Why Some Brands Get Away With Price Increases

If the test of a good brand is the ability to raise prices without losing volume, some winners and losers are starting to emerge.

This week’s winners: Kraft, Kellogg and Colgate-Palmolive, all of which reported strong revenue growth amid price increases. Kellogg, for instance, saw net income rise 3.7% to $312 million. Colgate-Palmolive, on the other hand, reported revenues of $805.9 million, up 17% from the year-ago period. Despite higher commodity prices, Colgate upped its ad spend by 18%, CEO Ian Cook said during a conference call.

On the losing side, Unilever and SABMiller upped prices only to have consumers trade down to other brands. In an earnings call with analysts, Unilever CEO Patrick Cescau blamed more private-label purchases for a 21% drop in revenues. SABMiller, similarly, saw its deliveries to beer distributors in the U.S. drop 2%. Worldwide, consumer consumption of the London-based brewer’s imports also declined.

Why the discrepancies? Possible factors include a more stalwart following for U.S.-based brands (Unilever and SABMiller are both foreign-owned), the resurgence of private label, ads that play up the emotional appeal, and the phenomenon of less mobile consumers spending more on food at the supermarket as they cut back on eating out.

James Gregory, CEO of Corebrand, Stamford, Conn., said consumer sentiment for American-based brands is typically high during a recession. “The pendulum has swung a bit,” he said. “The decline of the dollar makes American-based products much more attractive on a global basis and it makes European and Asian-based products much more expensive to the U.S. And that has a significant impact.”

Another contributing factor is the rise in private label store brands and the range of alternatives available in a particular retail category, which often correlates with brand strength, said Frank Jones, vp at AlixPartners, N.Y. Take, for instance, the laundry care segment. Faithful consumers of Tide or Downy will stick with those products, despite price increases, if they have a longtime association with the brand, Jones said.

On the other hand, private label is rapidly emerging as a dominant retail force, not just overseas, but in the U.S. as well. Safeway, for instance, is introducing its O Organics and Eating Right wellness and nutrition lines in U.S. supermarkets and school cafeterias this fall.

“Retailers have paid a lot more attention to the overall quality of [private label brands],” Jones said. “This is creating brand strength among consumers because consumers know they’re getting something good and at a pretty decent price.”

But Gregory said that linking swings in earnings and revenues to brand strength is tricky. “Each category has its own characters. It could be all kinds of things: distribution, the type of sales they have, advertising,” he added. “Advertising plays a significant role because you can measure it. There are many other things, even things as subtle as packaging, distribution and sales.”

In the Big Foods aisle, one reason why CPGs such as Kraft and Kellogg may have fared particularly well in second quarter sales is, ironically, due to the recession. As gas prices continue to spike, more and more consumers are opting to eat in, which accounts for a favorable following in the packaged and frozen foods sector.

“If you think about the price per serving relative to a meal away from home (i.e. at a restaurant), there’s great value there and that’s definitely playing out well for companies like Kraft and Kellogg in this environment,” said Matt Arnold, an analyst with Edward Jones, St. Louis, Mo.

The stay-at-home trend may also help Procter & Gamble, which will report its latest fiscal year earnings next week. In recent months, the company has rolled out a series of product launches, mostly in the home care sector, as consumers react to tighter economic times by cocooning. P&G’s Swiffer campaign, for instance, touted the product’s first “money-back guarantee” in a move to convince the public that Swiffer is still worth purchasing in spite of a recession.

Jones said the success of P&G’s strategy lies in its ability to address the underlying issue, namely, a pinched wallet, in a positive way. “The ads are saying, ‘Since we’re spending so much time in the home, we’re going to make it the best we can,'” he said. “There are a lot of things CPGs can do in terms of creating an advertising message that gets consumers away from a pure price play.”

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