‘Distribution’ and ‘assortment’ dominating factors in brand equity

They set out to determine how some brands are able to ride the wave of macro-economic expansions, while others are better able to successfully weather macro-economic contractions.

During economic contractions, characterised by lower disposable incomes and tighter budgets, consumers are more price sensitive, less brand loyal and more inclined to shift their purchases to cheaper private labels. This is also a time when consumers prioritise functional attributes over emotional ones. 

On the other hand, in economic expansions where there are fewer budgetary restrictions, consumers focus more on emotional attributes and their higher disposable incomes allow them to change their buying behaviours. 

Good brand managers understand these circumstances and can grow their brands during economic highs and insulate them from harm when the economy slows.

This new study found that strategic brand factors play an important role in moderating the impact of business cycles on brand equity. The researchers examined six brand factors that strategically position a brand against its competitors. These are:

1. Price positioning (value vs. premium).
2. Advertising spending (low vs. high).
3. Line length (short vs. long).
4. Distribution breadth (selective vs. extensive).
5. Brand architecture (single-category vs. umbrella-category branding strategy).
6. Market position (follower vs. leader). 

To understand how brands are affected by the business cycles, the research team focused on brand equity, which is a key performance metric of a brand.

Importance of factors will vary across different business cycles

Why do different brands fare differently during expansions and contractions? Study co-author Rajavi says the researchers argue that the relative importance of price, functional and emotional attributes, as well as functional and emotional risks, vary across the business cycles. 

“Brands are different with respect to price, functional and emotional benefits, and attendant risks. Such differences affect consumers’ preferences for brands with different strategic factors over the cycles,” Rajavi explains.

The study utilised data on 325 consumer packaged goods (CPG) national brands in 35 categories across a 17-year period in the United Kingdom.

“Our results show that a premium price position and market leadership build brand equity in expansions – while advertising, using an umbrella brand architecture and market leadership, contribute to brand equity in contractions,” says Kushwaha.

The two brand factors that dominate are distribution and assortment. Steenkamp explains that, during economic contractions, distribution is by far the largest contributor to brand equity. 

“Distribution also has a large effect in expansions. In both good times and bad times, extensively distributed brands have an advantage. In expansions, a wide assortment is also a strong contributor to brand equity, while it does not destroy brand equity in contractions,” Steenkamp states.

Key recommendations for brand managers

The study offers the following recommendations for brand managers:

1. Managers of brands with selective distribution need to consider whether this is a strategic choice, or the result of bad implementation of strategies to expand distribution. If it is a strategic choice, this research points to the negative consequences. If it is an unwanted outcome, managers may need to increase investments in channel incentives. Or, if the firm already spends a lot on trade marketing, examine why channel incentives do not result in expanded distribution.
2. Expanding assortment should be a priority for brand management, unless there are other overriding considerations (e.g., lack of resources). It is possible to change the brand’s competitive positioning from a limited-variety brand to a broad-assortment brand, if management chooses to do so. However, this will take time. With the elevated risks of a recession in 2023-24, managers planning for the long term might want to go against the general practice of cutting R&D expenditures during recessions and instead invest more. Given the time it takes to develop new products, they might be ready to launch just when the economy bounces back, reaping full benefits.
3. A premium price position and market leadership build brand equity in expansions. Advertising, using an umbrella brand architecture, and market leadership contribute to brand equity in contractions. However, the effect of management decisions with respect to these factors has only a modest effect on brand equity. Thus, these factors are of secondary importance when it comes to growing brand equity.

Find out more about the research paper Brand Equity in Good and Bad Times: What Distinguishes Winners from Losers in CPG Industries? here.