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How Retailers Can Appeal to Lower-Income Shoppers

November 24, 2011

Retailers face several challenges as they enter the 2011 holiday season. Unemployment remains high. Gas prices have risen 90% from 2008 to 2010, leaving consumers with $160 billion less spending money per year.

Many retailers are responding with across-the-board price promotion strategies. This is problematic, because not all shoppers are equally price sensitive across all categories. The Cambridge Group conducted a Pricing Power Study across 124 everyday consumable categories using Nielsen data from 2008 to 2010. Our findings suggest that a more precise strategy that carefully raises and lowers prices for the right shoppers in the right categories can drive profitable growth for the retailer and the category overall.

In particular, we found lower-income shoppers to be surprisingly resilient to price increases in a number of categories. These lower-income shoppers think like savvy CFOs and are willing to pay more for categories that provide a usage benefit as well as a variety of economic benefits for their own “household P&L.”

For example, lower income shoppers appear willing to pay more now to hedge future costs. One such category was over-the-counter family planning products, better known as birth control. Between 2008 and 2010, prices of these products grew 17%, while sales grew by 14%. Lower income shoppers may see OTC family planning as a way to control family costs in an uncertain economic environment.

We see that many lower-income shoppers think holistically about pricing, focusing more on total cost versus the individual cost of inputs. In food, for instance, we see that lower income shoppers think more about total cost-per-meal instead of cost per item.

We see that “sandwiches” as a meal category has grown, especially given the relatively low cost-per-meal ($1-2/meal per person) that sandwich items can provide. Low cost-per-meal sandwich categories liked canned seafood and packaged deli meats meaningfully raised prices and grew sales 5% and 3% respectively. In contrast, higher cost-per-meal categories like prepared meals (which cost $4-$5 per person, on average) raised prices 8%, but declined in sales by 5%.

Similarly, categories that provide similar quality but are a meaningful discount to their quick serve restaurant equivalents have grown significantly. Breakfast foods increased prices by 6% and grew sales by 9%, while coffee prices increased by 6% and sales grew by 3%.

Lower income shoppers are also willing to pay more for categories that they see as an investment in their careers and future income. For example, the men’s shaving category successfully raised prices and sales. While many assume men’s personal care is primarily driven by romantic relationships, in fact one of the biggest drivers of demand for men’s personal care is career advancement. Spending more on shaving products in a tough economic environment makes sense in that context, because it strengthens employment prospects.

Retailers must understand the role that a particular category plays not only in its shoppers’ lives but also in its shoppers’ financial context and their household P&L. Is the category a hedge, an investment with a greater benefit payoff or a cost to be managed? If it is a cost to be managed, then retailers must assess if the shopper is managing cost at a total level (e.g., cost per meal) or at an individual unit level.

Once a retailer understands the economic benefit a category can provide, it can tailor its merchandising and marketing strategies. Retailers can use displays to highlight the economic benefits of a category holistically and over time, versus merely the promotion on hand. They should think about prioritizing and merchandising lower total cost categories. Several retailers are capitalizing on this insight, and offering ‘meal packages’ which pull from several categories across the store, such as meat and fresh produce. SuperValu for instance, has reported that even its slowest ‘meal deal’ drove a 20% lift.

By more fully appreciating the shopping savvy and sophistication of lower income shoppers, retailers can avoid blanket and knee jerk price promotions/reductions strategies. These strategies not only leave money on the table, but are not viable strategies for long-term profitable growth. Precision pricing helps avoid pie-splitting strategies that yield ‘rented’ market share with low loyalty, instead of a true pie-growing strategy that drives healthy category growth.

Dr. Venkatesh Bala is the Chief Economist for The Cambridge Group. Shreya Shankar is a Specialist Consultant at The Cambridge Group. Eddie Yoon is a Principal at The Cambridge Group.

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