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Gas Crunch Slams Brands—But Not the Ones You Think

Everyone has been talking about the impact of higher gasoline prices on how much consumers buy, but what about the impact of higher prices on what consumers buy?

Woman bagging groceries
Katrina Wittkamp | The Image Bank | Getty Images
Woman bagging groceries

Research conducted by Babson College Professor Dhruv Grewal and colleagues uncovered some of the usual statistics. For example, for every dollar increase in the gas price per gallon, the average consumer reduces shopping frequency by about 10 percent and total expenditures by about 3 percent.

But Grewal's research also uncovers something that may seem counterintuitive.

As prices at the pump rise, consumers buy fewer full-price brand-name products, but not because they trade down to private-label products. Instead, they more actively shift to brand-name products that they purchase on promotion.

Grewal found that for every 100 percent increase in gas prices, promoted national brands gained an average of 29 percent in market share points, whereas private label gained only 3 percent in market share.

This shift in behavior put more pressure on bottom-tier brands, which saw their market share shrink.

Why?

Consumers are looking for inexpensive ways to feel indulged, according to Grewal.

"People feel that the top-branded items are the most recognizable," he said. "Even though they have less money to spend, there is still some feeling that they are not depriving themselves."

In fact, consumers will cut back their overall consumption before they trade down to a lesser-known brand. For example, they may shift from drinking three glasses of orange juice a week from four glasses a week rather than buy a less expensive brand.

"As gas prices go up, people really feel a hit in their short-term budget," Grewal said. And trimming the grocery budget is the first place shoppers look to make up the difference.

"For the most part, you can't cutback on your actual gas consumption," he said. "Sure, you will consolidate trips, but that won't be enough."

And other expenses such as the electricity or cable bill can't be easily changed.

That said, people do make fewer trips, and the big loser in that equation are grocery store chains such as Kroger and Safeway as consumers look to supercenters where they can buy a wider array of goods and buy them in bulk.

This research also sends a big message to Procter & Gamble , Kraft Foods and the other makers of consumer packaged goods about the need to sponsor promotional events. These discounts will help prevent consumers from switching to private label goods. But it is dangerous for a well-known brand to simply knock prices down to a lower tier because the product may be perceived as having a lower quality and consumers will pass it over.

Questions? Comments? Email us at consumernation@cnbc.com

  • Christina Cheddar Berk is editor of CNBC.com's Consumer Nation and chief trend spotter.

  • Courtney-Reagan-140.jpg

    Courtney Reagan is CNBC's Retail Reporter.

  • Tom Rotunno

    Tom is a Senior Editor and Assignment Desk Manager for CNBC TV. He also writes about the business of beer for CNBC.com.

  • Staff Writer

  • Stephanie Landsman is one of the producers of "Fast Money."

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