Loblaw and President's Choice: Less for More

Last year I wrote a bit of a rant about bagels. I used that example from a then-recent grocery shopping expedition to how some companies lower the content of a product and keep the price unchanged, and then seek to hide what they've done. This is common marketing practice, with the idea being (as I see it) to choose what the companies see as the lesser evil over raising the price when their costs increase.

The bagels in question were a product of Weston Bakeries (a division of George Weston) which are sold in many supermarkets. At the time I gave Loblaw a bit of a pass since, as the retailer, they were presumably only passing along the supplier's products and pricing, with their usual mark-up so that they, too, can make a profit. That would be perfectly acceptable to me.

However I failed to note one very pertinent fact, of which I was unaware at the time, that Loblaw's major shareholders are George Weston Limited and W. Gaelen Weston, who together hold a majority ownership of Loblaw. That changed my thinking, but only slightly since Weston Bakeries' products are, as mentioned, sold in other stores. This alone does not make Loblaw a party to what I see as deceptive marketing. Unfortunately I now find that it does not stop there, and in fact turns my focus directly in Loblaw's direction.

Consider the picture below of what at first glance appear to be identical products: packages of President's Choice brand hummus. These were purchased a few weeks apart. The height, diameter and design are identical from a typical viewing angle, such as when cruising the aisles. If you look closely, there is one notable difference. Can you see it?

The answer is in the lower left of the label: the net weight of the contents. The older product held 454 grams (about one pound) and the newer one holds 400 grams. Of course the price was the same. If you study the packaging carefully you will notice a few more differences:

• The UPC (universal product code) is changed. Presumably this was legally necessary to disclose that this is a different product.
• The top of the contents is lower inside the container.
• The bottom of the container was flat but now sports a deep concave indentation.

You now get 12% less product for the same price as before the change, and a package designed to mislead the buyer to believe that nothing has changed. In my opinion this is very deceptive marketing even if it is technically legal under food packaging regulations.

It does not end with hummus. If you shop at Loblaw you may want to pay close attention to other President's Choice products. They are using the same trick with other PC-labelled products. My trust and even loyalty to the brand has been eroded to nothing. For this household, grocery dollars will begin to be spread among other stores. Regrettably, it is difficult to avoid Loblaw entirely since there are few price-competitive alternatives and products from other suppliers often use the same deceptive practice, and those products appear everywhere.

No matter the sector, consumer or business, I do my best to avoid giving my money to businesses that lie or deceive. If there were a store where I could reward them for not going down this route, I would, but it doesn't seem to exist. Further, I expect to see the practice used more frequently as costs increase, such as may occur when they sign a new contract with their employees' union.

Catching the Smart Phone Market Wave

Antennagate is not hurting iPhone sales, nor should we expect that it will. Once the market decides that it loves a product it takes a lot of pain to sever that relationship. While Apple's release of quarterly results this week do not reflect loss of sales due to antenna problems -- the quarter ended before the issue became public -- there are ample indications that there is no business problem.

[Interviewer] Any changes in demand since antennagate?

Cook: “Let me be perfectly clear: We are selling every unit we can make, currently.”

Follow up: So you haven’t seen any slowdown in order rates, or any increase in returns?

Cook: “My phone is ringing off the hook with calls from people who want more supply.”

This is not unique to iPhone as even Toyota found out this year. When Toyota's sales dropped precipitously there was real concern that the company would suffer a blow it would not easily, or ever, recover from. Yet their sales have recovered quite nicely. Unfortunately I don't have the reference at hand, there was a survey of car shoppers done at the height of the public crisis over uncontrolled acceleration and Toyota's apparent malfeasance and negligence. What the survey found was that buyers that were considering Toyota before the crisis arose were still considering Toyota.

Rather than buying a vehicle from another manufacturer they were content to wait for Toyota to solve the problem and, importantly, for the recession to end: all vehicle manufacturers were deeply hurt by loss of consumer confidence and the resulting deferral of big-ticket purchases. If customer loyalty survived a product defect that could kill you, I imagine that a malfunctioning antenna and public relations missteps would not seriously hurt Apple.

A recent survey by IDC found that 66 percent of people who own older iPhones are holding off on upgrades, and 25 percent of new buyers are now delaying their [purchases].

...barring any other foul-ups with the iPhone or other products in the near future, Apple should escape this fiasco with its reputation intact. "The best defense against it is to have a strong cushion of good will already established. Apple has that," Bernstein said.

Apple is not unique with smart phone product defects. As I mentioned previously, the Nexus One built by HTC for Google has an almost identical problem. Then there's Droid X with its own problems. The fact is that all smart phones suffer from a host of defects, most small but some that are large: user interface peculiarities, speed, multi-tasking, networking, screen and camera glitches, and so forth.

