PL Buyer: Walking the Private Label-National Brands Tight Rope
Through a special arrangement, what follows is a summary of
a current article from Private Label Buyer, presented here for discussion.
"Step with care and great tact. And remember that life’s
a great balancing act."
– Dr. Seuss
More traditional supermarket operators are beginning to realize
that their private labels (PL) provide them with marketing points of distinction
in today’s
cluttered food retail landscape. So they’re introducing new lines and
moving up and down the value chain with more premium private label, lower-priced
lines and more niche offerings such as organics.
Will it reach a saturation
point when it comes to private label? The knee-jerk reaction from private label
advocates is to say no, pointing to European penetration rates in the 30-50
percent range or higher, far above where most U.S. retailers stand today. The
average private label penetration rate for PL Buyer’s Top 30 list of North American retailers of all kinds was 23 percent in 2009.
Another
easy answer is to point to the success of Whole Foods, Trader Joe’s
or Save-A-Lot , retailers where private label predominates, as proof that there’s
a long way to go before most food sellers reach the private label saturation
point.
But such quick answers miss the complexity of the topic and could lead
retailers to make private label choices that eventually come with high costs
— lost customers, lost national brand promotional dollars or both.
"They’re walking a tightrope because they know they need to promote
private label, but at the same time they get a lot of funding to promote national
brands," said Carl Munyon, a former vice president of purchasing with
Aldi and a member of the PL Buyer editorial advisory board.
Some experts contend
that the more aggressive a chain gets with private label, the more likely national
brands will be to offer more rather than fewer promotional bucks to keep their
products moving at that retailer.
"A lot of the promotional dollars that are out there are being brought
on by the threat of private label," said Martin Meloche, associate professor
of food marketing at St. Joseph’s University, Philadelphia.
If worries
about promotional dollars don’t figure into the discussion
of how much private label to sell, then what should?
"It’s easy to forget about the most important part of this
equation — the
customer," said Natalie Berg, research director with PlanetRetail. "The
most important thing for the retailer is balancing the assortment to make sure
that they’re offering the right products for their shoppers, whether
that’s
private label or national brands. If they’re not, shoppers can vote with
their feet, leaving retailers to risk losing an entire basket."
Indeed,
Kusum Ailawadi, a marketing professor at Dartmouth, said her own research shows
that when private label is more than 35-40 percent of a shopping trip, retailers
began attracting more cherry pickers who go wherever they find the lowest price
rather than remaining loyal to a specific retailer.
If retailers "start
pushing private label too much, they’re
headed into direct competition with Trader Joe’s and Aldi, you can’t
get there," said Prof. Ailawadi. Â Retailers "need to start with the
customer."
Discussion Questions
Discussion Questions: How should a retailer gauge the correct mix between private labels and national brands? How much should — and how much do — promotional dollars from vendors play into those decisions?
Research the issue–increase private labels in the mix and watch what happens. Better yet (he says, self-servingly) do this in a virtual reality environment where you don’t have to actually make the products, just design the labels. And recognize that this could well be a category-by-category operation–some may support more private label in the mix, some may support less. No reason to believe a fixed percentage is appropriate.
“Who am I?” is good starting point question for an established food retailer. If you didn’t start up as an imaginative private label retailer such as Trader Joe’s or Aldi, you have brought forth into today’s marketplace an assorted image of who and what are and that carries over, at last partially, into your private label’s desirability.
For PL to have much broader horizons against national brands and their enticing promotional dollars, private label products should match or exceed the overall quality, imagination and value reputation of the established retailer. In other words, it should follow that the consistently best and most exciting retailers have the best shot at raising their PL flag even higher.
In recent weeks, several supermarket chains including Food Lion and Safeway announced new private label efforts.
In the past three years, there has been an explosion in private label offerings in supermarkets. Aldi and Trader Joe’s continue to lead the segment with further penetration in private label. Safeway, Krogers, Publix, Stop & Shop/Giant, and others have made great strides in their private label offerings.
