Written by Rob Levine
Commodity prices have increased significantly in the last 12 months; dairy + 27%, grain + 33%, coffee + 32% and fruits are up a staggering 62%. Until now, hedges have shielded most manufacturers. The crunch has food manufacturers, restaurant operators and grocery retailers posturing on price increases, making their best effort to stay on the winning end of margin squeeze. As the debate plays out, both Kroger and Sysco are planning to leverage the unstable economic climate with an increased emphasis on their private label products.
This has branded manufacturers facing the proposition of raising prices in the face of a long, painful economic recovery with real unemployment hovering at 15%. During the 2007 crunch, some manufacturers lifted margins, while others raised prices and suffered as their customers traded down to cheaper, non-branded products.
Many manufacturers will cut costs and hunker down. Sometimes striking better deals with suppliers does this, but often it comes down to reductions in key areas that impact the customer relationship with the brand. In the short term, cheaper ingredients and packaging and cuts in marketing budgets and infrastructure may ease the pressure; however the long view suggests that this will have a negative impact on the brand, leading to lower sales over time.
Although retraction is a natural organizational reaction, marketing textbooks are filled with case studies on manufacturers who have seized the opportunity to retool their business in the face of a crisis. Apple and Ford, both in highly discretionary categories, continued to invest in innovation and marketing through the recent recession. Each brand emerged stronger and with incremental market share.
McDonald’s took the opportunity to build on their McCafe concept and establish themselves as a destination for snacks and indulgent beverages. Not only did they take market share from Starbucks, but also they are almost single-handedly responsible for the real growth in commercial restaurants forecasted by Technomic through 2010.
The recession yielded other phenomenon. Consider this—for the first time in 30 years the price of sugar as an ingredient was cheaper than high fructose corn syrup (HFCS). Beverage and snack manufacturers leveraged decreased input costs, along with the growing anti HFCS backlash, to reformulate products with sugar and take credit for the “premium” ingredient. Coke, Pepsi and Dr. Pepper/Snapple all highlighted the shift in consumer marketing and point-of-purchase materials. Consumers reacted and today the corn lobby is trying to get the name of HFCS officially changed to “corn sugar.”
Then, there is the classic story of how Kellogg used the Great Depression to establish dominant market share in the ready-to-eat cereal category. Both companies held relatively equal share in the emerging market in the late 1920s. When the depression hit, consumer demand for the category was in question in both organizations. Post reined in expenses and cut back on advertising. Kellogg doubled their marketing budget, moved aggressively into radio and heavily pushed its new cereal, Rice Krispies. By 1933, even as the economy cratered, Kellogg’s profits had risen almost 30% and it had become the industry’s dominant player; a title it holds over 70 years later.
As marketers finalize their FY 11 plans, they are faced with challenges that go back to the 1930′s, but are as fresh as 2007. In the wake of great uncertainty they can choose to “batten down the hatches” or “damn the torpedoes.” The past is a great predictor of the future; organizations that identify their opportunity and take an offensive stance will emerge with stronger brands.