The sad thing about this is that it is not unexpected; product releases with known defects is a necessary evil that manufacturers accept when there is a new market category -- smart phones -- that becomes enthusiastically adopted by consumers who can not buy the phones fast enough. Just consider all the new phones that have rapidly sold out or even had people lining up to buy them the first day, including every iPhone version, Droid X and HTC Evo.

There is money on the table right now, and only a foolish company would delay products to fix every last defect since gaining market share and riding the market wave demand that products are released early and often. If this is not done at the now critical phase of smart phone adoption, there is real risk of losing the market to competitors, not just this week or this quarter but forever. Not every smart phone platform will survive and survival requires maintaining market share and customer loyalty. Non-catastrophic defects can always be resolved in the next release (hardware defects, such as iPhone's antenna problem) or downloaded to customers' phones (software defects). Customer loyalty in this environment is sustained with a rapid release cycle that delivers new features and, we hope, defect resolution.

Get used to dealing with defects for some time to come, and even Android "fragmentation" for that matter. The nature of the smart phone market ensures that this mode of operation will continue for at least the next one to two years. Eventually the market will stabilize, the quantity of platforms and variants will settle down to a workable number, and the manufacturers will have some leisure -- but not much! -- to fix their products before you buy them.

Wireless Profits and Price Competition

The incumbent wireless carriers in Canada are doing very well indeed. Not only are they among the most profitable of all Canadian corporations, they rank exceptionally well among all major global carriers.

The Canadian industry leads the world in terms of average revenue per user (ARPU), earning an average of US $54.73 US per user per month. While Canadian carriers posted low per-minute revenue, value-added services such as caller ID and voice mail contributed to the high ARPU.

The average margin in the developed world was 38.3%, with U.K. firms posting the lowest result at 22.6%. The Canadian result was closer to the 42.2% average found among the 29 emerging economies in Europe, Asia and Latin America.

However this success does come with a cost, due to the high price of service.

Canada placed last among developed nations in penetration, at 69%, which was only three percentage points above the average penetration rate in the developing world, at 66%.

It is reasonable to conclude that there is more than mere correlation going on here, that the high margins and ARPU are directly responsible for the high profits of Rogers, Bell and Telus. Ideally, competition is the tool to prick the profit balloon, which by giving consumers more choice will push down prices and increase penetration. That is the idea behind the new spectrum licenses for Wind Mobile, Videotron, Shaw, Mobilicity and Public Mobile.

The market responded to the threat of competition, and therefore profitability, by (at least in part) driving down the share price of Rogers around the time that Wind entered the market and others announced plans to do so this year. This was a bit premature, as more recent price quotes show, with the reports that Wind was not winning large numbers of subscribers from the incumbents. This will indeed take time, not only for the new entrants to build their networks but also to convince the public that their service is reliable enough to make the switch.

There is also the matter of price, since the incumbents will not remain idle. They will have to be careful with how they counter the lower prices offered by incumbents, even if it is done under alternative brands such as Chatr by Rogers Wireless.

The first taste of that came Friday, as Mobilicity chairman John Bitove called reporters to his office and threatened to haul Rogers before the Competition Bureau or launch legal action. He sees the Chatr brand – specifically, talk of its too-close-for-comfort pricing plans – as an “abuse of power” that contravenes a section of the Competition Act dealing with temporary or targeted “fighting” brands. He said Rogers was trying to “destroy” his company.

Under the current federal government I am doubtful that the Competition Bureau or even the CRTC will be enthusiastic about getting involved unless the incumbents' prices become blatantly predatory by being set at levels well below cost. While the government has shown that it is willing to promote competition, even when it means overruling the CRTC and being "flexible" with regard to the Telecommunication Act, they are more relaxed about letting the market operate unfettered. There is also the matter of stock prices and employment: the incumbent carriers are major employers of Canadians and their shares are widely held in mutual funds and pension funds; the government will not want to open themselves to attack on either front.

A possible strategy that the incumbents could take would be to hide predatory prices among service bundles. If they lower a bundle of services (e.g. TV, broadband, wireline telephony and mobile), or offer to add wireless to an existing bundle for, say, $10 more a month, it will difficult to argue that it is the mobile component of the bundle that is getting its price cut rather than one of the other bundle components. However, if they go the route of separate brands for their cut-rate mobile services, such as Chatr, the bundling strategy does not work so well.