Only Great A&P failed in its efforts to successfully use more than 5,000 new SKU offerings to any advantage. The competition continues to roll over them, even though several of their offerings, Via Roma, Greenway, and Live Better showed promise initially.
Private labels are unique brands sold exclusively by stores. Strong private labels can only help a store’s bottom line, if executed successfully, priced right, and promoted.
Judging the private label opportunity requires an understanding of consumer priorities. It’s easy to understand why shoppers find it cost efficient to buy private label cottage cheese, while holding out for the national brand cranberry sauce for holiday entertaining. Is it too tedious to study opportunities category by category, brand by brand? Well, there is an old adage…”Slow but steady wins the race.”
So finding the right balance between private label and national brands requires consumer understanding and a sure grip on the financial opportunities provided by marketers who want to promote their brands.
The simple answer is, each retailer has a saturation percentage of sales from Private Label. And yes Aldi, Trader Joe’s and Whole Foods have much higher percentages of sales from Private Label, but history has shown us the downside, called the Ann Page effect.
The real issues are target customers and Private Label products. We are seeing higher-income consumers buying more private label especially when they are national brand copies with no performance difference, i.e. real-world equal to or better product quality.
The future is not Private Label copying National Brands; it is creating unique products customers want. Retailers have an advantage of a known target customer and geographic region. Private Label done right could achieve 35% to 45% for the typical supermarket. The CPG manufacturer risk is the third tier and regional brands having low volume.
Perhaps it is just a natural transition point along the evolution of private brands in the U.S. but many retailers today seem confused about their private brand strategy. Is the private brand for margin enhancement? Or is the private brand for retailer differentiation? Or are you trying to do both with a two-tiered private brand strategy?
Any of the above might be right for a retailer who has successfully answered Gene Hoffman’s question–“Who am I?” But then a successful execution of that strategy requires the same discipline as a national brand. Regardless of what you pick–“the essence of positioning is sacrifice.”
If the big manufacturers gave us a level playing field on the national brands they produce, this discussion would be a lot less interesting. Independents and small regional chains have been left out of the Hot Deal equation, as the better deals go to the Clubs, and Big Box stores. So…what is left for us to sell, and still compete on??? Yes…private label is something many stores have been forced to turn to, as the traditional Hot Deals are no longer available to them, thus making the situation even more frustrating.
I know it is not popular to discuss this delicate issue, but unless the National Brand food producers start giving us a chance to compete, private label will continue to grow, and in my opinion, it is not a great thing to ponder. I want a Hot deal on pop, chips, milk, detergents, and cereals, but for the most part, it is not going to happen, so I will continue to grow in perishables, and hang my hat on signature foods to boost my bottom line. And you know what?… It is not a bad thing….
Before we gauge the mix, let’s gauge the terminology. The term “private label” joins shopper marketing (in-store only or wherever shopping decisions are in process?) and even department store (Macy’s for sure but sometimes Kohl’s) in the world of assumed-but-not-agreed terminology and segmentation that gets batted around in retail. Is a private label a brand that a retailer creates from the ground up under its own brand only? Do exclusive and proprietary brands such as Liz & Co. at Penney’s and Simply Shabby Chic at Target count? They are often thrown in to the discussion. What about brands that a retailer distributes to other retailers (Sears Craftsman at Ace Hardware and Safeway O Organics at Brookshire Brothers)?
Further complicating matters, retailers have taken to the term “owned brand” which I’ve found changes the assumed definition even more. Private label as a singular concept is long in the tooth.
If the discussion revolves around promotion dollars, the partners have gone back to an older way of doing business that ignores the consumers. Worrying about whether there is too much or too little private label is useful only if and when the discussion adds “for our joint consumers.” Walmart’s experiment with eliminating brands and increasing private label went too far and they have added back a large number of branded products. Experimenting with different types of private label products and/or new products from manufacturers is certainly an important discussion. However, that discussion has to be in terms of understanding the joint shopper and/or consumer as a guide for choices being made.
The recession has actually been a good thing for Private Brands offering consumers a choice to purchase great Private Brand products at a good value while enabling them to meet their budget constraints. Retailers have only begun the climb to private label excellence.
