Yogi Berra once lamented that, “The future ain’t what it used to be.”   Today companies have a related complaint:  “Brand loyalty ain’t what it used to be.”

No longer can brands expect long-term loyalty, even from its most faithful customers.  As economic pressures mount, competitive landscapes shift, and life simply happens, it may seem pointless for companies to try to lock-in customer loyalty.

Nonetheless, last month the folks at SymphonyIRI Group released a study entitled, “Brand Loyalty:   How Understanding Brand Equity Impacts Brand Loyalty and Delivers to the Top and Bottom Line,” [free registration required] which attempts to deconstruct the drivers of brand loyalty.

The scope of the report is limited to consumer packaged goods, so the findings may not apply to all categories.  Also the analysis defines loyalty as, “Greater than 50% of buyer’s total purchasing is of a single brand, not including ‘private label.’” While you can argue whether or not this is an accurate definition of loyalty, the report points to a few truths about brand loyalty which stand on their own and which stand the test of time.

1. Price does not equal value.

Perceived value drives loyal purchase behavior.  The report explains, “…even when times are tight, brands are important. However, in the context of the new, more conservative world of CPG, brands that provide value are critical.”  But value isn’t about price alone.

The researchers found that when it comes to brand decisions, 79% of consumers consider price and 76% consider past usage and trust of the brand.  Shoppers also factor in requests of household members, product labels, in-store displays, and much more into their buying decisions.

Further twice as many people agree with the statement, “I tend to buy the items that give me the best value for the money” as those agreeing, “I tend to buy the lowest price item.”

So, bottom line, brands can’t bribe customers into loyalty with price.

2.  As brand loyalty increases, consumers are less sensitive to price changes.

While marketers may know this intuitively, SymphonyIRI reports category data to prove the point: “In sugar and butter, where loyalty is pretty low, substantial price hikes have led to sharp drops in loyalty during the past three years. In blades and dish detergent, on the other hand, relatively high brand loyalty has continued to grow despite rather sharp price increases.”

This should be good news to the many companies whose categories have been hit with rising raw material and manufacturing costs.  It suggests that consumers accept some price increases – loyalty is leverage.

And just because a category may not inspire high loyalty in general, it’s not stuck.  The research shows that brands can still build loyalty during inflationary times.  Chocolate candy is an example of a category with relatively low average loyalty (16%) that has seen an increase in loyalty between 2008 and 2011.

3. Private label enjoys loyalty too.

“Private label products have captured the attention, the respect, and the wallets of American consumers,” the report declares. The researchers found nearly all consumers purchase private brand products these days and more than one in three actually seek out private label products.

Although 47% of consumers are buying more private label today versus before the economic downturn began, the strength of private label isn’t simply a result of belt-tightening.  Consumer perceptions of the quality of private label products have become quite favorable in some categories. Across retail channels, store brands are viewed as offering the same or better quality as national brands by more than 50% of the population.

Private label loyalty is strong and growing across many of the top 100 CPG categories, the report shows.

Concluding recommendations come straight from the report:

• Invest heavily in establishing and strengthening brand loyalty, focusing in on and delivering against the most meaningful needs of key and target shoppers.
• Leverage frequent and granular assessments of core and target shoppers to ensure a comprehensive and always-current understanding of value drivers for key categories and brands.

Consensus Advisors just released their 2009-2010 Retailer Health Ratings (RHRs) report.  The RHRs measure and compare retailers over a five-year period on:

• healthy growth
• asset utilization
• pricing power
• balance sheet strength

The report and webinar were really interesting and so I thought I’d share some of the insights and my reactions.

1.    weaknesses of comparable store sales as a measure of retail performance

I wrote a post about this awhile ago and so I was pleased to discover Consensus shares my concern with comp store sales, which indicate the growth or decline of sales of stores that have been open for a year or more compared to the same period the year before.

Although they are the primary means of reporting retail results, “’Comps’ are short-term focused and potentially misleading when viewed out of context as they can be driven by unhealthy margins, inventory levels, advertising spend and consumer credit practices. Comps also say nothing about a retailer’s financial leverage, brand strength or ability to manage efficiently the assets on its balance sheet.”

