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When a tough economy makes marketers dial back their efforts to promote national brands, their actions may be penny wise when it comes to cutting costs, but pound foolish in terms of preserving brand equity, new research shows. Their belt-tightening, in fact, opens the door for increased market penetration by cheaper private-label goods.
During economic downturns, consumers are more likely to purchase private label packaged goods, which often cost 20 percent to 60 percent less than brand-name counterparts. When national marketers react to a depressed economy by cutting ad and promotional spending and holding back on product innovations that could help differentiate their brands, lower-priced private label brands have an opportunity to capture increased market share, according to research published in the January issue of the American Marketing Association's Journal of Marketing.
The research by Lien Lamey, Barbara Deleersnyder, Jan-Benedict E.M. Steenkamp and Marnik G. Dekimpe analyzed more than 20 years of market share data for more than 100 product categories.
"In contractions, national brand promotional activity declines relative to private-label activity, just when brands need it most," the study authors wrote. "This results in a significant increase in private-label share in recessions, which subsequently leaves permanent scars on national brand performance."
If national brand manufacturers want to better defend their turf, the authors said, they should try to maintain — or if possible even raise — current marketing spending during downswings because marketing plays an important role in helping protect market share. One approach they recommended is working with retailers to run more price promotions on their national brands or lower prices temporarily to narrow the price spread between branded products and private label.
Retailers marketing their own private-label products are getting it right by expanding retailer marketing and promotional activity in a way that gets their store brands into customers' carts, the authors said. Getting customers to consume private-label products will gain more customers for store brands and make it more difficult for manufacturers to win them back, even when the economy recovers.
Reach BusinessNewsDaily senior writer Ned Smith at firstname.lastname@example.org. Follow him on Twitter @nedbsmith