  The lower-priced, lower-margin brand cannibalizes the higher-priced, higher-margin product, and profits go out the window.

Other companies eliminate features from their value brands in order to attract customers with a lower price–putting these products in competition with generic or private-label products, which often have advantageous cost structures.  The result is a loss of profitability for the value brand.

* * * * *

Consumers seek a particular combination of price and features.  Value-brand customers are interested in and willing to pay for only a very limited set of product features (“primary features”).  Benefits that fall outside this category (“secondary features”) are not, to a value-seeking consumer, worth the price, no matter how desirable they may be to others. Yet those secondary features are very important to primary-brand consumers who are willing to pay for them.

* * * * *

To redesign value brands:

1. Identify the features that value-consumers care about the most and shed the others that add to both the costs and price without providing substantial benefit.

2. Add an “extra portion” of the qualities provided by the primary features

* * * * *

Example:

With personal vehicles, value-conscious consumers prefer extra safety features and good mileage to many of the bells and whistles that drive up cost.

* * * * *

More is not necessarily better, and sometimes it can be worse. It is the quality of the primary features that attracts the value seeker, not the total number of features.

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image

Edit by DAF

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Full Article:
http://www.bcg.com/impact_expertise/publications/files/Premium_Margins_Sept_2007.pdf

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Slash the Price and Sink the Brand

September 19, 2008

Excerpted from Harvard Business Online, “In A Downturn, Discounts Can Be Dangerous”, by Jeff Stibel, August 21, 2008

* * * * *

Often the first thing companies do during a downturn in the economy is reduce prices on their products and services. While it may be necessary in some cases to reduce prices, discounting has its risks. The biggest risk is that it can create a negative long-term perception of a product and a down-channel effect, ultimately leading to market-share erosion.

And discounting can also be dangerous to low-cost providers not focused on brand. Value-minded consumers have long-term memories and it is hard to retain market-share when the economy recovers and you try to raise your prices or eliminate promotions.

In some cases, it may make sense to buck the trend entirely and increase prices. In fact, many companies are taking this counterintuitive approach. To be sure, many are blaming the cost of commodities and these increases will put a strain on short-term growth. But over the long-run this could build brand value. 

There’s no doubt that discounting and sales promotions are a vital sales technique when done correctly. It inspires excitement and creates a call to action. However, when offered at the wrong times–for no other reason than to boost sales–it can cut the other way and create brand deterioration.

* * * * *

Consumers give you their hard-earned money in return for something that meets or exceeds their perceived value. They want to see value and quality in return for their money.

And studies have shown that in many cases, the more people pay, the more value they ascribe to their purchase. Money plays a funny role in the purchase process: it anchors perceived value. If you discount prices during adverse times, consumers may begin to question the original value.

When you discount, you undo the “placebo effect” of higher prices. And this leads to a decaying belief in the value of the product offered. So it may be short-term thinking to devalue a consumer’s perceived value of a product simply to move more merchandise during shifts in the economy.

* * * * *

There are ways around this, of course. Consider the auto industry, typically the first to discount their way out of economic woes. Chrysler recently did something to preserve their price while offering a discount for something that does not affect their brand: gas. Chrysler cleverly took discounting to the next level by offering up a $2.99 gas guarantee for three years on all new car purchases within its fleet. The idea was to subsidize the fuel that goes into the new car, not the MSRP of the car itself.

* * * * *

Consider the long-term consequences for discounting during a recession and the potential for inadvertently re-positioning your brand. If you must, it may be better to focus on something ancillary rather than what your brand truly represents. Because once that veil is pierced, it may be incredibly difficult to go back and reestablish the value proposition to your consumers.

Edit by DAF

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Full Article:
http://discussionleader.hbsp.com/stibel/2008/08/in-a-downturn-discounts-can-be.html

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Energy – Why do gas prices move up and down ?