The RHRs, in contrast, provide a more balanced and longer-term evaluation of a retailers’ performance.  Consensus uses 15 different measurements and weights them according to their correlation to the retailers’ results on commonly used financial metrics such as return on assets, net income margin, total investment return and return on invested capital.

For example, they don’t just look at the sales growth of a retailer – they also take into account sales volatility, cannibalization, and sales momentum.  And then they adjust that result to reflect operating profitability.  With this more detailed view, I find the strengths and weaknesses of a company relative to its competitors become much clearer.

2.    pricing power as a measure of brand strength

By looking at change in gross margin as well as gross margin volatility, Consensus claims they assess the strength of a company’s brand.  They explain, “As a brand distinguishes itself first from commodity competitors and then from branded competitors, its desirability to its customers can command a price premium.  Sometimes this premium is reflected in an increased price to the consumer; sometimes it is reflected in a stable selling price which does not go down as costs are reduced. Healthy companies enjoy brands that command steadily improving gross margins.”

I agree pricing power generally reflects brand strength from the consumer point of view – I’ve made this point myself.  But I wonder about how the Free economy changes this.

As Chris Anderson points out, “Virtually everything Google does is free to consumers” and yet one could argue that Google is one of the strongest brands today.  (BusinessWeek/Interbrand’s 2009 Best Global Brands report ranked Google as the #7 brand in the world and estimated its brand value at nearly $32BB — an increase of 25% from the prior year.)

For free offerings, user preference, perceived differentiation, esteem, etc. are probably the best measures of brand strength – and publicly available financial metrics such as the ones tracked by the RHRs may be limited in their ability to fully or accurately reflect brand strength.

3.    brand focus vs. product focus

Pointing to the recent struggles of youth apparel brands Pacific Sunwear, Hot Topic, and Zumiez, Michael O’Hara, Chief Executive Officer of Consensus, remarked about the risk associated with too specific of a focus.  After I submitted a question about this, he clarified his point saying that retailers need to have a flexible store concept that gives them the ability to migrate away from something that once was not but is no longer.

“Pac Sun,” he explained, “will always have to be about the beach, but to the extent that the beach goes out of style, then I wouldn’t want to be Pac Sun.”  He contrasted this with lululemon athletica which he perceives is more flexible because they’re associated with exceptionally high quality, high performance fashion apparel.  And so while right now they are into yoga apparel, he argues, if women suddenly got into ice hockey for example (but let’s hope they never do), lululemon can go there too.

While I don’t necessarily agree with him because I believe yoga defines lululemon, I do think he makes an important distinction.  In my mind the difference between these two examples is brand vs. product.   If your brand is tied to too narrow of a product assortment, it’s harder to evolve your offering as trends come and go.  But if your brand is defined more by values and personality attributes, you have more flexibility.

This is a particularly important point for apparel retailers where product demand changes so quickly.  Brand focus is indeed important but so is the ability to shift product focus — within the brand context — between categories and types.

There are lots of other juicy insights in the report so I encourage you to take a look (purchase required) or at least download the webinar presentation.

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Companies need to make money – I get it.  And as a capitalist at heart, I generally subscribe to the business practice of charging what the market will bear.

But as I’ve learned about the recent pricing decisions of two high-profile institutions of American culture – Starbucks and The New York Times – I’ve wondered if pricing models based on traditional understandings of profit margins and price elasticity can backfire.  That is, charging higher prices for certain offerings may make sense on paper – but they actually incentivize the wrong behaviors and reward the wrong customers. Here’s what I’m thinking:

Starbucks rolled out a new pricing plan last week, boosting the cost of some menu items by as much as 33% in some markets, according to the New York Post.  The price of an extra shot of espresso jumped from 55¢ to 70¢; shots of syrup and soy milk also cost more now.  However, customers with simple orders like plain coffee were rewarded with a price decrease of around 10¢.

On the one hand, I can see the logic behind this decision.  Given that the coffee drink passionistas who order their venti soy caramel lattes are already paying around $5 for their drug, er, I mean drink of choice, perhaps they won’t notice or care about paying an additional 50¢.  These kinds of drinks are already perceived as premium products, the logic might continue, so if you’re going to raise prices on anything, you should do it on these products.

