PLBuyer: Regional Retailing
By Kathie Canning
Through a special arrangement, what follows is an excerpt of a current article
from Private Label Buyer, presented here for discussion.
Somewhere between the single-store mom-and-pops and the multi-store national giants you’ll find an enthusiastic breed of retailer with an especially loyal customer base. That particular breed – the regional retailer – is very likely to cater to the unique needs and preferences of the shoppers in the geographic region in which it operates. And when shoppers believe that a store “understands” them, they’re likely to come back for more.
A solid private label program often plays a critical role in the regional retailer’s strategy – and its ability to meet its consumers’ needs. Even more importantly, such a program allows these retailers to stay competitive with larger national chains.
“I think first and foremost it provides us with a wonderful profit opportunity, because when you’re competing with some of the folks that are 10, 20, even 50 times your size, obviously you’ve got to be price-competitive on national brands,” said Steven Smith, president and CEO of K-VA-T Food Stores Inc., which operates 95 Food City and Super Dollar Discount Foods outlets in Kentucky, Virginia and Tennessee. “I think the way we’ve embraced our corporate brand program … allows us to have wonderful quality products that are well-accepted by consumers, and to enhance our margins so we can remain competitive on some of those national brand items you absolutely have to sell very cheaply.”
A spokesman for a Texas-based regional retailer that asked not to be identified echoes Smith’s sentiments.
“Our primary competitors are EDLP-type retailers who often price branded items at margins below our budgeted needs for the category,” he said. “In trying to stay competitive to these big box retailers, we are often forced to give up margin on national brands.
“Our private label products are not a lower-tier alternative, but rather national brand-equivalent, with quality being very important,” the spokesman added. “We price our private label products at a comfortable margin with a focus on being a value compared to the national brand.”
Discussion Question: How critical is a private label strategy for a regional retailer’s quest to differentiate itself from national competitors? What challenges do regional retailers face in developing successful PL programs that might be different than a larger national?
It comes down to buying power; regionals don’t have the resources to create and maintain a complete private label program. With that said, regionals must have house brands to compete with the majors. This opens up a unique opportunity for regionals to bring in different and higher quality products under their own label.
Regionals must also take into account their specific marketplace and bring in products that cater to their demographic. There is space to play but regionals need an edge.
Work we have done suggests that preference (or at least acceptability) for a private label brand is a driver of store traffic. Therefore, I feel that the store brand is critical to the overall brand image of the retailer as an attractor to shoppers.
I used to be an ardent champion of the need for regional players to develop strong private label programs. My argument, as so many others argue, was that private label programs can enhance the brand, provide differentiation at the product level, and contribute positively to gross margin.
All of that is true, and yet, like many other “answers” we pundits offer, may not actually deliver the benefits.
My new perspective is that effective market positioning and competitive differentiation cannot be achieved through a private label program. The national chains can execute private label better, across more categories, and with more marketing support than any regional player can. Period. This is simply economic reality. Note that I still advocate the existence of a strong PL program, but from a gross margin perspective and because the ROI is still good for the effort involved. Do it, but don’t have unrealistic expectations for it.
There are only a few variants upon which a regional chain can out compete a well run national chain. Others have hit on them. True customer service, differentiated product assortments, and unique in-store merchandising are the most obvious. To compete with the national chain it is necessary to be realistic about what they can and cannot do. What they CAN do is out-source, out-develop, and out-logistic the regional chain. They may NOT do these things, but they CAN. And the well run “winner” in the market will. What they CANNOT do is provide local service, localized assortments (truly localized) and location-unique shopping environments.
Without a doubt, regional retailers need to depend on a robust PL program to subsidize much lower margins on the National Brands they sell (if they don’t sell these products they will lose store traffic that allows them to convert National Brand buyers to PL buyers). Ultimately, regional retailers will have to evolve their PL strategy into something more than just selling average quality products at half the price of National Brands or run the risk of being consolidated into national chains. You cannot continuously lose operating margin in a mature industry, without your investors losing patience.
I can only speak to the non-food segment. For a regional retailer, clear target and product differentiation from larger national retailers is critical. Nothing they do can be me-too. PL is appropriate for them as a means of establishing differentiation, with items that are also clearly differentiated.
I agree that a regional retailer must find ways to differentiate themselves from the national chains. A strong, well thought out private label program is essential. It must have above average quality, well designed labels and be competitively priced. This however does not give them an advantage but merely levels the playing field. Their advantage comes from superior service, providing the localized selection of items that the national chains choke on and having a more inviting atmosphere to shop in.
Possibly a better meat market, or better bakery, or the best deli all come to mind. Employees that take the time to speak to their customers and act genuinely appreciative for your business will set them apart from most chains.
