Premium brands and the recession

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Premium brands and the recession
By Jose Mendoza

Time was when premium brands were the clever way to profitability and success. The recession changed all that. Studies of consumer behaviour in countries such as the USA have shown that, with the exception of top-end luxury brands, there has been a notable shift in the demand for premium brands to standard or value brands (Bohlen et al., 2010). Furthermore, according to a report from Alliance Consulting Group, premium brands are facing a number of challenges as a result of changing market structures: there has been a downward shift from luxury to premium brands, a shift in the perception of emotional benefits, the emergence of new products with a better price/value proposition, and brand imitations have grown from private labels and retail brands.

So 'brand premiumisation' is facing a tough future. This is evident in a wide range of industries-auto, beauty, beverages, consumer goods, pharmaceutical, wine and spirits.

How have premium brand firms headed off recession?

Premium brand companies have not stood still and watched their customers go elsewhere; they have responded by:

  • Introducing a “step-down” version of the brand to target customers trading down, but avoiding competing in the same segments as private labels and standard brands.
  • Introducing a “step-up” version to extend the equity of the premium brand with the aim of capturing both consumers trading down from super premium and luxury brands, but also consumers willing to upgrade to a more premium offering.
  • Using pricing as the main cue to signal the differences in the new brand offering.
  • Differentiating the premium brand offering with tangible and intangible features.

Stretch the premium brand offering

One strategy that improves the economic performance of premium brands is stretching of the premium brand offering. This is based on the concept of vertical line extension, where research has found positive benefits for ‘stepping up’ or ‘stepping down’ the premium brand offering. Rather than new product lines to appeal to new consumer segments, the same brand is presented at different price/value scales.

Stretching the premium brand pricing establishes a position within two different consumer segments using the same brand. For example, rather than competing with standard and private label brands, a premium brand might offer a lower–priced version of its main brand, but perhaps with some features as options. This appeals to consumers who can’t afford that premium brand but are hesitating to downgrade to standard brands. In turn, this will minimise the risk (economic and brand equity) involved by competing in price-oriented segments. According to some industry leaders, although consumers are trading down, they are not necessarily changing the place where they shop for products: a consumer who typically buys groceries at M&S will find it difficult to go to Aldi or Iceland.

Introduce a higher-priced version

In what may at first seem a bad move, a premium brand can succeed by companies putting their prices up, by introducing a new, higher-priced version. The aim is to appeal to those consumers downgrading from super premium and luxury brands, who are hesitant to lose the idea of exclusivity and differentiation provided by such brands. New extended features will appeal to those consumers downgrading from super premium and luxury brands, employing tangibles such as accessories, packaging and sizes or intangibles, such as guarantees, customer service, etc.

Does this work?

There are now many examples of premium brands who have succeeded by using this brand stretching strategy. Volkswagen recently introduced a bigger, more powerful Jetta 2011 model, with a price range from £16,000 to £23,000, thus appealing to a broader consumer group with a better car. Blackberry has a range of Smartphones, priced from £80 to £480, and Victorinox has a range of premium watches, priced from £200 all the way up to £1,400.

The future for premium brands

Canny owners of premium brands ride successfully on the knowledge that some segments actually trade up to higher quality brands, while others trade down. The trick is to become appealing to such groups: premium brand holders must identify these segments and present customers with an alternative based on stretching their premium price offering. In this way they safeguard their future, as they capture consumers migrating to super premium on the one hand, or sub-premium categories on the other.

Jose Mendoza is an executive doctoral DBA Student at Cranfield School of Management.

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