Wal-Mart, which sold more than $316 billion of low-priced goods last year, is not merely the world's largest retailer; it is also the foremost repository of information on consumer brands—and the marketing of those brands. Wal-Mart's shelves are jam-packed with the latest innovations in consumer goods packaging, design, promotion, and technology... from Gillette's patented razor blades to the myriad formulations of Crest's latest toothpastes.
But here's the paradox: Wal-Mart's brand value increases when those products stay the same—when consumer goods companies run out of ideas.
To understand why is to understand the nature of marketplace choice in today's hourglass economy: "Almost every category of consumer goods is in the process of forming into pools at both ends of the market," writes author Michael J. Silverstein in his new book, Treasure Hunt: Inside the Mind of the New Consumer. "In category after category, premium entries are growing, bargain brands are stealing share, and the middle is shrinking. "
Or to place his observation into marketing context: brands that innovate are growing, and brands that don't innovate are transferring their equity—and subsequent long-term income growth—to low-cost manufacturers and discount retailers.
In fact, Wal-Mart built one of the world's most valuable brands off of the backs of the world's most well-known brands. By pressuring manufacturers to reduce prices year after year on products that, in essence, don't change, Wal-Mart created a consumer expectation of one-stop shopping for trusted, bargain brands. Hence, the trusted—and growing—Wal-Mart brand: "Everyday low prices" on stuff that's perceived as "good enough."
But that's just half of the hourglass. The top half is growing as well, with distinctive products that offer tangible and emotional value for which people are willing to pay a premium. The one place a company doesn't want to find itself is stuck in the shrinking middle.
This shrinking middle is where many of America's most well-known and well-respected brands find themselves today—from iconic fashion brands like Levi Strauss, to Sara Lee's tired food and apparel brands, to Kraft Foods' household cheese brands.
And their self-imposed positions were fairly simple to foretell; all you had to do was watch their marketing efforts. When I discovered a $20 pair of Levi's jeans at Wal-Mart, the company's destiny was clear. I also watched Sara Lee's brands suffer from a paucity of innovation and gratuitous price reductions. And it appears from behemoth Kraft's recent predatory pricing practices on various supermarket cheese brands that it too has run out of ideas and is on the brink of handing over its well-deserved equity.
At face value, these tactics may appear to be temporary marketing maneuvers designed to reduce the encroachment of competitive brands, including store brands, and thus increase market share. In fact, they are conspicuous announcements by Levi Strauss, Sara Lee, Kraft, and others that "our brands are really nothing special" and therefore smart shoppers should choose based on price.
And once customers have relegated a brand to commodity status, to a choice made on price alone, it is very difficult—and expensive—to get them to trade back up for that brand in the future. So what's a consumer products company to do?
America's top consumer brands are at a crossroads and have some tough decisions to make to avoid being caught in this fatal squeeze of increasing sales and shrinking profits: Should we satisfy the street today or wow our customers and satisfy the street over time? Do we create real brand value or trade our equity to "hit the numbers?"
The two long-term strategic options are glaringly clear: re-engineer the business to become the world's low-cost producer, or invest in new product development and value-added marketing. The surer path to profitable market share growth is the latter, since it has been proven that customers will pay more if they feel that they are receiving additional value with the higher price.
So while struggling Levi's obsession with volume informs it schizophrenic product offering, fashion-obsessed Polo Ralph Lauren buys back its Polo Jeans license from Jones Apparel Group to stay focused on differentiated, high-end products. As Sara Lee attempts to boost sales of its Jimmy Dean sausage brand with quirky TV advertising, Nestle, the world's biggest food company, invests in patented technologies to tackle obesity and diabetes. And while Kraft surrenders to commodity pressures with price reductions, family-owned Sargento innovates with Bistro Blends, a proprietary idea mixing premium cheeses with herbs and spices.
Make no mistake about it: When companies run out of ideas, bad things happen to brands. Instead of differentiating their offerings with meaningful value-added features, like healthier and more flavorful products, time-saving recipes and packaging, or even emotive, associative value, marketers end up resorting to price cuts and special promotions. Instead of taking a long-term view of customer value and growth in sales, earnings and new product development, their focus shifts to a short-term desire to grow market share with discounting and deal-making.
Yes, there is a subsequent growth in revenue, but brand equity is damaged and profit margins invariably get chewed up as once-loyal customers migrate to even less-expensive commodity brands. And as with many fashionable new trappings, it's a position that is easy to slip into but can become a real struggle to wiggle out of over time.
Take the first step (it's free).
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