PL Buyer: Private Label Should Follow National Brands’ Lead on Marketing
Through a special arrangement, what follows is a summary from a current article from Private Label Buyer, presented here for discussion.
Dave Nichol, the former president of Loblaws Supermarkets and one of the key visionaries of its highly acclaimed President’s Choice brand, famously talked about the “brand tax” of national brands. Essentially, Mr. Nichol was referring to all of the marketing related expenses — TV advertising, celebrity endorsements, promotional campaigns, etc. — that added to the cost of its goods, and represented no tangible benefit to the consumer.
Loblaws, he argued, focused on product quality and delivering superior value to savvy shoppers who purchased Loblaws’ No Name and President’s Choice products. This marketing strategy was highly successful and was, in fact, a catalyst for the entire private label revolution.
While the concept of the “brand tax” remains relevant — and retailers need to maintain the price gap and margin advantage of their private brands over national brands — the need to market private brands has grown significantly, not necessarily to close the perception gap with national brands, but rather to differentiate from other retailers’ private brand programs.
One of the best examples of this was demonstrated last summer, when Loblaws ran its “Canada’s Biggest BBQ Event.” Through our audit of the North American private label landscape, we have identified a number of other retailers that are doing a great job marketing their private brands, including: Wegmans, H-E-B and Publix. And it’s no coincidence that these three retailers also possess incredibly strong overall brand equity.
So why don’t more retailers undertake significant marketing initiatives of private brands? Most cite the fact that they have no resources or budgets to market their private brands. This baffles me — a private brand can in many cases represent millions if not billions of dollars in sales, and can be one of the most influential consumer touch points of the business. Can there be any more deserving investment of marketing funds?
To supplement marketing budgets for private brand campaigns, we are encouraging our clients to get funding support from vendors of private brand programs.
Think about it — national brands provide funds for marketing of their products at retail. Why can’t private label vendors ‘invest’ in the marketing of the brand in which they participate? It’s a win-win situation, both in terms of the immediate benefits of potential sales lifts and longer-term brand equity building. But vendor support of marketing efforts cannot be perceived as simply a cash grab; vendors should have the confidence that a well-crafted, results-oriented marketing plan is in place, and that investing in the marketing of the private brands through which they sell their products won’t be wasted, or simply turn into a brand tax.
Discussion Questions
Discussion Questions: Should private label suppliers help fund the marketing costs of retailers’ PL programs? What are the pros and cons of such support for both PL suppliers and retailers?
If I were a PL supplier, I’d be pretty nervous about this. A branded manufacturer is controlling their own marketing — a PL supplier isn’t. A lot of trust would have to go into this and you can bet their costs would go up, which would be passed on to the retailer and then to the consumer. This is the retailer’s responsibility.
Private label suppliers already partially help fund marketing costs of retailers’ PL programs by providing cost differentials on the same product quality as national brands.
A CON: Suppliers can’t put 10 pounds of retail values in a 5 pound sack … nor can they increase their prices to retailers without reducing their ability to support retailers’ PL marketing programs.
A PRO: PL is gaining more stature and greater consumer acceptance each year and that appears to be an effective marketing program.
Seems to me if extra money is used to fund private label marketing, it will add to the cost of those products requiring higher prices. Isn’t that what brand names are? Products with added cost of advertising and marketing? Store brands are basically brand name products less all the marketing hype. Someone has to pay for the marketing. Either the consumer through higher prices or the vendor through lower profits.
PL suppliers would love to be able to help retailers market their store brand items and categories but the harsh truth is that, in the majority of categories, the retailers and the PL supplier competitors have put suppliers in a box. Most retailers want the lowest dead net cost that a supplier can offer and the bid or auction process has driven down those prices to retailers. While this is a very efficient way to drive costs out of the system, it also makes for some very intense competition and less margins for the suppliers.
Additionally, this process has forced manufacturers to run very lean so that any marketing funds are dedicated to product and packaging improvements. The retailers are the engine that should drive the marketing of their brands and the best in class are doing that already.
“…and retailers need to maintain the price gap and margin advantage of their private brands over national brands.”
Why?
If the Private Brand is truly of equal/superior quality and the retailer (“marketer” in this case) has truly built a brand equity, why does the price have to be lower than national brands to win consumer choice? It isn’t this way in all cases. Sainsbury and Marks & Spencer were both demanding brand premiums when I was kicking around the U.K. twenty years ago. As long as the private brand marketer relies on price advantage to compete with national brands — they aren’t really in the “branding” game.
“But vendor support of marketing efforts cannot be perceived as simply a cash grab; vendors should have the confidence that a well-crafted, results-oriented marketing plan is in place, and that investing in the marketing of the private brands through which they sell their products won’t be wasted, or simply turn into a brand tax.”
That may well qualify as the “but…” of the year.
Manufacturers (or in our market view terms “converters”) are routinely challenged to provide the lowest competitive bid for a given product spec possible. The business invariably goes “out for bid” once a year minimum. It’s razor thin margins for the converter already.
