Even Package Goods Not Immune

As Consumers Trade Down to Private Labels, Category Takes a Sales Hit -- and Marketers Might Have to Cut Ad Spending

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BATAVIA, Ohio (AdAge.com) -- Anyone counting on package goods marketers to provide shelter in a recession should think again: Signs indicate they may not be so resilient in the economic downturn, which means marketing spending in the category may well take a hit.

Household and personal-care marketers that have grown for much of the decade by trading people up are starting to confront the reality of people trading down, even without a recession having formally been declared.

Note: Across the 10 household and personal-care categories with greatest private-label penetration. Sources: Sanford C. Bernstein, ACNielsen

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Sanford C. Bernstein reported Jan. 11 that private-label shares in the 10 U.S. household and personal-care categories with the highest private-label penetration grew half a percentage point on average to 27.5% in the second half of 2007. That came along with a decline of 0.9% in overall industry sales for the four weeks ended Dec. 29, according to the ACNielsen scanner data, the worst performance in a year that saw steadily declining growth but no actual declines.

Trading down
The rise in private-label shares came even before a slew of price hikes set to kick in early this year. Even if private-label brands follow those increases, higher prices and a weakening economy still could encourage people to trade down, said Bernstein analyst Ali Dibadj. "The industry may not be as defensive as a lot of people think." Bernstein also said such players as Unilever, L'Oréal, Henkel and Reckitt Benckiser may need to cut marketing spending because of rising commodity costs in 2008. The industry did so in 2005, resulting in a slowdown in organic sales growth, analyst Andrew Wood noted, and he predicts the same for 2008.

December results for U.S. retailers who sell package goods were generally dismal too, led by Target, which saw same-store sales decline 5%. The two leading drug chains -- CVS and Walgreens -- also posted disappointing December results.

Wal-Mart, despite slightly beating analyst expectations for December same-store-sales increases, still saw its overall revenue growth rate slip in the U.S. compared with last year. Since neither Wal-Mart nor Costco (with U.S. same-store sales up 5%), contribute to ACNielsen scanner data, so as much as half of the December decline in measured household and personal-care sales could reflect a shift in market share to those players, Mr. Dibadj said.

"Even when consumers aren't trading down by going to private label, they're doing it by going to larger packs and bigger shopping trips at Wal-Mart or Costco rather than one-offs at other retailers," he said.

After running up considerably in recent weeks as defensive plays amid the growing economic gloom, the stocks of P&G and Unilever were actually down more than the broader market on Jan. 11 following the Bernstein notes. P&G shares fell 3.2%, and Unilever was down 5.5%, compared with a 1.9% drop in the Dow Jones Industrial average. D.A. Davidson & Co. analyst Tim Ramey said rising commodity costs and limited ability to pass along price hikes could eat into the good intentions of food companies to hike ad spending this year. "To the extent they have innovation, I think they'll support that," Mr. Ramey said. But he said spending on base brands or older products could suffer.
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