Branding: Back to basics

Do low-tier brand-name items help or hinder?

It was akin to Ferrari rolling out a moderately fast sports car or Four Seasons unveiling a three-star hotel. In early July, packaged-goods giant Procter & Gamble began selling Tide Basic — a laundry detergent that doesn’t perform as well as regular Tide but sells at a 20% discount — in about 100 Wal-Mart and Kroger stores in Texas and Louisiana. The initiative will test whether a stripped-down version of P&G’s iconic brand (containing fewer stain removers and whitening agents) can attract new consumers to Tide, says Kash Shaikh, a spokesperson for the Cincinnati-based company. But Tide Basic may also be Procter’s strategy to address a more pressing issue: its multibillion-dollar Tide brand has been losing sales to cheaper competitors during the recession, giving up 3% of its U.S. market share in the most recent quarter alone. While Tide Basic could water down the equity of the brand, its addition to P&G’s laundry detergent lineup may help it better weather this downturn. Indeed, brands with a range of price points seem best positioned in a time of cash-strapped consumers, since shoppers can trade down, says Colin Hession, a U.K.-based marketing consultant to the cosmetics and toiletries industries.

Starbucks, for one, is fortunate to have lower-priced beverages alongside its $5 venti mocha Frappuccinos. Retail figures in the U.S. show that while hamburger fast-food chains and doughnut shops are stealing share of specialty coffee drinks from gourmet coffee shops like Starbucks, gourmet coffee shops are growing their brewed coffee sales, according to a recent report from David Palmer, UBS Investment Research analyst. Increased sales of food and no-frill beverages such as a “grande mild” likely helped Starbucks post just a 6% decline in same store sales in the U.S. during its most recent quarter. Not bad considering U.S. retail and food service (excluding cars and automotive parts) revenues dipped 7.7% over the period.

P&G’s skin-care business also shows signs consumers are trading down while sticking with the brand. The company’s Olay line features products ranging from about $10 for a bottle of facial lotion to about $50 for a 1.7-ounce jar of ProX hydra firming cream. Olay actually grew its U.S. share of facial moisturizers in P&G’s most recent quarter.

For packaged-goods companies, selling lower-priced versions of a brand is crucial for fending off private-label products during a recession, since store brands typically prosper during tough economic times. Shoppers Drug Mart, for instance, has boosted its penetration of private-label products to 17.7% in its most recent quarter compared to 16.4% in the same quarter a year ago. What’s more, the severity of this recession may cause lasting changes in buying habits. Over a third of grocery shoppers are trying store brands for the first time in categories where they had previously only bought national brands, according to a poll of 800 U.S. households by GfK Custom Research North America. More important, 91% of those polled say they will continue to buy store brands when the recession is over.

While offering lower-priced products together with more expensive ones can benefit a brand during a downturn, introducing a lower tier of items has drawbacks. “I’m hesitant to criticize P&G because they’re usually pretty smart, but Tide Basic seems to be pretty risky. If the product works and does the job for you, why would you move back for goodness sake?” Hession says. Getting consumers to spend more on everyday purchases isn’t easy. Take Wendy’s. In 2005, the fast-food chain bumped the prices for some of its Super Value Menu items above 99¢ in an attempt to improve margins. But the change significantly hurt the number of people coming into its restaurants. In less than a year, Wendy’s had to drop prices back to under $1.

Whether Tide Basic can ultimately bring more bucks to P&G’s laundry detergent business remains uncertain. But even if the product flops, don’t expect P&G to stop targeting the lower end of its categories. The company sees capturing more of the value and super-premium segments as two of its biggest opportunities in the years ahead. Trading down, with the option of trading back up, may be a trend that’s here to stay — in good times and bad.