August 27, 2008

In last week’s post “Thinking about $4 per gallon gas”, I wondered why oil companies waited so long to push prices up to $4 — the apparent price that the market will bear — and why they don’t just let the price stick at $4 now that it has been tested.

Chris Hairel , MSB MBA alum, emailed a nice recap of the oil to gas value chain.

Bottom line: cost-plus pricing in a very competitive market.

Worth reading …

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The downstream refined products value chain — from crude oil to retail gasoline and other oil-based products — has six segments, each with its own unique industry structure, pricing levers and regulation:

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Refineries – the key asset in the business where the object is to maximize the economic value added of the refined products.

Refineries are basically price takers since their company trading group supplies them with crude oil and the projected prices for refined products.

Working with the trading group, the refinery is charged with turning that crude oil into the most profitable collection of products given the quality of the crude and the capabilities of the refinery.

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Bulk Markets – The trading group assumes title of the product as it leaves the refinery and arranges transportation to the terminals based on projected demand in the rack (or wholesale market).

Along the way the traders seek to increase the realized price for their products, react to supply disruptions or unexpected demand.

Bulk is a relatively efficient market with good price transparency based on key trading hubs like New York Harbor, Houston and Chicago.

The NYMEX futures market provides a facility for hedging and for paper speculation. Trading parties include oil companies, major users of petroleum products, independent pipeline companies and speculators.

Pricing is market-based and profit-optimized by the traders.

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Pipelines – Interstate pipelines with multiple customers are regulated by the Federal Energy Regulatory Commission .

Their tariffs (i.e. prices) are set based on a government sanctioned rate of return. So. pricing is essentially a cost-plus process.

Pipeline owners are not permitted to share information about who else is using the pipeline with their affiliated companies, nor can they give (or take) preferential treatment with respect to supply allocation or delivery scheduling.

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Rack Markets and Terminals – Rack markets cover the wholesale market for a city.

Prices in rack markets are set daily for the next day. The marketing group for an oil company looks at demand by channel of trade (i.e. branded, unbranded, spot), recent price history in the area and the supply situation.

The pricing mechanism itself may be based on an index, a cost plus or other model, but there’s some leeway on the decision under certain circumstances. For example, pricing is actually used as a key demand management lever since companies can purposefully price themselves out of the spot or unbranded channel in order to save product for branded customers.

Despite what the pricers do, most transaction pricing  is determined by long term contracts. These contracts usually allow customers to “swing” their volumes. A customer may commit to buying an average of 5,000 gal a day, but the contract management process will look at the monthly volume and divide by 30 – the customer can usually manage their buying pattern to buy more on days when gas is cheap and less when it’s more expensive. .

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Secondary Transportation – These are the tanker trucks that move product from the terminal to the retail station. The logistics are typically handled by jobbers or independent marketers that almost always price on a cost-plus basis.

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Retail – Retail gas stations typically price on a cost-plus basis with a slim retail margin added on.

The bulk oil stations’ profits isn’t from the gasoline !  Gas is simply the “leader” product that attracts traffic (literally) which often loads up with high margin coffee, soda, cigarettes, etc.

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Retail gasoline prices

Retail gasoline prices tend to respond quickly to market forces for 3 reasons: (1) cost-plus pricing, (2) retail competition, and (3) fear of government intervention.

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(1) Cost-plus pricing

Since cost-plus pricing is prevalent at all stages of the value chain, refined products’ prices and crude oil prices tend to move together.

Refiners’ margins are often forecasted using what’s called the 3-2-1 spread. Take the price difference between three WTI NYMEX contracts and the sum of two NYMEX gasoline contracts plus one heating oil contract – then trade accordingly.

When crude falls. the entire complex floats down with it since the bulk market is fairly efficient and the downstream segments all use a cost-plus pricing model.

If domestic bulk markets fail to react to lower crude prices, several large players can bring product in from Europe to capture the arbitrage.

