What Would Make Americans Eat Better?
Demand may be the key to healthier diets.
What Would Make Americans Eat Better?With the Pfizer-BioNTech, Moderna, and Johnson & Johnson vaccines for COVID-19 receiving Emergency Use Authorizations from the US Food and Drug Administration, one might be tempted to think, wishfully, that the period of uncertainty is ending and that things will soon be back to "business as usual." However, as history indicates, the next crisis is in all probability just around the corner.
Crises have an uneven and asymmetric impact on companies, with some emerging as winners, some showing scars, and some even perishing. For example, the pandemic has hit physical outlets such as Gold’s Gym, 24 Hour Fitness, AMC Theatres, Factory Furniture Outlet, and Neiman Marcus harder than it has hit some of their competitors, particularly those that primarily operate online, including Amazon, Netflix, Peloton, and Wayfair.
Companies that win or even just survive often have, or have had, to pivot their business models to adapt to a new, changed environment. As we described in a previous article, pivoting is defined as a "structured course correction" of a business model. It essentially entails a deliberate shift in the main strategic components of the business model: the customer, the company, and the competition (the "3Cs"). (For more, read "Pivoting in a Time of Crisis.")
However, transforming organizations so that they’re able to respond quickly to a crisis cannot always be done when they’re already in the midst of one. An effective and rapid response needs planning, operating models, and capabilities that unlock accelerated innovation, particularly around a company’s "4Ps": product, price, place (i.e., channels of distribution), and promotion. Organizations will be well served by closely examining where they are with these processes to ensure they are crisis ready. As Black Panther’s Shuri, arguably the smartest character in the Marvel Cinematic Universe, puts it, "Just because something works doesn’t mean it can’t be improved."
Crises can lead to unpredictable and massive changes in demand for products. The demand for entire industries—airline, cruise, and hotel among them—evaporated overnight during the early stages of the COVID-19 pandemic, while that for cleaning products, masks, and home delivery skyrocketed.
This could be attributed to the aggregated short-term reaction of consumers to a changed environment. As the cloud of uncertainty cleared and initial panic eased, a new steady state emerged. As we can see in the data on Google searches for the terms vacation and disinfectant through 2020 in the chart below, vacation initially dropped and then picked up, while disinfectant moved decisively in the opposite directions.
Given the potential advantages that accrued to companies that were able to address consumers’ changing preferences, accelerating product development was particularly important for businesses in 2020. Making the product-development process more agile by training employees, and developing technology to collect and analyze customer feedback quickly are two measures that companies took—and should continue to consider even more now to prepare for the future.
Tesla is a prime example of a company that managed to accelerate its product development. It uses an agile process, assembles teams of trained entrepreneurial and empowered staff, and equips those teams with technology such as core software architecture, a massive data repository, and automated testing platforms. The result is sub-two-year product-development cycles, versus cycles of four or more years at traditional automotive original equipment manufacturers. Chinese tech company Tencent developed and launched its QQ instant-messaging service rapidly back in 2009 by effectively assembling and training a highly cross-functional team that had all the core skills needed for the development and launch. Procter & Gamble took similar measures over the years to improve its processes, which enabled it, more recently, to launch Microban 24, a new disinfectant spray, just in time for the pandemic. While the product had been in the works for almost two years, these measures helped P&G fully capitalize on the spike in demand.
In times of economic uncertainty and crises such as the current pandemic, consumer confidence takes a tumble, which can lead to a decrease in overall household spending. Across categories, consumer willingness to pay (the maximum amount a consumer will pay for something) can change differentially both up and down, which in turn influences how those categories are affected.
As shown in the charts below, consumer confidence and spending dropped precipitously when COVID-19 hit. For services, spending is back up considerably but still not to the pre-pandemic levels, whereas spending on durable goods has in fact increased relative to pre-pandemic levels, possibly owing to work-from-home-driven spending by consumers. Given this scenario, pricing innovation assumes a greater significance for businesses striving to retain and attract new customers.
Developing an in-house pricing capability that is flexible across products, distribution channels, and customer segments is a no-regret move that companies can make now to prepare for the future. The enduring principle underlying pricing—that of recognizing and responding to the economic value that consumers obtain from a product or service—should continue to guide companies as they consider their responses. The launch of Tide Basic—to take another P&G example—was primarily a pricing move: to offer a “basic” version of the detergent so as to not lose customers whose willingness to pay had been affected by the Great Recession.
