75-Growth Rates That Count

In most markets, the middle-tier Standard Leader product Price Point would grow somewhat faster than the market over a several-year period. There are occasions, however, where Performance Leader or Price Leader products outpace the growth of the industry Standard Leader products. This blog demonstrates this phenomenon and explains why this happens.

Posted 1/26/08

No matter the pace of growth in a market, the key growth measures to watch are those of the various Price Points. Here is an example.

The U.K., as the U.S., is in a recession. As a result of tougher times, customers are trading down their purchases in retail stores, including grocery stores. A beneficiary of this trade-down in the U.K. is the supermarket chain, J. Sainsbury PLC. Sainsbury is the U.K.’s third largest food retailer. It picked up customers from some of its more upscale grocery competitors.

Sainsbury has three lines, or Price Points, in its market. These Price Points grew at significantly different rates than the company grew during 2008. The company’s “Basics” brand is the smallest of its three Price Point labels. It is also the least expensive. This brand reported a 40% rise in sales in the third quarter from a year earlier, as customers traded down to less expensive groceries. The company’s higher Price Point brand “Taste the Difference” saw a decline in sales during the same period. The company’s sales for stores open for at least a year grew 4.5% in 2008. But the growth rates at the two Price Points were very different from the company average.

In any market, whether growing or declining, a company should know the growth rates, not just of the industry as a whole, but of the Price Points in the industry. The real growth or decline story comes at the Price Points. And it is at the Price Points, rather than at the overall market, where the company focuses its decisions.

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Update 2022:

In January 2022, Sainsbury’s was the 2^nd ranked grocery retailer in the UK with a market share of 15.6%.  Tesco led the market with 27.9% of the market.  The UK grocery industry is led by the “big four” of Tesco, Sainsbury, Asda and Morrison.  Together, these 4 companies control almost 2/3 of the UK grocery market.  However, online retailers are taking on growing importance in the UK market, especially since the onset of Covid.  Grocery discounters are also growing at the expense of the big 4.  Tesco’s store growth has focused on smaller stores over the last few years.  Similarly, Sainsbury’s store growth has emphasized convenience stores while holding supermarket store numbers steady.  So, both of these chains have emphasized higher price points in their store growth rates.  Asda and Morrison are not increasing their number of stores.

The big 4 pursue somewhat different pricing and Price Point strategies in 2022 as reflected in their average cost of a shopping basket.  Tesco’s average cost was 28.4 British pounds.  Asda was lower at 27.07 British pounds.  Sainsbury’s was notably higher at 30.05 British pounds, as was Morrison’s at 30.75 British pounds.

This industry continues to use different tactics by Price Point. For analyses that would make these tactics clearer and more understandable go HERE, HERE, HERE, and HERE.

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Update 2/26

The issue at hand in this blog is differential growth rates in high (Performance Leader), medium (Standard Leader) and low (Price Leader) Price Points. In the average market, the Standard Leader product Price Point would hold 60% to 80% of the total unit volume in the market. Performance Leader and Price Leader products round out the remaining market share. Over a longer period of time, the Standard Leader product Price Point squeezes the margins of the products above and below it, by adding more high-end Functions against the Performance Leaders and by using scale advantages against the Price Leaders. For a few years, however, Performance Leaders or Price Leaders are able to grow faster than the market.

Over a recent five-year period, we have observed six industries where the Performance Leader products have led industry growth. The automobile industry has seen these products grow at 2 to 3 times industry growth rates. Airlines have also seen Performance Leader products grow at a multiple of the industry’s growth. The out of home coffee market (companies such as Starbucks and Peets) has experienced high-end products growing at roughly 1 ½ to 2 times the industry growth. Performance Leader hotel brands have grown at roughly twice the industry growth. The apparel market has shown similar results.

Several recurrent trends account for this Performance Leader product success. The first is spending by wealthy consumers who are not price sensitive. Second is companies in the industry pushing or encouraging customers to trade up to a higher priced category. Third, Price Leader products face intense price competition, bringing the industry narrow margins. The industry then evolves low-end products into loss leaders with very little industry support. Fourth, the industry focuses all its product innovation (Function) efforts on Performance Leader products where margins are rich.

We have also seen markets with faster growth in the Price Leader category. Grocery retailing is growing fastest at the lower Price Point products, especially private label products. Streaming video services, while growing relatively rapidly, has seen the fastest growth in the free ad-supported low-end of the market. Quick service restaurants have grown on the backs of their re-emphasized value meals. Similarly, the home fitness equipment business has seen most of its growth in the Price Leader dumbbells, benches and simple bikes, while the high-end products in the market, such as Peloton and Tonal, shrink rapidly. Finally, consumer package goods household essentials are growing much faster with Price Leader products designed for value brands and club stores.

What causes Price Leader products to outpace the growth of the overall market? First, many companies in the industries we have cited became very aggressive in their pricing as they came out of the Covid disruptions. The growth of prices often well exceeded increases in income so customers traded down. Second, many package goods products have become commodities has branded producers set high price umbrellas (Leaders Trap) over private label products. In turn, these private label products invested in product quality and gain share and Reliability reputations against the branded products. Third, the Performance Leader product category became saturated so consumers could see little difference among them. Again, consumers traded down. Fourth, retailers emphasized price promotions and product bundles at the low-end of the market to drive more foot traffic. Finally, consumers hired of the high subscription charges in all products, and especially in home fitness.

Longer-term, faster than market growth of Performance Leader or of Price Leader products is probably not sustainable. The larger market growth will inevitably return to mid-tier, Standard Leader products.

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