110-Competing Against Low-End Competition
The consumer food industry has both an opportunity and a challenge in today’s marketplace. The opportunity comes as consumers reduce their “eating out” occasions and, instead, eat at home more frequently. The challenge is the seemingly inexorable market share growth of the less-expensive private label products. Some of the responses of the packaged food industry to these opportunities and challenges give us some insight into how to compete with low-end competitors and offset the ravages of a tough economy.
Several of the branded food companies are instituting advertising programs emphasizing the value of their products compared to alternatives. They hope to increase their share of the growing eat-at-home market by emphasizing their good value. Oscar Mayer Deli Fresh Meats claims that they have deli fresh taste without the deli counter price. Lean Cuisine Frozen Foods claims that its products are good for the wallet. These companies are helping the consumer to see a cost advantage to the use of their branded foods in a difficult economy.
Competing with private labels is proving somewhat more difficult for the industry leaders, whom we call Standard Leaders. (See the Symptom and Implication, “The industry leaders are losing share” on StrategyStreet.com.) Some Standard Leaders argue that they offer better quality than cheaper alternatives. Others are responding directly to the low price challenge of private labels by discounting their products. Actually, relatively few branded food companies are discounting their products directly. Instead, several are offering discounts in kind. In this form of price discount, the company offers more product for the same price as the previous version of the product. Frito Lay is adding 20% more product to some of its snacks without increasing the prices. French’s is selling a 20 oz. bottle of French’s Classic Yellow mustard for less than a 14 oz. bottle.
Other companies assert the simple clain that their food is not expensive. A joint advertising venture between Chips Ahoy cookies and Capri Sun juice explains that a serving of the two snacks costs about a dollar. Del Monte argues that a consumer can stretch her food dollars because canned foods offer better value than frozen or fresh foods. Kraft Singles cheese slices claims that a Single’s cheeseburger costs less than a dollar.
Over the years, we have studied several hundred low-end competitors. We have analyzed how the industry Standard Leaders respond to these low-end challenges. We have concluded that there are four different types of low-end competitors: Strippers (some private label products), and Predators (most private label products) who are players who just offer low prices. The other two types of low-end competitor offer better performance as well as a lower price. The response to each of these types of low-end competitors depends on several factors in the marketplace.
In summary, we found that the Standard Leader responses to these low-end competitors fall into patterns. The ideal order of these responses would minimize the impact of the response on the company’s margins, as follows:
1. Ride out the challenge. The Standard Leader company does not change its own value proposition in response to the low-end challenge. Instead, it:
· Ignores the low-end competitor where the competitor cannot expand
· Blocks the low-end competitor by using legal challenges and control of information, among other means
· Acquires the low-end competitor
2. The company strengthens its own value proposition to make itself more attractive to customers in the face of the low-price challenge. It:
· Adds a low price point in the marketplace
· Increases its current product’s benefits without increasing prices
· Reduces its prices, as a last resort
In order for a response to succeed, the Standard Leader company must assure itself that its response will discourage future challenges and leave it better off than it would have been without the fight. (See the Perspective, “Turmoil Below: Confronting Low-End Competition” on StrategyStreet.com for much more detail on how to compete with low-end competitors.)
Over the years, branded package goods companies’ timid and tepid responses to private label product competitors have created a robust private label set of competitors. These private label competitors have strengthened their Performance offerings under the price umbrellas provided by the industry Standard Leaders. These private label brands are unlikely to decline anytime soon.
Like death and taxes, private labels are ever present in the consumer packaged goods business. In 2020, they held a significant minority market share and enjoy a good reputation with consumers. Private labels made up 19 ½% of the value of consumer packaged goods and 23 ½% of the units sold. Even after the Covid pandemic, 81% of US consumers continued to purchase private label brands. 87% of US consumers believed that private label variety is as good as the national brands. Also in 2020, 82% of consumers believed that private brands were a better value than national brands and 89% said they trusted private brands just as much as the national brands. 86% believed that private brand quality is just as good as that of the national brands.
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