The extra shots and special orders also require extra labor, something any margin-conscious business wants to make up for with higher prices.  Plus, you want to protect market share from the competitive encroachments of Dunkin’ Donuts and McDonald’s. Offering plain coffee at lower prices seems important, since many plain-joe customers are more price-sensitive and it’s easier to compare prices on a simple cup of coffee.

But here’s my question – does Starbucks want people to buy plain cups of coffee or does it want them to buy fancy souped-up coffee creations? I would think the latter – after all, those specialty coffees are unique product offerings which differentiate the brand and add to the brand cachet.  I’m also guessing that folks who buy the specialty products are more likely to linger in Starbucks’ stores and partake in the “romance” and “theater” of the coffee experience which CEO Howard Schultz has been trying to reinvigorate.

Charging disproportionately more for higher priced products also doesn’t seem to make sense in the current post-recession period.  I would think you’d want to encourage people to trade-up, not down – and make it easier for people to get back in the habit of buying premium products.

That’s why I’m thinking Starbucks’ pricing move may make sense in spreadsheets but, viewed through the lens of customer behavior, it may end up hurting the chain’s profitability more than help it.

The New York Times’ recent pricing announcement also raised questions for me.  The venerable newspaper announced that starting next year, people will be allowed to view a certain number of articles free each month on NYTimes.com — but to read more, readers will be charged a flat fee for unlimited access.  Subscribers to the print newspaper will receive full access to the site without any additional charge.

Again, this seems a logical solution to the problem that all publishers are struggling with.  Advertising revenue is no longer sufficient to sustain the business and as James McQuivey, media analyst at Forrester Research explains, “You can’t continue to be The New York Times unless you find” a new source of revenue.

Plus it’s clear NYTimes.com provides a valuable service and the capitalist in me believes people should pay for things of value.  So I’m all for levying a (reasonable) price for the site’s content.

What I question, though, is the practice of charging more for the exact behavior the Times want to encourage.  Reporting on the change, NY Times writer Richard Pérez-Peña says, company executives “said they wanted to create a system that would have little effect on the millions of occasional visitors to the site, while trying to cash in on the loyalty of more devoted readers.” (emphasis mine)

Said another way, the Times wants to assuage infrequent users while gouging loyal readers.  This doesn’t make sense if the ultimate goal is to increase readership.

Yes, most business models incorporate some sort of free offering and do so with the hopes of upgrading folks to a paid service.  We’re all familiar with the barebones software which is offered for free, while its full-featured counterpart is available for a price.  This approach is a form of sampling.

But this is not what the Times will be offering.  It won’t be offering access to exclusive content, additional services, or any other value-added benefits for its fee.  It’s simply charging more for more usage.  Won’t this discourage additional usage?  Particularly when there are so many other sources for content?

It might seem the Times is trying to get more print subscribers by waiving the fee for those customers.  But does it really want more print subscribers?  Perhaps having print subscriptions was the way the company used to make its money, but given the costs of distributing printed vs. digital content, I can’t imagine its future profitability is in print.

Why not, instead, institute a pricing strategy that encourages digital subscribers?  Make a digital subscription worth something and charge for it.

Am I wrong?  It seems price is not simply a tactic for making margin.  It’s a powerful tool for influencing customer behavior and impacting brand perceptions which ultimately have far more impact on profitability.

I’m really trying to get my head around both of these companies’ pricing moves, so I would appreciate hearing your perspectives.   Please comment (it’s free!)

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This week’s BusinessWeek features two stories back-to-back that together make an important point for all businesses trying to navigate today’s recessionary times. First is a piece on Target’s apparent move down market, “Look Who’s Stalking Wal-Mart.”  It outlines several moves by Target that seem to be taken from Wal-Mart’s playbook. Then there’s the article, “Why Old Navy May Still Be at Sea,” relaying the cheap-chic retailer’s struggles and successes over the past few years.