I suspect we will have to wait a while longer to find out what pricing strategies the incumbents ultimately settle on. They will not rush to lower prices until they believe they must -- to preserve high profits for as long as they can -- and this will not happen until the new entrants show some success at winning their customers' business. The pricing battle could become very interesting in the latter part of 2010 or early 2011.

Rogers Wireless Goes Down-market with Chatr

I hadn't intended to say anything more about Rogers Wireless' plans for their new Chatr brand, until I read this article. If these Rogers' executives are being honest in this interview about their marketing objectives, they believe that the new entrants are aiming at the budget end of the market.

This may be true of Public Mobile, which has stated they are after the urban, budget consumer, but it is less true of Wind Mobile. If this is indeed Rogers' competitive objective, I believe they are making a mistake. The mistake is in conflating two very different groups of consumers:

1. Those who can't afford to pay; and,
2. Those who want to pay less and get more.

Lower-priced plans, it is true, can appeal to both groups. However, the fact that the new entrants are offering lower prices and better terms does not mean they are all after the first group of consumers. For example, what may be true of Public Mobile is not true of Wind Mobile which is offering data plans and some higher-end phones. Wind is going after Rogers' bread and butter market, but with lower prices and better customer service. Both of these attributes appeal to the second group of consumers, but may also prove attractive to the first group.

While Rogers Wireless may be willing to compete on price with the Chatr brand, I have to wonder why they have not done so already under the Fido brand, and whether they will ever address the second problem area: customer service. Their current system (much to my own dismay and that of so many of their customers across all of their services, not just wireless) is focused more on avoiding customer service to reduce operating costs. I had a chuckle when I read this gem from the Globe and Mail interview:

[But] as we looked at some of the customers that left Roger to go to [new entrants], and it was a smaller number than we ever imagined it to be, but we still called them: Why would they leave us?

Rogers actually called a customer to ask them what they thought of Rogers' service? That's unbelievable. Perhaps they conducted a spot survey of a few defectors, but their time would be much better spent engaging with existing customers before they make the decision to leave.

Wireless Branding

Multiple branding is a common practice in all large, consumer-oriented corporations. Whether it is the seemingly countless household products sold by Proctor & Gamble or the many lines of automobiles sold (or recently retired) by General Motors, they not only market products under many brands, these products even compete with each other. The wireless carriers in Canada do the same, with the latest entry being the rumoured chatr by Rogers Wireless.

Since this practice of multiple brands may on the face of it seem both bizarre and counter-productive it is worth a look. After all, they are businesses so there must be an advantage to the practice. In particular, there are reasons why the big three wireless carriers -- Bell, Telus and Rogers -- all do it (Fido, Koodo, Solo). Roger's chatr will merely be the latest to appear on the scene. These brands are, as one outfit irreverently calls them, pseudo-MVNOs.

Just as with P & G and GMC, the brands they market often share the same factories, business structures and components, only differing in style and presentation. That is, they differ in their marketing. The wireless carriers' brands are the same: once you've bought your phone and service contract, you use the same networks as the carriers' primary brands, and suffer under the same customer service, billing practices, and contract terms and conditions. Indeed it's worse than with cleaning products and cars since with those there is at least a chance that there are some small differences among the branded products.

There are three key reasons, in my view, why corporations follow the multi-branding marketing strategy:

1. Illusion of choice - Consumers like choice. In a market where there is only one choice, even if that service or product is of decent quality and offered at a fair price, it will be treated with suspicion and attract attacks, whether or not those attacks are justified. Carrying the costs of multiple brands (and the costs are many) shields large corporations with a monopoly or dominant position in their market. People are not blind to the tactic, yet it is good enough to successfully deflect criticism in many cases. All it takes is a different line up of phones and service plans to complete the illusion.
   
   
2. Corporate aversion - We tend to celebrate the sudden emergence and success of upstart companies. We do this since we tend to identify with or envy their success, knowing that in our economy and society that, with a little luck and skill, we could each do the same. However when these companies then grow to be massive and ubiquitous we become uncomfortable and suspicious with them, just as we do with any large, dominant corporation or institution. For example, Google and Apple. Right or wrong, the public's reaction is pretty typical. By distributing their public image across multiple brands, much of this animosity can be defused by the corporations.
   
   
3. Market dilution - If I give you a coin and you flip it, there are two possible outcomes. Label each side with the name of a large wireless carrier, such as Rogers and Bell. Now I give you a six-sided die and to the other sides I add four more names: Solo, Fido, chatr and Koodo. You now have six possible outcomes when you roll the die, or at least you might think so. Let's now go further to an octagonal die, to which we've added Wind and Public Mobile. Roll the die and there is just a 1-in-4 chance you'll get one of the new entrants. That is market dilution. It's all completely transparent yet -- in concert with the illusion of choice -- it reduces the marketing effectiveness of the new entrants. All these brands are more than just names, as they must be to achieve dilution, and therefore include distinct advertising campaigns and retail channels. A naive, inattentive or rushed user is thus more likely to encounter an incumbent when shopping.

