Monday, January 6, 2014

Hype and Sales vs. Brand Quality

We live in a time of extreme hyperbole. A winter storm is now “snowmageddon.” The early December weather that shut down much of the Midwest became the “icepocalypse.” And it’s not just the Weather Channel that is to blame. Extreme hype attacks come from every corner – from movies (funniest movie of the year) to cars (prices below our cost).

As a result, consumers tend to take a jaundiced view when confronted with such extreme statements. This is clearly apparent in the recent holiday sales advertising. Studies have shown that Black Friday prices aren’t necessarily better than a mid-year sale, and consumers, for the most part, don’t believe the hype anyway.

A UK marketing group polled 1,500 U.S. shoppers in December about pre-Christmas sales and found that 70% of them believed the sale was fake and just a trumped-up way to drive traffic. That aligns with a Wall Street Journal article from November that challenged the validity of so-called “Black Friday” pricing; in many cases those prices were the same or even worse than other sales earlier the same year. Older and more affluent shoppers scored even higher on the cynicism scale – 84.4% of 55-64 year-olds who earn between $75,000 and $99,000 a year were more likely to dismiss pre-Christmas discounts as bogus.

The growth of sale activity by retailers, combined with the growth of cynicism by consumers toward those same prices, has led to a vicious downward cycle. More and more sales are being shouted about, but shoppers are less and less interested. Technology allows consumers to check prices locally and online in real-time to see if what is being touted as an unbelievable price is – in reality – believable. 

Despite the lack of interest by shoppers, retailers continue to pull out all the stops – at least in marketing terms – to promote fourth quarter sales. This is driven by retailers concerned about increased competition and fear of missing out on holiday spending by shoppers. But something else is happening as this cycle continues: Shoppers are beginning to lose trust in retailers. Not just in terms of sale pricing, but for everything. This, in turn, negatively impacts the retailer’s brand. 
JC Penney is an example of a company that drove this practice into the ground. 

When former CEO Ron Johnson took over JC Penney, he found that only one item in 500 was sold at full price. JC Penney had taught its customers to shop only for sales, which defeats the purpose of a sale to begin with. At one time, a sale was a way to drive traffic by offering genuinely lower prices and getting some regular-price merchandise into the shopper’s cart. Now if it’s not on sale, shoppers won’t even think about a purchase; they know to wait until it goes on sale (they also know that it will). While JC Penney is an extreme example, it’s only a matter of time before other retailers drive their way to the bottom. 

At the other end of the spectrum is Apple (oddly enough where Mr. Johnson made his name). Apple products almost never go on sale, and when they do the discounts are minimal. Yet Apple sells everything it makes, and the company’s margins remain the envy of the industry. 

Certainly more retailers would prefer to emulate Apple than Penney, so what is stopping them? Fear mostly; fear of a bad week, or a bad quarter or year. The problem is that few retailers have offered their shoppers anything other than price for so long that both the retailer and the shopper have forgotten what the store’s original point of difference was.

Consumer packaged goods (CPG) manufacturers should be concerned about this trend as well. The constant pressure for lower prices puts a strain on relationships that should be more partner-oriented and less adversarial. Over time, reducing prices, or even promoting the perception of lower prices, can be detrimental to a brand by devaluing it in the eyes of the consumer. 

Carbonated soft drink manufacturers have dealt with this phenomenon for years as package sizes grew from 6-packs to 12-packs to 24-packs, but prices only increased a small percentage. Soft drinks are often cheaper than water, and the only time shoppers will buy them is when they are on sale. And if it’s not on sale this week, they’ll wait a week until it is.

The relentless push for low price also impacts CPGs from a sourcing perspective; a never-ending search for cheaper ingredients and cheaper packaging adds up to a reduced quality perception from consumers. Combine this with the low price and the overall brand value can be severely and permanently affected. 

While the push for “cheap” may not have reached its nadir, that point isn’t far off. Even with the overwhelming hype and millions of marketing dollars, Black Friday 2013 wasn’t exactly a rousing success. And while the counting continues for the overall holiday season, early indications are that it’s not going to be a banner year. 


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