How They’re Similar

Both stories reflect the challenges presented by the changing consumer world.  Time was, both Target and Old Navy could thrive by offering cool designs at accessible prices. Both chains met with success by targeting savvy shoppers who were as concerned with the way a product looked as much as the price on its tag.  But the recession seemed to alter their shoppers’ desires – no longer did they seem as willing to spend a little more to indulge their design sensibilities.  Target saw its comp store sales and stock price slide while Wal-Mart’s surged; Old Navy’s partnership with designer Todd Oldham did little to revive the brand which had been floundering for several years already.

Both retailers have since adjusted their strategies in ways that seem to appeal more to today’s frugalistas than yesterday’s fashionistas – and both have met with some success.  Target just posted its first positive quarterly results in 8 quarters and Old Navy announced its fall sales were up vs. prior year, the first time the business has grown since the spring of 2004.

How They Differ

There are some important differences between the two brands’ stories, though.  Old Navy has been struggling with its identity from before the recession.  As early as the early 2000’s, Old Navy had lost its competitive edge.  Back then H&M and other retailers were gaining ground in the fashion-made-affordable category while, according to BW, Old Navy “didn’t change.  Its clothes started to seem uninspired, its stores outdated.”

A new president brought in a fast fashion strategy, a focus on the “young, fashion-conscious woman,” and the partnership with hot designer Todd Oldham.  But the changes didn’t take hold while the recession did – so the chain has now reversed direction and is focused on attracting a more traditional customer with more traditional designs and more traditional (low) prices.

Target on the other hand had been experiencing such success with its brand platform embodied by the tag “Expect More, Pay Less” that it held firmly to the strategy despite the onset of the recession.  But since the business started to post poor results, the company has gone to work on new initiatives to emphasize the “Pay Less” part of the brand equation more.  These have included a new marketing strategy to emphasize its low prices (75% of its advertising budget is now devoted to price vs. 25% last year) and a more aggressive push into groceries to drive more frequent visits.  The BW article describes the changes as  a “role reversal,”  explaining, “Wal-Mart has long borrowed from Target.  Now Target is stalking Wal-Mart.”

To me, though, these moves aren’t the usual check-check-mate game playing between the two rivals.  Target is responding to changes in consumer demand in ways that are strategically robust.  While its marketing communications have indeed taken on a more price-oriented message, it’s done in a way that reinforces the brand personality.  Their new webisodes feature Marie Claire fashion director Nina Garcia mentoring “frayed, broke moms on how they may feel poor but can still look rich.”  And the grocery expansion has been with fresh food and exciting private labels instead of the typical packaged groceries you’d expect from a mass retailer.  “Expect More, Pay Less” indeed!

Why It Matters

This demonstrates the power of innovation and creativity directed at a common business challenge.  Everyone is feeling the pressure to speak to consumers’ new budgets and mindsets, but that doesn’t mean you must focus on price exclusively or retrench to worn territory as Old Navy seems to be doing.  Target’s approach seems more rooted in its brand value and therefore more differentiating and compelling.

The BW article sums up the challenge facing Old Navy – and really any other business that doesn’t take advantage of these hard times to move their brand forward:  “When the economy improves, the company may find that all it has to talk about is price.”

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Within a month of each other, two articles appeared in BusinessWeek about  luxury brands.  The articles, about Coach and Tiffany & Co. respectively, describe how the brands are dealing with the decrease in demand due to the recession.  Each has devised a strategy for lowering its prices without tarnishing its brand.

That is the luxury brand dilemma, isn’t it?  With The Conference Board’s Consumer Confidence Index still falling and consumer spending essentially flat, all brands are desperate to generate sales — but while some  have resorted to value messaging and price promotions, these don’t seem appropriate for luxury brands.  Luxury brands’ higher price/higher quality positioning — and the status which comes along with it — plays a key role in their brand image and identity.  They don’t want to do anything to jeopardize their ability to command a higher price in the future.

So, what’s a luxury brand to do?!

Coach has developed a whole new product line, Poppy.  Actually way back in July of 2008, the senior executives at Coach sensed the coming recession and CEO Lew Frankfort knew “Coach would need to create even more compelling reasons for consumers to shop.”  At the same time, Frankfort declared, “We never go on sale.”  So the company set about designing a new line of purses to meet price points approximately 20% lower than their usual $290 average.