With industry consolidation always happening, differentiation is one of the pathways to growth with a clear focus and plan in developing their brands. Implementation and adherence to category management practices will fuel the projected growth we read about in Private Brands. Development of Private Brands in emerging areas like Ethnics will be a real factor as the migration of population shifts to the U.S. from other countries. With the competitive landscape changing in the U.S. as new players enter the market and current players expand i.e. Aldi; the limited assortment format will become dominant and should be a natural growth for Private Brands. The continued growth of Private Brands across the store will keep the National Brands in line, creating more awareness and promotional activity. Ultimately, go-to-market strategies should be continually refined in order to remain fully aligned with the changing consumer in the ‘New Normal.’
I agree there is a balance to be struck between private label and national brands in the merchandising mix – but the balancing point is steadily shifting. When well-crafted (a big “if”), a store brand program contributes several benefits to the retailer: 1. Improved average gross margin; 2. Exclusivity and price competitiveness in the mix; 3. Distinct identity for the retailer and its banner; 4. Greater leverage with national brand suppliers, who must compete for scarcer shelf and display space.
In my opinion, food retailers are not at great risk of losing trade dollars as they gradually, steadily expand their proportion of store brand items. Brands need distribution; and retailers with strong shopper banner loyalty are the most desirable place to be.
I think that retailers need to focus on consumer need states and populate the products to fill those need states with items that are differentiated–this leads to basket expansion and sales growth that exceeds the promotional spend required to drive those sales.
Consumer need states: Value; Mid-Price; Premium; Luxury.
In each need state, brands and products should only be carried if they meet on of these four differentiation “Value Segments” and do not duplicate another products segment:
Value = Price (more for less)
Value = Quantity (more for same)
Value = Quality (more for less)
Value = Differentiation (more for same)
This 16 square matrix should drive selection and variety and will maximize effective assortment while maximizing supply chain efficiency.
Boy, is that the $64,000 question, or what? I would say that it would depend on the brand and the customer perception of that brand: Trader Joe’s can go all the way, Whole Foods can lean heavily, Safeway too…but Kroger, or Walmart? Not as much.
In my mind right now, it’s a “push and see” mentality. I’m preaching to a lot of choirs here, but I would also be very cautious if I were a more traditional grocer. Those national brands have been around a long time for a reason: customers trust them (nothing to do with incentives). So, test a lot, and of course, talk and watch your customers a lot, but don’t let the cash back do the talking.
When engaging in brand rationalization, retailers need to consider what number of brands truly satisfy consumer needs. It varies by category. To use some extreme examples, in refrigerated gelatin, there could be Jello and private label. In ketchup, there could be Heinz and private label. Those choices would satisfy most consumers. It’s more challenging in other categories.. But–with some exceptions–an assortment consisting of the category leader, a regional favorite, and a private label would probably be fine.
Private label should play an important role for both the retailer and the consumer. One of the problems that I see in some retailers is that they provide only the private label choice in some categories, which is a complete turn off to me and other consumers. Example, I wanted to buy some beets, but the only choice I had was the store’s private label, I would have preferred at least one National Brand option.
The current economic situation offers a great opportunity to increase private label options.
Private label should provide the following:
– an alternative to the national brand but it needs to be a quality item;
– an alternative at a lower price, but not so much lower that it does not appear to be a quality item;
– the retailer should be getting more penny profit from the Private label;
– consistency in pricing versus the national brand (20% lower on some items and 50% lower on other items sends a confusing message to the consumer) how can the 50% be as good as the 20%, yet they have the same private label name?
There is not a “correct” mix of PL and brands. Find the place where the maximum volume curve intersects the maximum margin curve and drive the most growth with whatever mix ends up being most profitable for the company. The US is behind the world with very few exceptions, who already have been mentioned herein. PL? “Just do it!”
Consumers want choices in private label products as well as national brands. Retailers need to balance the assortment as well as differentiate their private brands. I’d like to see more of that in the marketplace.