The decline and fall of the premium brand

Is it really happening?

Stephan F Buck

Stephan Buck suggests that the premium brand is no longer guaranteed its position in the market, and examines the growing importance of the retailers' brand. The mechanisms that link advertising and consumer behaviour are examined in a study by Taylor Nelson AGB.

CLAIMS THAT the premium brand is in terminal decline are not new. To my personal knowledge they were made in the 1970s, continued through the 1980s, and are of course very much in vogue at present. Yet most of the dominant brands of the 1970s are still with us and usually still brand leaders. Mark Twain's comments on reading his own obituary that 'reports of my death have been somewhat exaggerated' come to mind.

But even if we are sceptical about scare stories alleging the imminent extinction of the premium brand, it would be a mistake to swing too far in the opposite direction, and deny the possibility of major change in the structure of the grocery market.

Such changes do happen. A century ago the key players in the grocery market were the wholesalers, who split up basic commodities and sold them on to the multitude of small retailers. Subsequently, developments in packaging and marketing techniques led to the dominance of the manufacturers' brand, and although wholesalers still exist, they now play a relatively marginal role. The question is whether evidence can be provided to suggest that we are now in another period of transition, resulting in the inevitable decline of the manufacturer's brand to be superseded by, presumably, the retailer's brand.

One can point to a number of significant and growing threats to the dominant position of the premium brand. Exhibit 1 shows the growing share of the market for packaged groceries held by the top five supermarket chains (Sainsbury, Tesco, Asda, Safeway and Gateway). I exclude Kwik Save from this list for reasons I shall explain shortly. Together, these five hold two-thirds of the market, a share which has doubled in the past 17 years. This must give these companies great market power, and it would be most surprising if they were not able to use this to improve their margins at the expense of their suppliers.

Exhibit 2 shows one result of the growing power of the supermarket chains. Retailers' own-label products have remorselessly increased their share of the grocery market, from a little over 20 per cent in the late 1970s to an all time high of 35 per cent in 1994. This expansion is largely at the expense of the manufacturers' advertised brands and naturally creates severe problems for them.

A close inspection of Exhibit 1 and 2 might suggest that a slowing down of supermarket growth occurred in the early 1990s. This obviously raises the question whether this signalled a turn in the tide for the premium brand. Sadly for them the answer is no. In fact, the development causing the slowdown in supermarket growth has put premium brands under even greater pressure.

Supermarket growth slowed in the early 1990s because of the challenge of the discounters. Kwik Save had maintained the policy of concentrating on low prices, particularly by offering budget brands, when most of its competitors converted to the Sainsbury strategy of selling themselves in terms of the value they offered. The Kwik Save policy paid off in the 1990s both for them, and for a number of other discounters who entered the market. Altogether, the discounter share of the market almost doubled between 1990 and 1993, although it remained only about a fifth of the supermarket share. However, the trend was enough to induce most supermarkets to enter a price war, offering cut-price own-label products (eg Tesco Value) which made premium brand prices look even further out of line.

There are many examples of the growing importance of price in the UK grocery market, but most are anecdotal or product specific, and therefore to some extent, suspect as a basis for generalisation. However, there has been one thorough and widespread study of the grocery sector between mid-1991 and 1994 using the AGB Superpanel data- base (Hamilton 1994) from which significant general conclusions can be drawn. Exhibit 3 shows some of the important information produced by this study. As would be expected, the price elasticity of brand leaders is lower than the average, and if we look at the three year period as a whole, number two brands in the market show average price elasticity. But there has obviously been a significant change in the last year covered by the study (July 1993 to 1994) strongly suggesting that the effect of the price war has been to promote the ranking of price sensitive (ie usually cheap) brands although, normally, not to brand leader. This point gains confirmation from the fact that brands launched in the last three years have a very high price elasticity (see Exhibit 3), suggesting they were marketed on a price platform.

EXHIBIT 3. PRICE ELASTICITY OF BRANDS IN SUPERPANEL DATABASE

PRICE ELASTICITY INDEX
Brand leader 1991-199487
Brand leader 1993-199493
No.2 brand 1991-199499
No.2 brand 1993-1994118
New brand in last three years140
All brand average July 91-94=100
Source: TN AGB Superpanel