Unlocking the full potential of premium brands
As a manufacturer of premium CPG products, you take great pride in preserving both your products’ quality and price point. That higher price tag, however, introduces other complexities, particularly when it comes to managing your inventory effectively.
Similar to the challenges faced by conventional brands, premium CPG manufacturers also must navigate the risks of excess inventory, which can occur due to changes in consumer preferences, supply chain disruptions, overproduction, or production delays. But unlike conventional brands - whereby discounting has become a more common means for managing excess, manufacturers of premium products are known to be more reluctant to discount their products, fearing that it could damage their brand’s reputation and lead to cannibalization of their full-price products.
While these are not irrational concerns, there are several reasons why premium CPG manufacturers should second-guess destruction or disposal as the only viable option in dealing with excess.
Does discounting lead to cannibalization?
The main concern we hear from premium brands is that offering products at a lower price point will lead to consumers opting for the discounted product over the full-priced version. While it is true that some customers may prefer to buy the same product at a lower price, many studies suggest that discount channels often attract a different customer segment than full-price channels, making it less likely for cannibalization to occur, and even better, a previously-untapped source of brand discovery.
According to Timothy Derr from Kearney, “Lower cost inventory through discount channels presents an opportunity to engage new customers vs. deteriorate the brand. This could be a way to introduce the brand to new consumer segments and drive earlier adoption. I view this as a positive.”
Discount retail is one of the fastest growing segments in the food industry - in 2021, discount retailers accounted for nearly half of all new stores. As more discount retailers are adding refrigerated and frozen sections to provide a wider product assortment, premium manufacturers are beginning to take notice of the potential in the discount retail space.
One factor contributing to the growth of discount retail is the shift in consumer behavior towards value-oriented shopping. As the cost of living continues to rise, many consumers are looking for ways to stretch their budgets without sacrificing quality.
With millions of Americans shopping at discount retailers such as Aldi, Grocery Outlet, and Dollar General, this presents an enormous opportunity for brands to get in front of a vast consumer base.
Manufacturers that still wish to avoid brand perception concerns can also sell to repackers, who relabel their inventory prior to selling in retail stores. These approaches allow premium brands to avoid the landfill while appeasing internal concerns about channel conflict.
Pro Tip: Consider the opportunity to target new demographics by marketing your discounted product through value-channel retailers.
The importance of sustainability for premium CPG customers
Sustainability has become an increasingly important factor for many consumers when making purchasing decisions. According to a survey conducted by Nielsen, 73% of global consumers say that they would “definitely” or “probably” change their consumption habits to reduce their impact on the environment. This statistic increases as millennials and gen Zers continue to take up more of the market share.
This trend is particularly relevant for a segment of the population that is willing to pay a premium for products that are perceived to be aligned with their values. Research by Capgemini shows that 77% of businesses say their sustainability approaches increase customer loyalty, and 63% experience a revenue uptick. Additionally, Agility Research’s study shows that, “at least two thirds of the affluent consumers in each market do care about luxury brands being ethical. So, the vast majority of the affluent consumers are certain that the brands they consume will have to commit to and deliver on their sustainability pitch.”
Additionally, landfill tipping fees in the US continue to increase with the national average in 2021 being around $54.03/t, up 0.6% compared to 2020. Both landfill tipping fees and legislation around organic waste disposal vary by state and locality.
Although manufacturers agree that secondary sales are less likely to turn a profit compared to primary sales, minimizing write-offs is a far better outcome for businesses.
It is widely understood that disposal of excess inventory is the last-resort in managing excess inventory, not just because it carries with it disposal costs, but also because it has the potential to negatively impact your brand’s reputation. Parker Lane Group advises against this, “Many brands resorted to the destruction of new stock, promulgating serious environmental problems. Brands that were exposed doing so led to widespread consumer backlash and PR disasters - once consumers uncover unethical business practices, it usually results in a Herculean challenge to revert a tarnished brand name.”
Parker Lane Group’s CEO, Raffy Kassardjian, also explains that you don’t need to dispose of premium inventory to protect your brand: “The dilution of brand prestige is only a consequence of not thinking beyond their core markets, rather than as an inventory issue in itself. Re-commercing to secondary markets provides immediate, much-needed cashflow without tarnishing the brand.”
When premium brands integrate excess inventory management with their ESG initiatives, they are also able to justify and be transparent about their premium prices to their customers.
Positive profit and perception
Effective inventory management is essential for premium CPG manufacturers to maintain profitability, and automation tools can help mitigate risks associated with managing excess inventory. Selling excess inventory at discount retailers can help manufacturers minimize financial losses, reach a different customer segment, and maintain relationships with retailers. By embracing sustainable practices, manufacturers can appeal to the values of premium CPG customers and enhance their brand’s reputation. Manufacturers can take these steps to continue to grow and thrive in today’s competitive marketplace.
72% of manufacturers recover 50% or less of their costs on excess inventory. Download the report, Technological Maturity in the Secondary CPG Market to discover the need for effective inventory management.