Happy Labor Day everyone! Normally I provide fresh content on a weekly basis but this week’s original content also appeared on my Canadian Grocer blog from not too long ago. Not completely fresh content, but there are some relevant points to consumers, not just retailers. So this week’s post is a re-post of what I wrote up for the publication: Stopping Beverage Category Erosion.
Soft Drinks like Coca-Cola and Pepsi have long been featured on the front pages of flyers at deep discounts to drive traffic in-store and shopping trips. These deep discounts have benefitted the retailers as consumers reward retailers with their grocery dollars in addition to buying the featured soft drinks. However, other retailers see the increased foot traffic and participate with deep discounts themselves. This has led to category erosion as profits are stripped away, ultimately conditioning shoppers to only look for the lowest prices.
As a result, both manufacturers and retailers looking to protect category margins have conceded margins on other segments, such as water and energy drinks. Have you noticed that the pricing on these products have gotten more aggressive and feature activity has increased? What are the next steps for manufacturers, and how do they resolve these category eroding issues?
Manufacturers have adapted to this new reality by charging identical prices on smaller packages, and creating supersized packages to charge higher price points. Examples of smaller packaging include the 600ml bottles becoming the 591ml bottles for soft drinks & bottled water, and the non-carbonated beverages coming in 341ml aluminum cans rather than the traditional 355ml aluminum can. Upsizing examples include the larger 473ml cans from Red Bull and the 710ml cans from Monster Energy and Rockstar Energy. Smaller package sizes are slightly modified to look similar to the current packaging and may not be noticeable by the shopper. And the fewer liquid in the container allows the manufacturer to save on each unit’s product costs, effectively taking a price increase. The larger sizes are an attempt to trade up the buyer, and may also be at a price point that makes the original feature look less attractive.
While manufacturers have gotten creative to curb the deep discounting, retailers have persisted to promote the category on price alone. What are some alternatives for the retailer to avoid this deep discounting? For one, use better analytics to understand whether these deep discounts are actually driving new business. Ensure that the retailer is not subsidizing purchases that would have occurred regardless of the feature. Also investigate whether the features are happening too frequently and try to match the features with the customer’s purchase cycle. Understand the discount levels to see if a slightly lower discount will yield the same results – would a 30% discount yield the same results as a 40% discount?
Keeping the customer in mind should be the top priority for retailers, but protecting the category profitability is also a key responsibility. Only with stronger profitability will the category be able to survive and bring innovative products to store shelves.