Since the vast majority of transactions are priced on a cost-plus basis, companies compete on their ability to “buy right”,  on the efficiency of their operations, and their opportunity for more profitable ancillary sales. .

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(2) Retail CompetitionFew prices are signaled to potential customers more visibly than gasoline prices.

There are often 2 or 3 gas stations on a corner,  so consumers are tempted to chose the cheapest one even if it’s only a cent or two cheaper per gallon. The conventional wisdom is that brand loyalty is low. 

The same price pressures evident in the wholesale rack markets since unbranded retailers have the option of buying from multiple terminals. If Shell is less expensive than Exxon on a particular day, Shell gets the sale in the unbranded and spot channels of trade.

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(3) Threat of Regulation

A third force is the threat of government action.Pricing through the entire oil value chain is very transparent.  Timely price data available from multiple sources for every segment of the market (DOE data, NYMEX, bulletin board exchanges, broker quotes, daily PLATT and OPUS surveys, AAA retail surveys, etc.).Oil companies generate two-thirds of their profits from crude oil production and refining. The wholesale and retail marketing and distribution parts of the business is generally considered mote of a cost of going business (i.e. overhead) than a profits source.  So, oil companies would rather play it safe (from government regulators) than try to eek out an extra half percentage point of profit at the wholesale or retail level.

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Pricing Tactics – To increase sales, just drop the dollar sign … huh?

August 21, 2008

Excerpted from WSJ online, “To Get Customers to Spend More, Drop the Dollar Signs”. August 18, 2008

Researchers at Cornell University found that restaurant owners who drop the dollar sign from their menus got clients to spend more — $5.55 more per meal on average, to be exact.

The researchers noted that just seeing the dollar symbol agitated diners so much that they spent less.

Something as simple as how you display prices can have an impact on customer perception and actual sales  …  like that penny-off trick to enhance perceived value  … $9.99  just seems less than 10 bucks.

Source:
http://blogs.wsj.com/independentstreet/2008/08/18/to-get-customers-to-spend-more-drop-the-dollar-signs/

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Pricing – Airlines bring back "structural" price discrimination …

August 20, 2008

Excerpted from WSJ: “Airlines Revive Minimum Stays On Cheap Fares”, August 19, 2008

One of the craziest aspects of the airline business is that two passengers sitting side-by-side can pay vastly different fares for the same seat — sometimes hundreds of dollars.

Airlines contend business travelers buy a different product.

A business traveler pays more for a seat purchased close to departure because the airline has taken an economic risk to hold that inventory back. And business travelers pay more for tickets with fewer restrictions — you pay a lot for the ability to change or cancel.

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Now, get ready for a wave of annoying airline rules requiring you to stay at your destination a minimum number of days or over a Saturday night — if you want the cheapest tickets.

The move is an effort to force (price insensitive) business travelers, who usually need the most flexibility and want to be home on the weekends, to pay more for their flights.

Airlines have increased restrictions on cheap fares by raising overnight requirements, upping what had commonly been only a one-night stay requirement to two and three nights.

Airlines tried to bring back Saturday-night stay requirements earlier this year.  For many years the Saturday-night requirement was a prime tactic airlines used to separate business travelers from leisure customers. The Saturday-night stay forced many business travelers to either pay hundreds of dollars more for each ticket, or to spend an extra night or two on the road to save money. If the choice was a $300 ticket or a $2,000 ticket, many companies would ask travelers to stay over Saturday night at a nice hotel, have a nice meal and still save hundreds.

But the change didn’t stick, mostly because discounters compete on so many routes these days … without onerous restrictions.

(So) business travelers see them as a more-viable alternative as the price gap widens in fares. If big airlines run their prices up too high by making discounted tickets unavailable to business travelers, they risk losing customers. That’s been the history, likely to repeat this fall.

Full article:
http://online.wsj.com/article_print/SB121909457563650833.html

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Thanks to Justin Bates, MSB MBA for the heads-up.