Their development process involved predicting consumer sentiment (Reed Krakoff the brand’s creative director decided, that despite a heightened level of anxiety in the marketplace, “People are not buying safe…People want to be inspired.”), sourcing new materials and striking deals with new factories, and re-thinking the company’s financial models.  Ultimately Coach introduced the new Poppy collection earlier this year and two of the bags have exceeded sales expectations.

Tiffany has taken a far more limited and less visible tack.  Late last year, Tiffany decided to lower prices for engagement rings (one of its biggest sellers) by 10% — but they haven’t publicize the move.  Salespeople discreetly tell customers about the reductions.  The discount is positioned as  a “gesture” to consumers in acknowledgment of the environment.

Other than that, the company is committed to its overall pricing strategy.  Tiffany CEO Michael Kowalski says, “It’s about maintaining the long-term value of the enterprise.“  Instead the company is looking at layoffs and store closings in order to manage costs and maintain profitability.

It’s too early to tell whether either or both of these approaches are the right ones.  Not only do they need to stem sales declines now, but also they need to sustain the brand status in the long run.  But, kudos to both companies for their willingness to assume risk and think differently and their commitment to protecting their brands in addressing the luxury brand dilemma.

The editor of QSR Magazine, the trade journal for quick service restaurant brands (fast feeders like McDonalds, Dunkin Donuts, Baskin Robbins, etc.), interviewed me to explain to QSRs “Why You Win If Starbucks Survives.” The interview is based on an article which I’m posting in full here.

Why We Need Starbucks to Succeed

Starbucks continues to struggle and many in the quick-serve restaurant (QSR) business may be quietly celebrating the problems of the former industry darling.

After persevering through the years when it seemed Starbucks could do no wrong, the chain’s current stumbles are a welcome antidote to the constant comparisons to Starbucks’ success that investors, the press, and even customers have loved to make.  After all, running a QSR chain is an incredibly difficult business and it’s nice to see the rest of the world recognizing what we’ve known all along – Starbucks’ formula is not fool-proof.

But the fact is we need Starbucks to succeed.  And not just because market valuations tend to punish an entire category when a major player hits a rough spot.   Or because we need a common enemy to fight against.  Starbucks benefits the QSR category in ways that cut to the core of our business.

First, Starbucks provides a real-life R&D lab for innovation.  From its new products (chai tea lattes for example), to its original service standards (employees calling out people’s orders in a friendly banter), and game-changing brand experiences (offering chain-wide Wi-Fi), Starbucks has led the category with its innovations.  And there’s a lot to be learned from their stunning successes and equally staggering failures.

I don’t mean to suggest that QSRs should sit back and let Starbucks do all the innovating (although a case for adopting a “fast follower” strategy could be made).  Rather, companies need to aggressively pursue innovation now more than ever.  But we should factor into our development efforts and decision-making the results that Starbucks has experienced with similar new concepts.

Particularly for high-risk or high-cost innovations, it’s safe to assume that most QSRs have conceived similar ideas.  Without the scrutiny of franchisees, Starbucks has the freedom to make some of the moves we wish we could.  They can take the leap from R&D to store more easily, working out the kinks to make a successful launch or taking the beating when one is not possible.   Through careful study and analysis of what works and what doesn’t for the coffee chain and why, we benefit from letting Starbucks serve as our learning lab.

Starbucks also benefits the QSR category by mainstreaming high-margin products. Let’s face it – before Starbucks came on the scene, most QSRs thought the price ceiling on a cup of coffee was a dollar or two.  Now it’s common to see hot — and cold — beverages selling for $4-5 in many places.  Same goes for cookies not baked on premise, pastries not sold by a bakery, and iced tea that’s brewed in bulk.  And that’s not to mention all of the non-food products like high-end coffee makers and CDs – items that don’t consume much labor cost or square footage, so they prop up operating margins.  By making many high-margin products part of the QSR experience, Starbucks has opened for other chains an alternative to merely playing in penny profits.

Finally by setting a high bar that financially-stretched consumers trade down from, Starbucks benefits the QSR category in tough economic climates like the one we’re currently experiencing.  For all intents and purposes, Starbucks is a luxury brand – meaning, consumers pay a premium for the chain’s products because of its brand image and/or its higher quality (depending on who you ask.)  As a result, its prices are perceived as high (or at least higher than most) and so when consumers feel the need to cut back on discretionary purchases or the frequency in which they indulge in them, they’re likely to trade down to another QSR.  Simply put, everything’s relative.

