The Economy May Be Improving, But Consumers Are Still Scrambling for Bargains

Last Updated Aug 26, 2010 2:53 PM EDT

Consumers don't believe in Santa Claus, the Tooth Fairy and, as a recent study indicates, the economic recovery. Their skepticism will drive retailers and their suppliers into conflict as they aggressively bargain for shopper support.

Recently, when Kroger (KR) told analysts that its manufacturer-brands growth had returned to parity with private labels in terms of product tonnage sold â€"- a measure the retailer favors because it indicates trends in raw demand -â€" recovery boosters took it as a sign that consumers had gained enough confidence in the economy to return to old buying patterns.

However, according to the study by GfK Customer Research, more than eight in 10 supermarket shoppers in the United States see no improvement in the economy, and 40 percent say it has gotten worse. Only 17 percent saw improvement.

The study was commissioned by the Private Label Manufacturers Association, and it was intended to demonstrate that store-brand products still have the dark energy of economic anxiety to drive them. Yet the results seem to affirm that consumers still want to catch any break they can when shopping.

For example, when asked if economic conditions prompted them to purchase store-brands, 75 percent responded in the affirmative. Even though store-brand quality, packaging and presentation have improved significantly in recent years, anxiety about fiscal conditions remains critical to motivating private label purchasing among consumers.

Clearly, the opportunity for more private label growth exists. That's why bargain retailer Family Dollar (FDO) is adding more private label products. However, it's adding manufacturer brand items, too. Family Dollar recognizes that store-brands help generate sales, and today even more so. Family Dollar has responded to the economy and the expansion of private labels by increasing their promotional activity, especially in the form of coupons.

According to the Inmar 2009 Coupon Trends Review, branded product manufacturers in the United States boosted the number of coupons available to the highest level in over 30 years, issuing 367 billion of them. They have done so in part to maintain the interest of frugal consumers, but also to close the price gap between their products and private labels.

Coupons allow brand manufacturers to deliver bargains to consumers when and where they have the best prospects of building customer loyalty. Sometimes it's a matter of mailing coupons to zip codes where sales are stalled, or providing a deep discount during a critical holiday period when a break on a brand will reinforce an emotional connection. The alternative is general price cutting, which can erode profit margins disastrously.

Consumers have responded. Inmar, a business services firm that helps retailer manage promotions, reported that in 2009, for the first time in 17 years, consumers used more coupons than they did the year before. They used them to buy 3.3 billion consumer packaged goods, a 27 percent increase over 2008.

While this was going on, manufacturers and some retailers were working out deals with coupon websites to provide codes give consumers breaks on Web purchases. As bloggers emerged to track new and conventional coupon deals, companies even began to feed them specially issued codes to further drive sales. And mobile coupons emerged as a new delivery method and portable coupon dispenser.

Kroger has been aggressive in using manufacturer coupons to build sales, linking them to its critical loyalty card program. Those activities may help to explain why its manufacturer-branded product sales have gained when other retailers, Safeway (SWY), for example, continue to see quicker gains in private label.

Although they contest private label sales, retailers like manufacturer promotions. With coupons, brand manufacturers reach beyond stores and prod reluctant consumers to shop. And they spend their own money to do it, augmenting retailer marketing

Private label helps retailers reinforce their identity, particularly as a place to find bargains. The downside is that lower sales prices depress topline revenues and comparable store sales in locations open for a year. The effect has hurt sales numbers at Kroger and Walmart, and, as a consequence, their share prices. The dilemma has already prompted some changes in strategy. Walmart (WMT), for example, is adding product deleted from shelves to restore brands its customers were buying elsewhere. The move will also restore the promotions generated by those brands.

Consumers still deeply worried about their financial prospects will continue bargain hunting, and retailers and their suppliers will fight â€"- sometimes with each other -â€" to deliver them The longer the economy remains soft, the more ingrained that pattern will become.