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Starbucks – Grasping for (iced coffee) straws ?

August 6, 2008

Excerpted from CNN.com Aug. 5, 2008

Looking to bring more value-seeking consumers through its doors for a late afternoon caffeine fix, Starbucks … now offers its morning customers any iced grande beverage for $2 after 2 p.m.

The price is a big cut from the normal price of most grande-sized iced drinks. A grande iced latte, for example, costs about $4. To get the discount, customers must present a receipt from their morning Starbucks visit.

The company said it is …  answering consumers’ calls for more value at the chain, which has seen traffic drop as gas prices rise and consumer spending falters.

“It’s easy for baristas to implement and it’s easy for customers to understand.”

In some cities, it has offered discounted drinks on Fridays, Saturdays and Sundays. In July, the chain also gave away 12-ounce iced coffees on Wednesdays to customers in New York City, Philadelphia, Washington, Boston and Detroit who turned over an “iced brewed coffee card,” a reusable voucher distributed in stores and newspaper inserts.

“Certainly a discounting approach could lead to a better perception of value in the short run but the longer-term question remains — at the regular everyday price point, would the consumer still see Starbucks as offering the right value for them?”  “That remains uncertain.”

Full post:
http://www.cnn.com/2008/US/08/05/starbucks.deal.ap/index.html

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Observations

1.  “Easy for customers to understand” … they’ve got to be kidding … the more hoops that folks have to jump through, the less likely a promotion will succeed.

2.  How will they handle loyal customers who don’t do coupons (or morning coffee) and see the guys in front of them get a half-priced iced-coffee.

3. Does Starbucks know that 2-bucks (no “bounce back” coupon) gets you an large iced coffee at Mickey D’s?  Mrs. H. seems to like them …

4.  Ken’s fundamental law of marketing: if you you want to do something, do it … don’t do it half-way with hooks, lines, and sinkers … otherwise, just don’t do it.

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Thanks to Dave Fedlam MSB MBA ’09 for the heads-up … Dave says ” as a typical non-Starbucks customer, 2 cups of coffee for $6/day doesn’t really seem like much of a deal at all.”* * * * *

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Mktg: Mickey D – How to Raise Prices (w/o Raising Prices)

August 4, 2008

Excerpted from WSJ: McDonald’s Tests Changes In $1 Burger As Costs Rise, 08-04-08

McDonald’s is testing modifications to its popular $1 double cheeseburger, and higher prices for the sandwich … selling it with one slice of cheese instead of two, and billing it as a “double hamburger with cheese ” …. or offering a double hamburger without (any) cheese …  or  selling the traditional double cheeseburger at prices ranging from $1.09 to $1.19.

Launched in 2003, the Dollar Menu has been a key driver of sales at McDonald’s 14,000 U.S. restaurants and has helped it ride out dips in consumer spending. But recently, franchisees have complained that the menu has brought too much unprofitable traffic into their restaurants.

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As of late June, sales of the chain’s lattes, cappuccinos and other espresso drinks were off their peak … lower-priced beverages, including $1.89 iced coffee and a $1 … sweet-tea promotion, have pulled some sales away from the espresso drinks … 

McDonald’s overall beverage expansion, adding espresso drinks, smoothies, cold tea, bottled drinks and ice-blended coffee beverages at U.S. locations, is on track to exceed the company’s goal of adding $125,000 a year in sales per restaurant … and adding $1 billion a year to the company’s sales.

http://online.wsj.com/article/SB121780568775808337.html?mod=2_1567_topbox

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Observations

1.  One way to increase price is to skinny back the product — put fewer cornflakes in the box.

2.  The $1 double cheeseburger is the heart of the menu — dropping it will be a big deal — no way I step up to $1.19 or buy a chesseburger with no cheese.

3.  Has the multi-dollar cup of coffee market peaked ?

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