A truly clean store is another biggie. It seems like a no-brainer but I am amazed at how many stores can’t get this right. If you can’t manage the basics, you are in the wrong business.
I’m an advocate of store brands as an important vehicle for regional grocers. They deliver merchandising differentiation and gross margin.
Private label products are essential to the merchant’s offering. But store branding should reach wider than that–to the entire image and positioning of the retailer amidst its large and small competitors in the region. Here’s where a shopper-driven proposition must come into play.
Me-too products aren’t close to the whole equation: PL quality must be on-target; price gaps strategically set to communicate price image using demand cues; branding consistently delivered and designed to underscore the retailer’s umbrella positioning. Even visible service standards can be branded as part of the message mix.
Yes, big chains have some scale economies in their favor. But regionals have the advantage of local focus. When “store brand program” means branding the store in every relevant aspect, a higher level may be achieved.
Regarding regionals remaining competitive against the nationals, I think one has to ask if PL is in fact a red hearing. After all, the nationals already have PL products that compete against the name brands on price and/or quality. So for regionals to just start offering their own PL lines, perhaps they are in fact just putting “lipstick on a pig.”
Maybe they need to start asking themselves what they can do to create a unique experience that goes beyond the PL issue. There are dozens of ways that effective internal programs can be created to bring people in. Product demos, store layout, classes, email promotions, and product depth are just a few.
As for products, if a regional is really set on bringing in PL lines, then I would suggest they bring in products that add to their depth rather than their mix. That would also allow them to compete more on quality than price.
Private label brands executed successfully provide identity, profit, customer recognition and loyalty. They clearly and constantly remind the customer where they shop. National brands available at any price are incapable of accomplishing these things.
The regional grocer has almost no other way to establish identity. It is absolutely essential for the consumer in their area to open their cupboards and refrigerator to see the retailer brand daily.
The number of private label products which were once limited is now growing into nearly every category. It is critical that they be of good quality and reliable.
All that said, consumers in my region expect the label and its acceptance has grown further as it continues to penetrate even more categories.
The points of differentiation come through packaging, presentation, quality and–most importantly–how they are sold. The combination of products and experience can be a powerful advantage.
Regional retailers are able to use P/L in ways national retailers can’t. First off, they have the ability to create products geared to local tastes which allows them to create a bond with their customers that national retailers can’t. Second, regional retailers can differentiate their P/L products by category to allow them to more closely align themselves with how their individual stores are merchandised.
No, a regional retailer is not going to have the same price advantages or product mix a national retailer is going to have. However, if they’re willing to accept that and leverage what they can, then they can use it to reinforce their role in the marketplace.
Regional chains must use Private Label to be different. Using Private Label is an alternative to supporting some regional brands. A big difference between regional and national brands is the product taste. Regional retailers can focus in on getting just the right taste for their consumers; for example, BBQ sauce.
The biggest limiting factor is buying volume. Until a regional chain can create sufficient demand, Private Label turnover is lower than required.
The role and importance of private label in regional retail chains depends completely on the type of marketing strategy any given retailer offers, and which approach or approaches they take for a private label strategy.
Some retail chains try to use private label as a point of differentiation but to varying degrees of brilliance (or lack of) and success.
Even after years of private label evolution with many different approaches, most regional chains continue to use the oldest private label “strategy” which is simply to knock off the national brands, squeeze the PL manufacturers for the lowest and most efficient costs, and offer the products to the consumer for 50% to 70% of the national brand price. The product might or might not be national brand equivalent but in almost all cases, the package designs appear inferior and lack enough consistency to make a true statement to support the retailer’s true objectives.
What is most important is to choose packaging, design, and consistency (and quality) that supports your marketing message and points of differentiation, and not to over-dress nor under-dress your program for the true marketing objective you want to get across to the consumer.
I think the PL weapon for a regional chain is critical to its success. My concern has always been that to create the buying power to procure non-perishable items the real option becomes one of partnering with their supplier like a Topco program to pool purchasing and to develop and drive categories
The real advantage I believe is in the perishable areas where local unique and imaginative programs can be developed and implemented.
I think programs like Ukrop’s meal program, services like ShopRite’s Shop at Home program, or developing partnerships with local restaurants like the Fresh Direct program all serve to make you a destination for consumers in your marketing area.
Almost every regional supermarket chain, like every larger supermarket chain, already has a private label program. Almost all of them, national or local, large or small, are the same. They knock off famous brands in the same categories. The quality is rarely so different that any civilian could tell one from the other in a blind test. Almost no grocers have invested the time needed to do anything creative like Trader Joe’s. This was the situation 10 years ago. This was the situation 20 years ago. Wanna bet it will be the same situation 10 years from now?