The current crisis has seen similar pricing innovations. In many cities, restaurants and hotels are teaming up to offer socially distanced experience room and food product bundles. One such bundle is a dining experience in a hotel room, a way for diners to enjoy a meal without others in close proximity, and its price includes food and two to three hours of a room rental. Such offerings have created a revenue stream for two of the hardest-hit industries in the pandemic while providing new sources of value for people craving a safe and quiet meal outside the house.
In another example of pricing innovation, financial-technology companies including Affirm, Afterpay, and Klarna Bank AB are seeing massive increases in valuations owing to increased use of their installment payment products. More and more customers purchasing goods from companies such as Bonobos, Dockers, Macy’s, and Peloton are availing themselves of interest-free installment options, in a bid to reduce how much they pay up front while still receiving the benefits of the product or service in question. Companies that have embraced such pricing schemes are therefore providing value by lowering the price of access to their products. We expect some of the behaviors consumers have developed during the crisis to continue even after it abates.
When businesses are buffeted by crises, the “what” and “how” of promotions need to keep pace with changes in the marketplace. In the apparel industry, homebound consumers swapped office wear for more casual attire, which created a challenge for retailers that needed to eliminate inventories of “mismatched” styles. As shown in the chart below, retail inventories of clothing and accessories skyrocketed in April. This prompted many in the industry to offer bigger discounts. While discounts might have been inevitable, a robust system for rapidly experimenting with and testing various promotional vehicles (discounts, BOGO offers, etc.) along with targeting consumers with the right communication vehicles (think emails, display advertising, and retargeting) can help minimize the potentially damaging effects of consumer expectations for lower prices in the future and the consequent discount death spiral.
Another example of a changed promotion response to the crisis comes from JPMorgan Chase’s credit-card unit. In order to preempt customer churn when travel plummeted, JPMC tweaked the rewards it offers on its premium Chase Sapphire Reserve credit cards. Cardholders now earn 3 points per dollar (instead of the usual 1) on up to $1,000 of grocery purchases each month through April 30, 2021. Additional benefits include DoorDash, Grubhub, and Peloton discounts, and the temporary ability to spend the $300 in annual travel credits on groceries or gas. By offering promotions that add value at a time when travel is curtailed, Chase hopes to retain customers until regular activity resumes.
In general, testing and using a wide range of promotion channels, both offline and online and over time, can help build expertise that comes in handy during crises. This cross-channel-promotion knowledge coupled with scenario planning can be a powerful capability that allows a company to react quickly as needed and to appropriately tailor promotions.
Of the 4Ps, place may be the one that has stood out the most during this pandemic. As the chart below illustrates, e-commerce sales got a major boost in 2020, jumping from a 12 percent retail share to over 16 percent in a matter of months. For context, historically it has taken almost 20 months to achieve each additional 1 percent increase. Companies that were created online, or at least had a significant presence there, fared much better than their offline-only peers.
To prepare now for the future, a company could establish a presence across distribution channels and create playbooks that give it the ability to quickly make adjustments. Even in industries that have primarily been offline, companies should be exploring online distribution channels to fully capitalize on potential opportunities. Zara’s owner, Inditex, is relying heavily on its online business to make up for the loss of offline sales. Gucci, among a few other retailers, introduced augmented reality Snapchat filters that let users try on its products online when they could no longer go to a brick-and-mortar store. Retailers are also addressing the fall in impulse buys at physical stores by replicating the experience online and nudging buyers to keep it up. Walmart added a “last minute deals” page on its website that includes items such as toys and small appliances. Target put together a gift ideas section, and Bed Bath & Beyond curated collections to encourage buyers to purchase items complementary to what they have in their carts.
As Master Yoda put it in Star Wars: The Last Jedi, “The greatest teacher, failure is.” Not all these initiatives will work or pay off. Nevertheless, these various measures enable companies to respond to this crisis and can even help during normal times. And by carefully experimenting and evaluating with the tools available in their arsenals, companies will be better able to take on the next challenge, whenever that might arise.
Pradeep K. Chintagunta is the Joseph T. and Bernice S. Lewis Distinguished Service Professor of Marketing at Chicago Booth.
Yogesh Kansal is a project leader at Boston Consulting Group and a recent graduate of Chicago Booth’s MBA Program.
Pradeep Pachigolla is a research assistant at Chicago Booth and a PhD student at Cornell.
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