Elasticity, Revisited
Back when this newsletter was in its infancy, we discussed findings from IRI’s 2020 CPG Growth Leaders Report.
A key takeaway from that report was the fact that the CPG market was bifurcating: “Large CPG innovation and hyper-targeted small CPGs” were increasing premiums at the top-end of the market, while more value brands and private labels are capturing more of the rest of the market.
In response, we wrote that might be challenging for CPG brands who were following the original/traditional DTC playbook of lower prices/higher value might find it challenging to reach their growth potential:
A slightly-better-for-you version of something at not-quite-a-premium price is how the traditional DTC brand could be described. You could also describe this as attempting to blur the lines between value and high end. And based on the IRI insight, it sounds like that approach may end up being an uphill battle.
There’s plenty more time to go before we dissect whether that intuition was right, but Business Insider reported this week that Whole Foods is raising prices on emerging brands. A sign, perhaps, that trying to straddle two worlds is even more dangerous during an inflationary (and possibly recessionary) period?
If this is true, or if you believe it has a high likelihood of being true, pricing and market positioning may be the most valuable levers to pull you can pull right now to continue driving growth.
As we wrote in Elasticity this June:
The bet here—or the hypothesis, at least—is that when larger CPG brands cut prices to maintain market share, smaller brands are likely to lose their lighter buyers.
This likelihood is more tied to consumer behavior and a brand’s market size than a brand’s near-term marketing tactics, so trying to fight them by responding in the same way as larger competitors may be futile.
(We’ll note there are nuances and exceptions to this, but will skip those for now.)
Instead, a move to increase prices would mean ceding a group of light buyers in exchange for more revenue from existing heavy buyers—and new customers who align more to the demographics of existing heavy buyers.
This move, it seems, may be forced on brands by some retailers who are aiming to drive growth through the same mechanics as discussed above.
Whole Foods is the first retailer to be reported in doing this, but it wouldn’t be too surprising to see other retailers adopt this approach, as well: By forcing smaller CPG brands into a higher premium, it allows for retailers to convey even more value for private label.
If consumer spending is down, this mechanism would create an anchoring effect that would potentially create more demand for higher margin products. A private label brand would remain the same product as before at the same price as before, while a small CPG brand would be the same product as before at a higher price than before. Where do you think the lighter buyers of the small CPG brand will go?
If this is the case—and should it be impacting your brand—the question, it seems, is whether you lean into the opportunity to move upmarket or whether you try to straddle the uncomfortable position of remaining in the middle.
What’s good for the retailer may seem, on its face, to not be good for the small CPG brand. But if you see room to win at a premium (or potentially move into the premium part of the market), this may be an opportunity worth exploring.