Pinching pennies: Consumers switch brands
Posted
Aug 06 2008, 02:41 PM
by
Anthony Mirhaydari
Rating:
It looks like there's a positive side to the economic slump after all: Consumers are quickly changing their spendthrift ways.
During the second quarter, Americans lifted their savings rate to 2.6% from a pitiful 0.3%, while real consumer spending net of medical care, food, and utilities clocked in at only 0.8%. It's "a vivid sign that frugality is now replacing frivolity," in the words of Merrill Lynch economist David Rosenberg.
This means healthy market-share gains for private-label groceries from companies like Supervalu, Kroger, and Safeway. The transition away from expensive brands is especially noticeable in more "commoditized" products where the fancy national brand hasn’t noticeably differentiated its products. Think trail mixes, egg substitutes, salad dressing, butter, canned vegetables, etc.
According to point-of-sale data from AC Nielsen, market share for private-label goods such as these increased percentage point to 21.4% during the second quarter. That's up from smaller gains earlier in the year -- so we're definitely seeing an accelerating trend.
You can't really blame consumers for making the switch. On top of a weak employment outlook and tightened credit availability, big branded food companies like Kraft, ConAgra, and Campbell Soup have been passing on rising input costs. Prices on these items increasing 5.8% during the second quarter, according to AC Nielsen scanner data.
Although the grocers come out as the winners here, they still must contend with the same rising raw food costs. In fact, private label prices were up 9.4% during the period, albeit from a lower original level.
But while the price gap between branded and generic products is narrowing somewhat generally, a company-level analysis by Citigroup analyst David Driscoll shows Kraft, ConAgra, and Campbell Soup vulnerable as many of their key products are actually demonstrating a widening price gap compared to private label alternatives. A larger gap increases the consumer's incentive to trade down, as carefully constructed brand equity is ravaged by price disparity.
ConAgra is worst off; not surprising considering its brand lineup is heavily focused on simple staples like corn, beans, and potatoes. After boosting prices nearly 8% for the quarter, price gaps versus the generic labels are widening in six of the company's top 10 product categories -- which is up from a widening in just one category four months ago. ConAgra's unit volumes declined nearly 6% for the period. Comparative private label volumes were up 1.3%.
Kraft was next on the hit list, with volumes down 6.2% compared to a 0.7% gain for the private labels on a widening price gap in seven of its top ten categories. Campbell's volumes declined roughly 4%, while generic competitors increased 1%, as the gap widened in two of the soup maker's top five product types.
One important caveat to all this is that the AC Nielsen data captures the traditional food, drug, and mass retail channel which represents about 60% of total U.S. food sales. It notably excludes Wal-Mart, which has a much weaker generic label presence but is renowned for its ability to keep vendors from raising prices.
America's newfound frugality shows up everywhere from a reduction in the size and number of vehicles driven to a reduction in causal restaurant traffic. The grocery sector is the latest place to profit from the shift.
(Disclosure: I don’t own shares in any of the companies mentioned)
Related reading:
Sign of the times: Restaurants going bankrupt
McDonald's Dollar Menu threatened
Casual restaurants burned by inflation
Americans own too many cars
