Nielsen Economic Advisor Whitepaper

Nielsen Economic Advisor: What You Need to Know a Nielsen white paper by Todd Hale, Senior Vice President, Consumer & Shopper Insights, The Nielsen Company and James Russo, Vice President, Marketing, The Nielsen Company

Over 70% of the U.S. GDP is a result of consumer spending. So now more than ever—as we work to dig out of a steep global recession—our focus must be on the consumer. We must listen closely and carefully to what consumers say, and relentlessly observe what they do. And even though at this moment we do not see positive trends in consumer spending, retail sales and other leading economic indicators, it is imperative to continually measure and analyze—which is what we do at The Nielsen Company—so that when things do start to improve, we’ll be able to recognize and properly respond in accordance with the underlying elements that help drive the change. The following insights were gathered from resources across The Nielsen Company—insights uncovering the manners in which consumer behavior is changing, how consumers expect to change going forward, and what marketers can do to drive growth in these highly challenging times. Since 1948, there have been nine recessions generally acknowledged as such by economists, and those recessions have averaged 11 months in length. Each of the recessions has been followed by a period of economic expansion averaging approximately four years in length. No one—no academician, no government statistician and no world economist—has yet been able to adequately characterize the full historic significance of

today’s steep recession. Most feel that the recession will continue for a number of months, with the economy perhaps moderating or edging upward by year-end 2009. A primary cause among the drivers of the severe economic slowdown is a marked downturn in consumer spending. But the drop-off in consumer spending has not occurred in a vacuum; that is, the entire global economic system is basically ridding itself of previous excesses. And we are on the verge of a potential long-term shift in how consumers shop and buy. Under these circumstances, the companies positioning themselves for growth will, in the short term, deliver value— value that consumers can clearly comprehend, and are willing to spend for. And in the longer term, the companies that are positioned for growth will be focusing on innovation—all the while, never forgetting their value promise to consumers. Insights and opportunities for success will be driven by any given company’s capability to understand the behavior of consumers and to understand categories, channels and media—all at increasingly granular levels. And a company must be able to mine those granular details, properly analyzing and making the knowledge work to forge the company’s actions toward continued and/or renewed success.

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N i e l s e n E c o n o m i c A d v i s o r : W h a t Yo u N e e d t o K n o w

Dramatic Declines in Discretionary Trips 2008 vs 2007 Percent Change

Shopping Trips

8

$ Spent Per Trip

6 4 2 0 -2 -4

Trip Generators

Dept.

Mass

Toy

Office Supply

DIY

Con/Gas*

Apparel

Electronics

Total Outlets

Liquor

Grocery

Pet Stores

Drug

Dollar

-8

Club

Supercenters

-6

Online

The details of how we got here over the past number of months—with banking and industry shortcomings leading to massive government bailouts and major liquidity investment— are well-known. Credit markets remain tight, and consumer behavior reflects a substantial measure of fear of the unknown, as well as a realization that the world is, indeed, experiencing historic economic turbulence that cannot be anticipated to be fully remedied in a very short period of time. Unemployment rates have added to the pressure. Consumers are generally uneasy about their own jobs and other economic factors. And they are showing by their spending (and non-spending) patterns that they place a very high premium on value.

Trip Avoiders

Source: Homescan,® a service of The Nielsen Company *Excludes gas-only trips

Because of our statistical and analytical capabilities, we at The Nielsen Company are able to quantify and publish for broad discussion and review a number of current U.S. and global consumer characteristics. In the past several months, declining consumer confidence has been real and measurable. Consumer expectations, in fact, have plunged to record lows. And statistically measured consumer behavior reflects the reinforced consumer movement to “value.” Many consumers, for example, now prefer to eat less expensive meals at home, rather than going out. Entertainment at home is a preferred option—watching television and using “delayed-watching” devices to record programs, rather than spending more to go out to a movie or other entertainment. In the fourth quarter of 2008, retail sales stalled significantly in the United States, and statistics also showed retail sales slowing across Europe. Consumers’ discretionary spending is significantly down across U.S. retailers, whereas value and convenience spending in retail channels like grocery, dollar stores, and drug store have performed better—likewise for the “stock-up-and-save” spending in warehouse clubs.

In the first half of 2008, inflation occurred due to a rise in commodity prices. Grain prices were up because of the demand for corn in the making of ethanol. Later in 2008, commodity prices came down significantly with the severely slowing world economy, but savings in the way of lower prices at retail were very limited. Consumers continued to feel strapped, as they saw the value of their homes and investments plummet and job losses mount. And their behavioral shifts can be characterized as partly gradual and partly immediate. The “gradual” portion relates largely to what has been perhaps a decade-long shift of consumers to value-retail channels such as club stores, dollar stores and supercenters, as the numbers of those stores has risen. And some of the “immediate” consumer-behavior shifts relate to, for example, people spending more time at home, saving money by watching television for entertainment. Also, there’s been a marked halt in the rate at which people were basically ignoring coupons and other bargains. Consumers are shifting back to using coupons and finding better prices. The beneficiaries are value retailers and those offering food assortment.

