Competitors to Sell Safeway Brands
Safeway’s done pretty well with its Blackhawk Network business selling gift cards in other retailers’ stores. Now, the chain is looking to competitors to help it build its private label sales by selling its O Organics and Eating Right brands through the grocer’s Lucerne Foods division.
Other food stores looking at the Safeway brands can buy with the knowledge that each line is already field-tested. According to an article on AdAge.com, the 300-item O Organics line is expected to generate over $400 million in sales at Safeway this year. The Eating Right brand will do about half that.
James White, president of Lucerne Foods, said the two lines provide consumers with a “great-tasting, highest-quality, more-affordable option [than established organic brands], which allows for the mainstreaming of market.”
Selling at a lower point than organic brands has enabled the Safeway private label lines to overcome some of the price objections being seen in the market.
“There is a significant consumer market for organics, and I don’t think that will slow down,” said Mr. White.
Discussion Questions: Will Safeway be successful selling its house brands to other retailers? Do Safeway and the retailers buying from them risk being seen as very much alike by selling the same products? Does the sale of these products take away the differentiation that most retailers are looking to create with store brands?
What proportion of shoppers drive out of their way to seek private label brands? Most private label customers probably just compare the price to the famous brands displayed within the same location. So Safeway isn’t losing anything by selling its private label brands to other grocers, as long as the other grocers pay their bills.
Any grocer large enough to have its own private label goods probably won’t buy Safeway’s brands, unless Safeway can somehow price their goods lower than going direct. The Safeway goods have no brand equity so there’s no reason for any grocer to pay more for them.
I don’t see Safeway being successful in selling its private label organics to competitors. The competitors can simply sell their own private label. If it happens I don’t think it will be wide spread. This makes for a great press release but its easier said than done. Didn’t Wild Oates try this with some Ahold stores? What happened with that?
Doing it right, Safeway should be successful selling its Private Label to non-competing retailers. Loblaw’s President’s Choice was highly successful selling to other retailers. Wild Oats was selling their Private Label to other retailers. Safeway has two options. Turn these product lines into National Brands and loose the Private Label unique label effect. Or they can sell these product lines with regional exclusivity.
Assuming that Safeway will only offer its brands to retailers in non-competitive geographies, it might represent a nice incremental business.
There is some precedent for this. Several posts above mention the President’s Choice controlled label from Loblaw’s. Another historical example is Eight O’Clock coffee–introduced by A&P in 1919. It peaked at a 25% U.S. market share by 1930, and was offered to other retailers beginning in 1979 (Wikipedia).
For retailers who choose to offer the O and Eating Right brands, it seems to me the private label margin advantages would be diluted. There would be some advantage based on geographic exclusivity, but unless Safeway constructs a national branding umbrella, these products might not be more interesting to shoppers than other comparable store brands which aren’t burdened with those marketing costs.
There’s probably a margin of ten to fifteen percent opportunity with this move. It will give regional retailers addition exposure on flavors and sizes.
Give Safeway some credit for the effort in making this decision. After all, a Safeway decision of this magnitude minus successful research would be a decision designed to fail.
In addition to the above comments, I would add that by selling their private label brands in competitive stores, they’re giving customers a reason not to shop at Safeway stores (across the country–Domirdi’s Tom Thumb, etc.) and will lose incremental basket sales to competitors.
Genuardi’s and Dominick’s are perceived as being more expensive than stores like Giant or Wegmans. SuperFresh on the East Coast is converting some stores to Pathmark lower priced. They need exclusivity with strong private label brands like O and Eating Right to keep bringing people in.
Unless, of course, they sell them in Sears and Kmart. Maybe Safeway stores should sell Kenmore appliances. Do I smell a sweet brand alliance strategy here? Just kidding, folks.
There are natural markets for this already–smaller chains and Mom & Pops that don’t have scale for their own programs, regional chains outside of Safeway’s geography (which provides a nice little testbed partnership for potential acquisition too).
Hey, maybe if they can make it work and spin it off, they could create a successful CPG company. Then, Safeway could launch a new store brand to compete. 😉
In response to David’s question about Wild Oats at Ahold: When Whole Foods first announced its acquisition of Wild Oats, CEO John Mackey wondered in public why a retailer would want to give its products to somebody else and risk losing customers to its own stores.
I can’t help but ask the same question about Safeway now. The company has established O Organics and Eating Right as strong brands that differentiate its stores from other supermarkets, Walmart, etc. Why would they risk diluting that equity by making them available elsewhere?
Even if they do make money from the venture (and assuming that direct competitors won’t be able to buy), I can’t help but feel this is a long-term, “big picture” mistake.
Safeway will need a great salesman to be able to sell it’s own brand to competitors. The reason is that competitors also view store brands as an opportunity for points of differentiation, just as Safeway views them. Safeway’s exclusive brand is just someone else’s brand to anyone other than Safeway.
Safeway can sell O’ Organics in its stores precisely because it is a store brand. In fact, Safeway often takes a higher margin on national and regional (most organic items are regional still) organic food and grocery items in order to achieve this.
Safeway likes to take a 40-50% gross margin on natural and organic dry grocery category products from suppliers.
Once O’ Organics brand items go into a Raley’s (they won’t), a Ralphs (they won’t) or a Joe’s Family Market (they might), they no longer become store brands. Rather they are mass consumer brands.
Gone are the advantages chains have with their stores brands–favorite shelf placement and facings, preferred end-cap display space in the stores, free feature ads in the weekly circulars, zero slotting fees…etc.
Gone also is the price advantage–Safeway has to take a margin, along with building marketing and promotions costs for the brand into the margin.
There’s also a brokerage fee to the food brokerage firm that will be selling the brand into the competitors, as well as making the HQ calls and store visits.
All of the above goes into cost of goods. By the time a can of Safeway O’ Organics brand black beans hits the shelf at Joe’s Family Market all of the pricing advantages Safeway has–not to mention the merchandising ones–will be gone.
The category buyer at Joe’s also isn’t going to take less of a margin on O’ Organics just because it happens to be distributed by a supermarket chain that uses it as its store brand–one of many of course.
So, in competitors’ stores, O’ Organics will play on a level pricing and merchandising field with the many competing supplier brands in the market.
For those of us who have done a little marketing without having a store brand advantage–that will be the true test for O’ Organics and Safeway. It isn’t going to be easy.
I would put more of a focus internationally on O’ Organics were I Safeway, rather than in the U.S.
The Safeway brands could work in area where they are not operating, this is not too different than the various control label houses offering a brand for small chains who don’t have the resources to build their own private label program.
I don’t see chains or operators who compete with Safeway supporting a competitor by helping to build their brand.
As another commenter stated, A&P started selling Eight O’clock coffees in other markets back in the late 1970s after it had pulled out of various markets. It worked then, and Tata continues to make it work today.
That being said, other retailers such as A&P’s Onpoint division, has been set up in the same way Lucerne was established by Safeway, to market private label brands to independents in other parts of the county.
I don’t see any thing wrong with this approach. A&P uses C&S Wholesalers to distribute these products to other retailers. I am sure Safeway has a similar distribution system in place.
These products are of high quality, and will benefit the independents in their pricing strategy to offer high quality private labels at significantly lower prices.
I think it will be difficult for Safeway to be successful, but not impossible. These products are in response to consumers growing interest in natural and organic choices. Offering some obvious price savings to consumers in important. Marketing efforts should be part of an overall health strategy.
I agree with other comments that the differentiation for Safeway will be lost if products can easily be found at their competitors.