CPG Turns to Premiumization to Boost Growth
Macroeconomic Conditions Impact Shopper Attitudes
CPG manufacturers and retailers still recovering from the last recession have relied on price increases for boosting the top and bottom line. Recognizing this is an unsustainable long-term strategy, management teams have turned to premiumization as one strategy to drive sustainable growth.
- The strengthening U.S. economy has benefited most shoppers, but especially wealthy ones.
- Wealthier shoppers are focusing on purchasing big-ticket items, while other shoppers are increasingly spending more slowly.
- These spending patterns are true for both national and private label brands.
Premium Strategy Can Yield 10–15 Percent Topline Growth
IRI research indicates that shoppers remain eager to try new products and are willing to pay more for new experiences. A premiumization strategy leverages the fact that many shoppers at all income brackets are in better financial shape than just a couple of years ago. For a manufacturer with $1 billion in revenues, 10–15 percent topline revenue translates to $100–$150 million in growth.
- Premium CPGs also allow consumers to indulge at a cost well below that of dining out and/or professional services (e.g., spa) so they can begin to live better while still staying on a budget.
- Within the top 10 fastest-growing CPG categories, premium-tier products have gained share since 2010.
- Premium-tier products are gaining share in all types of large-format stores; growth in small-format stores is more limited.
Making the Leap to Premium Can Be Perilous
The potential success of a premiumization strategy is built solely on the willingness of shoppers to accept the premium value proposition. Gaining this acceptance is possible for both newer brands and established brands, but each category faces different challenges.
- Premiumization isn’t for every brand and doesn’t motivate every shopper.
- Shoppers’ openness to try new products does not extend to every category, channel or even region of the country.
Framework to Win
To maximize the potential of premiumization strategies by driving maximum incremental revenue, gaining market share points and enhancing shopper loyalty, manufacturers and retailers can take advantage of IRI services that will help them accelerate growth through premiumization. These services will enable management teams to:
- Define a business strategy based on pockets of growth and white spaces in the CPG companies’ current categories.
- Develop a portfolio pricing strategy to pinpoint optimal price points at a subcategory level.
- Understand the right mix of products across price tiers to target specific regions, channels and retailers.
- Develop a strategic storyline for retailers to convey portfolio upgrades to the premium tier and value propositions for the new offerings.
- Understand consumer buying behavior and their path to purchase.
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