103-The Power of Low-End Products for Industry Leaders
Low-end products can save an industry’s bacon when the industry falls on hard times. Most low-priced products are what we call Price Leaders (see Audio Tip #83: Price Leader Products and Companies on StrategyStreet.com). These products offer less Function or Convenience than do the industry’s more important Standard Leader products, for common pricing savings of 25% or more. (See Audio Tip #81: Standard Leader Products and Companies on StrategyStreet.com.)
These Price Leader products are helping the domestic beer industry today. In the domestic beer industry, Price Leader products are called “sub-premium brands.” These brands saw sales gains of 8% over the last year. In contrast, the industry Standard Leader products, called “premium” beers, saw sales fall 1.4%. “Sub-premium” beers are keeping the industry moving forward. These “sub-premium” beers cost about 25% less than the premium beers, so they offer drinkers an attractive price alternative when the economy gets tough.
Most of the “sub-premium” beer volumes are products of the big brewing companies, including Anheuser-Busch InBev NV, SABMiller PLC, Molson Coors Brewing Company. (See the Perspective, “When Product Mix Matters” on StrategyStreet.com.) So the industry’s Standard Leader competitors have closed the door on erstwhile Price Leader, private label, suppliers of cheaper brews.
These Price Leader products also have a few cost advantages over the Standard Leader products. Most importantly, the big brewers rely on word-of-mouth and price-based impulse buys to generate sales. They spend very little on advertising these brands. On the other hand, they spend a great deal to advertise the “premium” Standard Leader brands. So, while profits are lower on the Price Leader products, the lower margins are nowhere in proportion to the lower prices these products seek.
For the last 10 years, the beer industry in the US has been flat. Volume grew by 1% in total but sales grew only 0.1%. Despite the slow growth in the broader market, the number of breweries grew at a rate of nearly 13% from 2016 to 2020. The larger companies seem to have succeeded in shutting the door against new entrants at the low end of the market. Instead, virtually all of the growth in the market is taking place at the higher end, in brewpubs, microbreweries, and superpremium beers and ales. The major brewers have yet to figure out how to slow the newer high-end entrants. In this slow growing market, brewers are ramping up new product development to target fresh consumers. They are introducing hard seltzers, hard kombuchas, hard teas and coffees and CBD beverages, along with low alcohol and no alcohol beverages. These are examples of product proliferation in a challenging market.
Brewpubs, microbreweries and superpremium beers and ales are examples of Performance Leader products. These products compete on unique Functions. Go HERE to see a discussion about when to compete on new functions.
THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile. We put their facts into frameworks applicable to all industries and found patterns. Strategystreet.com describes the inductive results of these thousands of observations and their patterns.