With the Great Recession nearly four years in the rear view mirror, packaged goods companies would love to declare a truce when it comes to discounting. But that could be premature if recent events prove prescient.
The Keurig K-Cup has been one of the fastest growing consumer packaged goods innovations ever, but growth is slowing. Despite booking sales increases of 59% and 21%, respectively, for its K-Cups and Keurig single cup brewing units & accessories in the first quarter of 2012, Waterbury, VT-based Green Mountain Coffee Roasters saw its share price plunge over 40% in one day in May. This after the company announced that it was having difficulty anticipating demand and consumer response to price increases.
The future could get even more interesting for Green Mountain as reusable filters designed to be used with single cup coffee makers like Keurig are widening their supermarket distribution in the US. One new alternative, the Ekobrew Reusable Filter, enables consumers to use whatever coffee they want, and save up to 70% on the cost of K-Cups in the process. Ekobrew also makes an environmental statement with its “Make Coffee, Not Trash” advertising slogan that highlights the amount of solid waste generated by disposable K-Cups. That could resonate as over 54% of US consumers say that environmental and ethical considerations are important when deciding which products or services to buy, according to a 2011Datamonitor(www.datamonitor.com) consumer survey.
Another sign of consumer price sensitivity is consumer rejection of J.C. Penney’s new everyday low price initiative that replaced the department store’s heavy reliance on coupons and sales. In mid-May, the retailer reported an 18.9% drop in sales at stores open at least a year in the first quarter of 2012. This announcement, combined with the news that J.C. Penney would be dropping its dividend, sent Penney shares down by nearly 20% on May 16th for its worst percentage point decline in decades.
What these two events have in common is that they underscore the still tenuous state of the consumer and consumer spending. “Consumers became more deal driven during the recession, and it is going to take an extended period of time to wean them from discounts which have become something of an addiction” notes Tom Vierhile, Innovation Insights Director for Datamonitor.
“Even innovations like the Keurig single cup coffee maker that offer great convenience benefits are going to be pressed to make a more persuasive ‘value for the money’ case” says Vierhile. He goes on to note that “distinctions between packaged goods products have eased over the years as ‘new to the world’ innovation has slowed, making it harder for consumers to justify paying a price premium.” Indeed, a 2011 Datamonitor consumer survey found that over 70% of US consumers agreed that so-called “famous brand” products were more expensive than private label offerings because of extra spending on advertising.