Roger's intention with regard to the final point -- market dilution -- seems fairly clear, as the following article extract indicates:

Analysts suspect that the brand will toss confusion into the crowding Canadian marketplace by adding yet another new option in addition to the three new entrants and four existing budget “flanker” brands owned by the incumbent wireless carriers. BCE Inc., for example, owns both Solo Mobile and Virgin Mobile Canada, while Rogers’ already owns Fido, and Telus Corp. has Koodo Mobile.

There is also a sense that Rogers will use the brand only in places where the company faces fresh competition from new entrants – such as Wind Mobile, Mobilicity and Public Mobile, and later cable companies launching wireless services – and not in areas where it would simply be providing consumers with a lower-cost option to its existing services.

Multiple branding strategies don't always succeed, but very often they do. With an increasing number of market commentators and media now ready to point out the translucent relationship of many wireless brands to their corporate owners -- to distinguish them from truly distinct brands with their own networks -- there is a good chance that, over the long term, consumers will see through the tactic more often. This does not mean that the new entrants will win consumers' business, only that they will stand a better chance of competing on their merits.

Marketing Guinea Pigs

[Something on a lighter note today, for the lead up to Canada Day celebrations on Thursday. I have a longer post on globalization in the works (inspired by the recently-completed G20 summit) which may appear by the weekend.]

Last year I wrote an article complaining about, of all things, the price of bagels. More particularly, a 20% reduction in the weight (or content) of a particular brand of bagels -- Country Harvest, made by Weston Bakeries -- while leaving the price unchanged. Their objective appeared to be increasing profits by betting on consumers not noticing the drop in consumable content. (Possibly they were motivated by the rise in the price of grains, which is obviously a key input to producing baked goods, but the topic today is regarding marketing the change, not their specific motivation or justification to change.)

Subsequent indications (I have no direct evidence) is that shoppers did notice the change in bagel content. In addition to bagels they tried the same tactic with their breads, and it backfired on them. The obviously anemic-looking "premium" bread loaves turned me off and, going by observations of others I observed who picked the loaves up, weighed them in their hands and then returned them to the shelf, turned others off as well. Very soon Weston gave up on the experiment and the bread returned to the original weight, where it has stayed to this day.

Not so with the bagels. Unlike the bread, the package of bagels was not so obviously reduced in content. Even so, it must have had some impact (it did on my shopping choices) since they have been experimenting with prices for many months. What they are up to I am not sure, except that it is both bewildering and entertaining at the same time. Although it was fun for a while, it's getting annoying. I'm beginning to feel like a marketing guinea pig, and I don't like being treated that way for very long.

The regular prize for a package of six Country Harvest bagels around here is typically $3.29 at Loblaws, where I often shop. The pricing experiments are nearly weekly events, and are in the form of 2-for-1 sales. For example, two packages for $5.00, which is $2.50 per package (you don't have to buy two). Since this an approximately 24% price reduction is more than the 20% reduction in content which started this pricing game, this could be seen as a good deal. These sales are not contained to Loblaws since there are equivalent sale prices at other chains at the same times.

I have this picture in my head of teams of accountants and product managers at Weston's head office studying the sales figures during and outside of sale periods, and trying to figure out whether to hold to original price or perhaps lower it permanently. The difficulty of selecting the optimum price point must be a daunting one to explain their nearly year-long experiment with pricing: $3.29...$2.50...$3.29...$250...ad nauseum.

Recently this numbing price cycle was interrupted to try out some other novel ideas. These ideas are to experiment with prices between $2.50 and $3.29. Pricing innovation must be taken seriously by Weston that they would have eventually deigned to try a few other price points to see what would happen. I have to wonder about these people that they would seem to model their customers as such simple automatons that they would persist in believing that there is no intelligence within them (us) other than to test a price against some vague internal scale and then having our brains throw a binary switch to the "buy" or "avoid" position. It's getting both annoying and tiresome. Now, rather than having to ask myself if their bagels are worth $2.50, $2.75, $3.00 or $3.29, I have to wonder if Weston's products are worth purchasing at all.

Weston needs to stop poking consumers with needles and make a decision. The never-ending price experiments need to end since they are showing themselves to be incompetent business operators. Does anyone at Weston have any knowledge of the consumer business at all? The supermarket chains are also complicit since they agree to post these silly prices without pushing back on the supplier. They at least should know better.