Home Commerce How Brand Power Leads To Pricing Power

How Brand Power Leads To Pricing Power

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Hey readers! This is James Hercher, with the latest AdExchanger Commerce dispatch.

This week, we’ll highlight a few recent CPG earnings reports, during which legacy food and beverage brands appear more optimistic about their staying power than their startup competitors.

What’s in a brand?

In February, Scott Norton, co-founder of condiment startup Sir Kensington’s, published a eulogy for its ketchup line after stopping manufacturing.

Startups like Sir Kensington’s will sometimes claim that their products have prompted big brands, such as Heinz, to make big changes, like no longer using high fructose corn syrup. But the demise of the Sir Kensington’s ketchup line makes it clear that replacing a grocery store staple goes beyond creating a good product and inspiring new consumer grocery search patterns.

Startup brands are up against deeper pockets and powers of incumbency that cannot be matched.

On Amazon, a brand is a mix of pricing, customer star ratings, reviews, product imagery and product descriptions, as well as how the brand shows up in Amazon searches. But in a retail store, a brand relies heavily on a product’s recognizability – like how Tony the Tiger means Frosted Flakes.

For legacy CPGs, their brand is essentially the delta between what people will pay for a private-label clone and what they’ll pay for a recognizable product.

By that definition, legacy brands are very strong. They’ve been able to consistently increase prices without sacrificing revenue, even if there is a drop in total sales.

“The team is accepting the reality of an extended or expanded price gap versus private label as the challenge they need to deal with,” Procter & Gamble CFO Andre Schulten told investors last week. “What that means is we need to create product and packaging innovation, communication strategies and in-market executions that are able to provide value to consumers and retailers.”

Online native brands attempting to expand into grocery stores are built on super-low online margins and rely on data-driven advertising to target niche audience segments. They’re often not profitable and are backed by VC investors.

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In a store, those ecommerce brands are fighting a recognition gap. For example, they can sometimes be confused with private-label lines since people often don’t know the name and because the product is more likely to have a lower price.

“It’s really the third and fourth tier players in categories that seem to get hit the hardest” by retailer private-label lines, General Mills CEO Jeff Harmening recently told investors.

Pricing power

General Mills, like Coca-Cola, P&G and other CPG giants that reported earnings this month, raised prices, but that hasn’t dissuaded shoppers.

Chris Carey, Wells Fargo’s head of consumer staples research, said the quiet part out loud during the General Mills investor call this week, when he pressed executives to explain how the brand “comes to retailers with an inflation story” or a “pricing story” that justifies increases despite a high profit margin.

Coca-Cola’s profit margin “reached a new high watermark” this past quarter, said Lauren Lieberman, an equity analyst at Barclay’s, speaking during on Coca-Cola’s earnings call this week.

John Murphy, Coca-Cola’s CFO, said the company will “continue to be laser focused” on sales “using our RGM work to stay with the consumer.”

“RGM” is Coca-Cola’s term for revenue generation management, one of many euphemisms for price increase mechanisms. General Mills has SRM, strategic revenue management, while many investors and corporate execs favor the simple term “elasticity.” Regardless, these all describe strategies for balancing price increases and marketing increases with supply chain cost decreases.

Rather than being responsive to what consumers can afford, price increases are now part of the overall shareholder profit margin proposition. Product pricing is also increasingly detached from the prices of things like raw ingredients, energy and transportation.

For a category like sparkling water, for instance, price increases represent investments in marketing and the reality that people making those purchases are willing to tolerate a high margin for a zero-sugar drink in a thin can.

“Clearly, consumers are differentiating by category and brand strength and whether the brand or the category has earned the right to do the pricing, even if the pricing is largely cost driven,” said Coca-Cola CEO James Quincey.

In other words, pricing isn’t about what went into making and distributing a bag of potato chips or can of sparkling water. A business earns the right to raise prices by creating a known brand that people will pay more for when they see it in a store.

Five or six years ago, CPG brands responded to ecommerce rivals by cutting prices to compete on DTC terms, often trimming marketing to offset the loss of profit margin.

Now, legacy CPGs are raising prices, balancing sales and letting DTC companies operate rock-bottom margins without the national branding they need to justify price increases.

Do you really think Coke won’t win the zero-calorie beverage business? That Cheerios will give up its shelf space without a fight?

Let’s just say, stock up on Sir Kensington’s original ketchup while it’s still in stores. This will be the last summer when you can find it.

If you come at the condiment king, you best not miss.

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