Converters who have tried offering value-added services have either a) lost the business to a lower bidder when they tried to charge for it, or b) simply seen that additional cost disappear from their already thin margin.
If retailers want to own the brand, they need to bear the brand marketing costs. If they want to compete with national brands on anything other than cost/quality — they need to pay for the marketing or the “brand tax.” If they are using private brand as something more than a margin enhancer — they need to price up to pay that brand tax.
There’s still no free lunch.
Private label philosophies have been all over the map since early in the 1980s to the present. I have been so deeply involved with the transformations that I dare say that in some ways the strategy has come almost all the way back full circle, and that’s not necessarily a good thing because private brands are starting once again to look like plain label. Yuck!
Attention retailers; your store brand program is a reflection of your company’s own brand and it makes a statement, for better or worse, about your identify and points of differentiation.
Oh, come on. Retailers can change PL suppliers over a penny a pallet. Auctions make loyalty a sick joke. This is simply another way to make money on the buy instead of the sell. And why should a supplier be expected to cut razor-thin margins even thinner by giving a retailer “marketing money” which will, for the most part, just go straight to the retailer’s bottom line anyway? And if you give it to one, you should give it to all; and of course if this were to take hold, every retailer would want it. Well, I could go on for a very long time on this one. Retail truly is a bizarre bazaar.
Brands are what you make them…P/L or otherwise. Brands have tangible value. Just ask Coca-Cola, the World’s most valuable brand. Retailers can be just as savvy in brand marketing of their P/L products. Many already are doing just that.
In my view, even some of the very best store brand retailers under-market their private label in that most rely on EDLP price comparison tags and price shielding to tell the story, day in and day out. I think those that DO support store brands by running continuities, points programs, and other promotional incentives have figured out that will all the coupons and deals that focus on branded product…retailers are going to have to become more “creative” when it comes to marketing their own brand, or lose share.
While it would be intuitively positive for private label suppliers to allocate funds for marketing their product, this practice would likely only cut into the margins that retailers rely on with store brands and lead to frustration. Further, I believe it is up to the each retailer to devise their own store brand marketing calendar, creating synergy and coordination with their CPG promotions. The retailer, not the store brand supplier would be better positioned to do so.
With that said, some retailers remain undoubtedly reluctant to further promote store brands as it may diminish the margin advantage they often rely on in the merchandising mix to make the numbers work at the end of the period. But margin rate erosion of store brands may be one of the new costs of doing business in a continuing tough economy.
But now is a great time for retailers to enhance the value proposition of store brands, with new mobile and other technologies providing new ways to reach a value-minded customer. “Compare and Save” tags and an occasional weekly promotions will have an increasingly tough time competing with coupons, deals and promotions from competing CPG brands.
Ben Ball nailed it. Retailers should fund their own PL marketing. These dollars do not materialize out of thin air. If their store brand goods are so good, then retailers shouldn’t be afraid to price them closer to national brands in order to fund promotions, e.g., to fudge on the store brand fudge.
There is no disputing the fact that the intelligent marketing of Exclusive Brands will attract new customers to a chain as well as build loyalty with their existing customer base.
The question is, can a PL supplier working much more closely with a chain on product development, cost control and go-to-market strategy afford the additional costs that will accrue to them by supporting their marketing efforts?
Given the fact that their are only a relative handful of PL suppliers in each category capable of quality product, continuity of supply and added value packaging and marketing expertise, I would say that chains might want to differ in applying the same “Ask” criteria or “brand tax” they have levied on the branded suppliers.
There seems to be more of a partnership at stake for both parties that would suggest a going forward together based on transparency and mutual interests.
At the end of the day, this issue is irrelevant. The cost of any campaign will be paid by the “spread” or difference between retail shelf price and the product cost. Either it is just gross margin of the retailer or a promotional payment from the manufacturer.
Now to the point, while specific drives concerning a certain category could be bought into by manufacturers, general campaigns are very unlikely. Manufacturers would fiercely resist to pay for it.
Then, the discussion could turn to the margin and there is where the relevance of my initial comment lies.
Marketing is a tax only if it isn’t effective.
Retailers should be investing in the marketing of their own private label brand. Lest they not forget that their private label brand is a reflection of their own store.
A great discussion about a sensitive topic.
This article is actually one of a series of ten articles published in PL Buyer Magazine, outlining our company’s “10 Keys to Private Brand Success.” Go to the PL Buyer website and search “Rodmell” to get access to the other nine Keys.
Regarding this specific article, some comments argue that the increased marketing investment from private brand vendors would have to be passed on to consumers. While this is most likely true, our belief is that there is room for increased prices for most private label products; most retailers price their private label alternatives too low relative to national brands. In fact, too large a price gap enhances the perception of inferior quality and can actually compromise trial.
This is covered in more depth in Key #3: Effective Pricing Strategies.