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Companies' Next Coronavirus Challenge: Getting Cash-Strapped Shoppers to Spend

13/05/2020 4:04pm

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By Saabira Chaudhuri 

The makers of shampoo, cereal, frozen pizza and other supermarket staples are working to woo shoppers who are cutting back on spending, as tough economic times set in.

Executives are looking back at the last major recession for tools to keep customers from swapping their brands for cheaper ones from rivals. Nestlé SA -- the world's biggest packaged foods maker -- is rolling out new, more affordable pack sizes, while Oreo cookies owner Mondelez International Inc. is narrowing ranges to focus on core products. Kellogg Co. is exploring marketing to convey how many meals a single box of cereal can provide.

"We've studied what worked well and what did not in past recessions and how this one could be different," Kellogg's Chief Executive Officer Steve Cahillane recently told investors. "We're preparing ourselves."

Preparing for a downturn this time around is tougher, executives say, because the potential for wider spread or a second occurrence of the new coronavirus isn't yet known. Consumer-products companies are already scrambling to meet surging demand for household essentials while operating factories at lower capacity because of worker sickness or social distancing.

"You need to manage right now with both a telescope and a microscope," said Graeme Pitkethly, Chief Financial Officer for Unilever PLC, owner of Dove soap and Hellmann's mayonnaise.

The Covid-19 recession is expected to be deeper and more global than the financial crisis of 2008-09. The International Monetary Fund has forecast the world economy would shrink by 3% this year, compared with a contraction of 0.1% in 2009. U.S. consumer spending in March logged the steepest monthly decline on record, while the monthly number of jobs lost in April was the biggest on record.

Back in 2009, consumer-goods companies used a variety of tactics to cater to cash-strapped shoppers. Unilever acquired affordable personal-care brands like Sanex and Radox from Sara Lee Corp. to complement its portfolio of higher-priced brands. PepsiCo Inc. tailored promotions to paycheck cycles, pushing large multipacks of snacks near the start of the month and smaller packs later on after finding that brand loyalty dwindled with cash.

Others reformulated existing brands. Procter & Gamble Co. launched a variant of its Tide laundry detergent that was 20% cheaper. ConAgra Brands Inc. reworked its Banquet frozen meals to continue selling them for $1 even as costs spiked.

Though it is early days, some companies are examining pack sizes to make products more affordable.

Nestlé plans to roll out single-serve sachets of its Maggi chicken seasoning in Indonesia for the first time, to appeal to shoppers with little to spend. In parts of Europe it will sell one-kilogram bags of the seasoning, which are cheaper per serving than the 200-gram or 500-gram packs currently sold.

"We are leaning in by doing multipacks, big packs, 10% free, which we weren't doing with the same intensity before Covid, and which is what we will do more and more post-Covid," said Wayne England, who runs the food business for Nestlé.

Hershey Co., whose SkinnyPop and Pirate's Booty snack brands last month lost share to cheaper products, said it is also evaluating pack sizes to ensure it has enough entry-level priced items.

"A significant number of American households are not working and experiencing meaningful financial pressures," said CEO Michele Buck. "Their shopping priorities have changed."

During recent economic crises in Brazil and Argentina, Unilever deployed what its executives call "the full price piano," ensuring its most popular products are available in a range of sizes and prices. The variety allows shoppers to stick with brands regardless of their budget. In Brazil, Unilever's upscale laundry detergent brands Omo and Comfort are complemented by a medium-priced brand Brilhante and a cheaper one, Surf.

"We understand very, very deeply the attractiveness of making brands affordable to consumers," said Mr. Pitkethly. "I don't mean just value brands themselves, I also mean premium brands that are available at affordable price points."

Kellogg, P&G and Coca-Cola Co. are also tinkering with packaging to put products within reach of consumers with tighter budgets. "We're really looking at how we can drive affordability," said Coca-Cola CEO James Quincey.

Companies are girding to defend market share from cheaper store brands, which grew strongly in the last recession and have seen growth accelerate during recent lockdowns. For the four weeks to April 19, U.S. volume in store brands for food grew 16.1%, compared with growth of 5.8% for branded items, according to IRI.

Nestlé has begun changing its on-pack recipes and creating new video ads to pair its cooking aids with cheaper ingredients like eggs, rice and pasta, or chicken rather than beef as consumers trade down, said Mr. England.

Kellogg is considering ads that tout the affordability of its cereal. "If people understand how many meals you get from a box of cereal, that could be very helpful," Mr. Cahillane said. During the 2007-09 recession, the company ran a two-month campaign in the U.K. spotlighting the cereal's cost of 10 pence a serving.

Past crises have shown executives that consumers often indulge in more upscale supermarket products as they cut back on dining out and salon treatments. As shoppers flocked to high-end chocolate during the 2007-09 recession, Mars Inc. introduced M&Ms Premiums, made from a new recipe with no candy shell in flavors like mint chocolate and raspberry almond.

Nestlé recently reported strong first-quarter growth in premium brands like Nespresso and San Pellegrino in the U.S., even as it said consumers are focusing on value for money.

"It's the two extremes, the value side and the premium side that do hold up quite well in a downturn," said CEO Mark Schneider. "For the early innings of this new situation, that seems to apply as well."

Shoppers may find fewer flavors and fragrances of products as retailers conserve shelf space for top-selling items.

Companies had already narrowed ranges to focus on making larger volumes of their most popular items to meet surging demand from consumers in lockdown. Mondelez, for instance, has prioritized its top 100 lines. It said Oreo lines like Double Stuf and Thins will continue uninterrupted, while seasonal variants like strawberry shortcake or s'mores are more at risk.

Companies across the sector are also accelerating cost-cutting efforts and delaying some planned new products. But spending on advertising and investments in research and development are still important, say executives.

"Some of the mistakes made across categories in recessions is a hunkering-down mentality," said Kellogg's Mr. Cahillane. "People still want good news. People want fun. They want to try things in an affordable way."

Annie Gasparro contributed to this article.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

 

(END) Dow Jones Newswires

May 13, 2020 10:49 ET (14:49 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.

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