Copyright © 2009 The Nielsen Company • Confidential and Proprietary

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To find better value, consumers are doing more online shopping. Also, they’re limiting their discretionary trips. Food categories are gaining strength, as consumers prioritize their shopping trips to find food, and other goods, for less. At mealtime, some consumers are trading down—going to restaurants such as fast-food outlets that are less expensive—or “trading out” and participating in sit-down meals in restaurants much less often. In a recent Nielsen consumer survey, 48% of respondents say they have cut back on sit-down meals. The result is that fast-food restaurants and pizza-takeout establishments are doing pretty well—advertising and delivering value. But casual-dining and upscale restaurants are struggling. One of the most telling statistics basically summarizes our points regarding both dining and retail-shopping trends. Of the 30 companies comprising the bellwether Dow Jones Industrial Average, only two experienced higher earnings in 2008: Wal-Mart Stores Inc. and McDonald’s Corp.

“If You Can’t Eat It, You Don’t Need It” Top 15 Categories: % Unit Growth (FDM with Walmart)

Canning & Freezing Supplies 7.4

Wine Vitamins

4.8

Dry Vegetables & Grains

4.8 4.6

Fresh Meat

4.3

Dry Mix Prepared Foods

Overall, there’s been a significant decline in ad spending and a shift across advertising media. Advertising in the United States has fallen sharply in the last year, and the reason behind the ad-spending drop-off can be explained largely by the precipitous drop within the two industries that advertise most, automotive and pharmaceutical. For CPG, there is actually still very real ad-spend opportunity. In today’s muddled economy, should a retailer or manufacturer—regardless 11.5 of industry—try changing its advertising to improve performance? Perhaps implement a packaging change? Or would it be by any measure logical to change pricing or promotions?

3.2

Flour

3.2

Refrigerated Juices & Drinks 2.8

Frozen Novelties 2.3

Frozen Vegetables Pasta

2.3

Salads, Prepared Foods—Deli

2.2 2.1

Candles & Incense

1.8

Liquor Baking Supplies

Edible product categories are driving dollar growth, although some of these categories have declined in unit sales when compared to the previous year. Non-edible categories are lagging behind in both dollar and unit sales. Among the edible categories, food staples top the list of stores’ growth categories. It’s almost as if consumers are saying, “If you can’t eat it, you don’t need it.” Sales of canning supplies— for longer-term food preservation—are up significantly, and people are planting gardens in efforts to save money on produce. Increasingly, consumers are buying less expensive store brand goods instead of branded products. And retailers are offering discounts and working to deliver value. As a result, consumer packaged goods (CPG) are under enormous margin pressures.

1.4

Source: Scantrack®, a service of The Nielsen Company; 52 weeks ending 01/24/09 versus prior year—FDM with Walmart, minimum $100 million in sales

In addressing these questions, the consumer’s perspective is critical. Generally, when given the option to buy a downsized product with no change in price, most consumers have said they prefer to purchase larger package sizes with a lower price per unit or serving. However, as we’ve seen many times, downsizing of products to absorb rising costs and maintain margins is a viable manufacturer strategy to avoid passing on large price increases to consumers. Many retailers are also looking at the store brand option to help win cost-conscious consumers.

Copyright © 2009 The Nielsen Company • Confidential and Proprietary

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N i e l s e n E c o n o m i c A d v i s o r : W h a t Yo u N e e d t o K n o w

Another point of note is that during any recession, retailers and manufacturers should think long and hard about their marketing and sales efforts. McGraw-Hill, in a study of 600 companies’ historical performance during the recession in the early 1980s, concluded that by a dramatic margin, those that maintained aggressive sales and marketing efforts during the recession emerged much more successfully after the recession. In fact, those companies that remained aggressive in marketing during the recession showed revenue growth during the five years after the recession of a whopping 275%; those companies that cut their marketing spend during the early-1980s recession showed revenue growth during the five years after the recession of only 19%. Also, the success rate of new products is similar regardless of the economic climate. So whether in good times or bad, don’t hesitate to bring new products to market. A good, well-conceived and desired product will succeed; a poor one will fail. Historical statistics show that those products will not succeed or fail simply because prevailing economic conditions at the time of launch were good or bad. The leading economic indicators are all down, and have been for an extended period of time. But those indicators, including all-important consumer confidence, will also be the first to show upticks when the economy begins to improve. Regarding consumer confidence, optimism is weakest in Latin America, the European Union and Japan

regarding prospects of pulling out of the recession soon. Results from a Nielsen Global Consumer Confidence Survey in October showed that an average of only 18% of consumers in 52 developed countries believed the recession would end within one year. Looking to the future, we at Nielsen see challenging times in 2009, but we also see opportunities. Existing consumer behavior, in the short term, will intensify—with greater at-home-related opportunities, fulfillment of basic (primarily food-related) needs over discretionary needs, and pervasive trading down. Variety and convenience are definitely taking a back seat to value. But do not assume that consumers—even in a tough economy—are not willing to pay a premium. Make good use of advertising to communicate why your brand should be bought or store shopped exactly at the point when consumers are thinking about every purchase—such as during a recession. And remember that more than ever, the ability to understand consumers, categories, channel and media at an increasingly granular level holds the best potential to deliver the insights to drive your success. Never forget the prescient saying that it’s always darkest just before dawn. And remember Sir Winston Churchill’s boundless encouragement, “When you’re going through hell, keep going!” Obviously, there’s no turning back.

For more information, contact your Nielsen representative at 800-988-4226 or visit www.nielsen.com Copyright © 2009 The Nielsen Company. All rights reserved. Printed in USA. Nielsen and the Nielsen logo are trademarks or registered trademarks of CZT/ACN Trademarks, L.L.C. Other product and service names are trademarks or registered trademarks of their respective companies. 09/056 4