Lowest Price Not Always the Best Price

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Lowest Price Not Always the Best Price

By Todd Hale - 01/20/2010
U.S.-based store brands are benefiting big time from the current economic downturn. As consumers continue to turn to better prices and value, retailers have clearly stepped up their game by enhancing their brands’ overall product quality and by adding strong marketing muscle behind store-brand initiatives. But a Nielsen review of U.S. department-level price gaps between store brands and manufacturer brands shows that retailers may be hurting themselves in the long run — and missing out on opportunities to collaborate with manufacturer partners to drive stronger category sales.

Within food, drug and mass merchandisers (including Walmart), Nielsen reports that the price gap between store brands and manufacturer brands is considerable — especially for non-edible departments such as health and beauty and general merchandise, where gaps ranged from 74 percent and 63 percent, respectively. Food departments have a smaller percentage gap: store-brand prices in the deli department were 22 percent lower than branded and up to 50 percent lower in the dairy department. Since the same period in 2006, price gaps have widened in four of seven departments (deli, frozen foods, dry grocery, dairy, nonfoods, general merchandise, health and beauty).

Closing the Gap
Are retailers losing category dollars because of aggressive store-brand pricing or greater focus on store brands vs. brands? While it’s recognized that that department-level price gaps can be driven by differences in category mix, brand and/or size mix (an examination of gaps on an individual category-by-category and product-by-product basis is recommended), these differences are significant and suggest that retailers aren’t maximizing category sales.

Consider this: an increase of just one cent in store-brand prices translates to roughly $400 million dollars in sales across all departments measured by Nielsen. In departments and categories with extreme price gaps, the potential to enhance category sales can be significant. With the ongoing price compression in the industry causing declining category and same-store-sales, retailers would be wise to think about shifting focus on raising prices on some of their own brands.

Prices Alone Not Enough
Prices alone aren’t the key to shoppers’ hearts. Price is top of mind for all retailers right now, but Nielsen’s annual “Shopper Trends” study reports that strong shopper relationships are built on at least four other factors that are equally important to driving commitment. When the pursestrings relax as the economy improves, those other factors will separate the strongest grocery retailers even further from the pack. “Shopper Trends” is an annual survey of Shopper Equity for the top retailers in the grocery channel, conducted across more than 55 countries globally. The U.S. shopper survey included feedback from over 29,000 American shoppers across all 48 contiguous states.

The survey found that the most successful retailers are the ones who are complementing current pricing strategies with a strong commitment to other shopper needs and building a stronger platform for long-term success. The five overarching areas that the study identified as contributing relatively equally to shoppers’ emotive equity in the U.S. are:

—Store accessibility
—Store format and wide selection
—Pricing and value for money
—Stocking quality products
—Efficiency and loyalty programs

The importance of these other factors also explains why every shopper isn’t doing her weekly grocery stockup in a discount chain, despite the pressure of a recession. Consumers still want to have a pleasant experience, and there’s tremendous value in making that process convenient and easy for them.

Dos and Don’ts
Manufacturers who think that store-brand success will fade when the economy improves are likely in for a rude awakening. Best-in-class retailers and manufacturers are those who collaborate on category and total store assortment, pricing, promotion, and advertising decisions.


—Don’t let price gaps get too large or risk declining category sales
—Don’t de-list high-penetration, high-frequency or strong niche brands, or risk driving shoppers to retailers who do carry them
—Do promote store brands with brands where there’s limited shopper overlap to drive category sales
—Do promote store brands along with noncompetitive or complimentary branded offerings to build larger baskets
—Do select credible suppliers and hold them to high standards


—Do branded vs. store-brand pricing analytics and show retail partners which branded offerings make good promotional partners
—Do proactive assortment analytics to demonstrate why your brands align well with store-brand assortments
Do take a collaborative approach to how you assess branded vs. store brand risks and —opportunities — retailer focus has never been greater.
—Do explore options for using excess capacity for store-brand production