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Eleven risks for consumer products companies - 2. Pricing pressures and pricing strategy - EY - Global

Eleven risks for consumer products companies

2. Pricing pressures and pricing strategy

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Prices drive category expansion in emerging markets

Nestlé focuses on Mexico as a key market and has introduced low-priced coffee sticks in two different sizes. Although this has impacted sales of coffee in larger packs, the loss was more than compensated by overall category growth. In the South American and South African beverage market, by contrast, SAB Miller and ABI have been able to increase prices ahead of their competition as they have leveraged strong distribution platforms and dominant brand positions in markets such as South Africa, Colombia and Brazil.

"Many consumers who began trading down during the recession were positively surprised by the quality of private label products compared to national brands. This will make it more difficult for leading brands to justify price premiums, withdraw promotional support or widen price gaps."
Tom Bishop, Advisory Services, Ernst & Young LLP

The global recession and smarter consumers have made effective pricing strategies more important than ever as consumer products companies seek to combat the twin risks of pricing pressures and input cost inflation.

Consumers reset perceptions

The global recession reset consumer's perceptions of value and price. They maintain a cautious outlook and we expect them to continue to buy less expensive products and shop around.

Consumers select brands based on:

  • Good value for their money
  • Low price
  • Availability of discounts

During the recession, consumers were surprised to find lower costing items could have good quality, according to Morgan Stanley research. This will make it difficult for leading brands to win back consumers.

Input cost inflation is back

Consumer products companies face more pressure because of the return of input cost inflation. This started to rise in mid-2010, according to Morgan Stanley data.

To make up for these losses, companies are more likely to scale back on promotions rather than increase product costs.

In the long term, we're likely to see agricultural commodity prices rise, too. Why? The growing middle class in developing countries are likely to move to a protein-rich diet. This will put upward pressure on agriculture commodity prices.

Branding investment is booming

Faced with a squeeze on pricing and input costs, consumer products groups are responding by investing in their brands.

Spending on marketing to increase brand equity can help improve pricing power because pricing power is based on more than just price. It's also based on the attributes, qualities and benefits of the brand.

However, price is exactly what many companies focused on during the downturn. This can be harmful, because companies can enter a downward spiral with each other continuing to lower price without seeing sales increase.

Prices drive category
expansion in emerging markets

Yet, it's difficult to measure ROI for branding investment

Many companies don't understand return on investment (ROI) from trade promotion spending as well as they should.

For example, buy-one-get-one-free promotions reward existing customers rather than drive brand penetration.

Companies need to become smarter with trade marketing by focusing relentlessly on the ROI associated with this spend. Manufacturers need a crystal-clear understanding of promotional events by brand, size, event type, account and season. This means having the right systems, processes and evaluation techniques, scaled and sized appropriately to an organization's resource and capabilities.

Companies need to introduce consumers to their brands at a price point that is consistent with income levels in the local market to promote category expansion, as well as taking infrastructure and distribution capabilities into account.

Spending wisely or just spending more

Pricing pressures are unlikely to diminish. The strategy for overcoming them is to spend smart instead of just spending more.

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