That’s not to say that other QSRs should position themselves as low-priced alternatives.  Instead, companies should seize the influx of value-minded customers as an opportunity to increase their brand’s value perception.  This is a great time to forge a bond with new or lapsed customers by over-delivering on their expectations and making them feel they’ve made a smart choice.  McDonalds is already employing this strategy with its McCafe launch.  They intend to offer the same product quality — but at lower prices and with faster service and “less attitude” than Starbucks.  But this tack has the chance to work only because Starbucks exists.

So as much as we might not want to admit it, Starbucks is good for us.  And while more skepticism about and scrutiny into Starbucks is a much needed counterpoint to recent years’ hype, we certainly should not be rooting for the chain’s downfall.  To paraphrase an old adage, with Starbucks success we may lose something – but there’s more to gain.

Feedback?  Questions?  Please let me know.

I was really pleased to read about apparel retailer abercrombie & fitch’s commitment to its brand in a recent LA Times article.

CEO Michael Jeffries told analysts during an earnings call, “We will use markdowns only to clear through seasonal product in a brand-positive way…It is clear to us that the short-term relief provided by the use of promotions is more than offset by the damage inflicted on the brand in the long-term.”

I admire the company’s rejection of the temptation to let fear and market sentiment pull them down into the morass of apparel retailers that are dramatically slashing prices in a desperate attempt to maintain share,

It appears others are less courageous.  According to the article, A&F’s primary competitor American Eagle held a buy-one-get-one-50%-off sale on nearly everything in stores and online. Aeropostale Inc. posted a $10 off in-store coupon on its website and boasted markdowns of as much as 70% off select merchandise.

While such aggressive promotional tactics may generate short-term traffic, A&F is right to be concerned about their effects on the brand in the long term.  Some possible results:

• Come the return to full-prices next year, some customers may bristle at paying a premium for products similar to those they saw priced so low just a month ago.
• The category will become (more) commoditized — drawing so much attention to price causes customers to put more weight on the price side of the price:quality value equation.
• Points for differentiating the brand may decline — after all, if “everyone” is running price promotions and you do too, then really, what makes you different from them?

Nonetheless some might call A&F’s strategy ill-advised at best, crazy at worst — particularly when their sales are so dismal.  But as a person who believes that a strong brand can ward off economic and competitive threats alike, I am optimistic about the chain’s future and look forward to seeing the results of their tenacity.

Just the other day, I encountered a sign on the counter of my local Panera Bread.  It announced price increases on its bagels due to increased costs.

I’m sure many businesses faced with increased margin pressures are looking at price increases as a way to offset some of their costs – but they fear angering loyal customers and losing business when they need it most.

It is possible to maintain good customer relationships – and perhaps even to generate additional equity — while taking a price increase.  As with all business decisions, make the change using the brand as a guide.

Here’s some specific advice:

• DO: be authentic – inform your customers why you’re increasing prices – people appreciate businesses that serve them with honesty and integrity
  • DON’T: make the increase the primary message – use small signage if you’re a retail businesses or a small alert on your homepage if you’re online – keep the focus of your communication on the great value you provide and your key brand differentiators
• DO: run strategic offers and promotions – make price increases more palatable by creating bundled offerings with value-added services or add-on products that increase the value perception
  • DON’T: resort to gimmicks - for example, don’t just repackage your products into smaller quantities to offset the price increase – today’s savvy customers will resent you for thinking they wouldn’t notice
• DO: give customers some relief - consider keeping one or two core products at their regular price – margins on these products might suffer more but the goodwill you build for your brand will payoff in increased loyalty
  • DON’T: exacerbate the pain – just like slowly peeling off a band-aid, taking a bunch of small price increases over a short period of time hurts worse than doing it all at once – you want to get the focus off of price as quickly as possible

Pricing — and your strategies and policies to determine it – are a key touchpoint for the brand.  Viewing price through the brand lens is one example of “brand as business.”

Any other do’s or don’ts?