Posted: Mar 1st, 2010

Anyone who has ever reached for the supermarket label instead of the premium brand knows that consumers have changed their buying habits says TEP faculty member Kusum Ailawadi. The question, however, is how they've changed them and how companies should react. According to Ailawadi, a professor of marketing, too few companies make understanding consumer behavior a priority, which leads to unfounded assumptions and flawed strategies in retooling their operations for the downturn. "Researchers link companies' actions during economic cycles to their market value and infer optimal strategies in a recession," she says, "but I think we should start by understanding what consumers do in a recession."

To answer that question, Ailawadi and her co-authors embarked on a two-and-a-half-year study of consumer behavior, tracking every grocery purchase of a panel of households from 2006 to mid-2008 (as the recession was beginning, but gas prices were already affecting disposable income). For every dollar per gallon increase in gas price, the average household in their study reduced monthly consumption by almost 10 percent and monthly expenditures by just less than 5 percent–this despite grocery prices trending upward and consumers eating out less. Perhaps more interesting for companies is exactly how these households reduced expenditure. As gas prices rose, they shifted purchases away from traditional supermarkets and drug stores. Mass merchants like Wal-Mart and Target gained share but only at their "super" stores. Club warehouses such as Costco and Sam's Club saw only a marginal share increase, perhaps due to cash-strapped consumers not willing to make the bigger investment required to buy in bulk.

One important finding for packaged-goods producers is that the death of brands–and the subsequent rise of store brands–is somewhat exaggerated. While consumers in Ailawadi's study did shift away from regular-priced brand-name goods, the largest gains were made not by private labels but rather by brand-name goods sold on promotion. In other words, while some consumers are only sensitive to costs and buy store brands, there are plenty of others who are loathe to give up their favorite brands, provided they can get them at a discount. "I'm not suggesting we shouldn't worry about store brands," says Ailawadi, "but consumers are not running to store brands in droves. If national brands are able to provide promotions they will retain customers through these troubled times."

Of course, that means those brands might need to cut into their own profit margins, but Ailawadi argues the cost is worth it. Likewise, other researchers have found that companies who cut advertising during a downturn tend to suffer more in the long run than those that take a hit on profitability during a recession but continue to support their brands. "Speaking of brands, for years people have said, 'don't promote because it hurts brand equity,'" she says. "I would say that fear is overrated–companies need to stem the possibly long-term loss of consumers to store brands. And promotions can do this. Recall that Procter & Gamble wanted to cut promotions drastically in the '90s but retreated from the move in the face of sustained and significant market-share losses."

What Ailawadi does worry may dilute brand equity is initiatives by manufacturers to offer lower-tier versions of their brands–such as Bounty Basic or Tide Basic–to stave off consumer flight to private labels.

Among consumers loyal to national brands, Ailawadi found, higher-tier brands gained share at the expense of lower-tier brands as gas prices went up. It is as if consumers said if they were going to pay for national brands then they wanted the best. "'Basic' versions of well-known brands have to be priced very low to effectively compete with store brands. Unless manufacturers can really separate these products from their core brands by selling them in different retail outlets, etcetera, they could end up doing damage to the core brands while still not profitably competing with store brands," she says. And if a company is going to remain competitive when the clouds lift and the economy improves, a vibrant brand may be the most important asset it has.