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[9 comments]

FRBuyer: PL Price Gaps Too Wide

November 13, 2012

Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Refrigerated Buyer magazine.

Price gaps between private labels and national brands in the food category should naturally be determined at the item level, not by category or department. But it's clear that in many segments, the gaps are still too wide.

"Particularly for those retailers more focused on premium private label, we think there are opportunities to narrow those gaps," said Todd Hale, Nielsen's VP of consumer insights. He added that just a one-cent decrease in the price gap between store and national brands would result in an additional $437 million in annual sales.

Not only are retailers leaving money on the table, but in categories like ice cream where the gaps can be as wide as 40 percent, too-low prices make consumers question the store brand's quality, said Albert Greenwood, director of frozen foods at Daymon Worldwide. Can a $2.49 gallon of private label ice cream really be as good as Breyers at $4.99? Of course it can, he answered, but consumers won't believe it unless the prices are more comparable.

Part of the problem is that retailers that don't have an economy tier are using their national brand equivalent store brands to fill two conflicting roles: reasonable alternative to the leading national brand and opening price point option for consumers looking for the best value, according to Jon Hauptman, a partner at Willard Bishop.

"When retailers add a robust assortment of economy private labels, they can recalibrate their national brand equivalent items slightly higher than before, which reduces unnecessary price gaps," he said. "Offering an economy tier also dramatically enhances a store's price/value image," he added. As retailers communicate the low tier's availability, "Shoppers will recognize that they don't have to go to the dollar store, limited assortment store or supercenter to save," Mr. Hauptman said.

David Warrick, MMI's director of analytics and insights, agrees that opening price point products in key categories represent a significant opportunity for private label. In fact, he reported, MMI is currently working with Family Dollar to identify private label opportunities in dairy and frozen. Traditional supermarkets that hope to compete will need to offer similar items at an equally low price.

FINANCIALS:     [NYSE:FDO] [ ]

Discussion Questions:

Are the price differences between private label and national brands still too extreme? Has the focus on NBE and upscale PL hurt the economy tier and taken retailers' eyes off the ball when it comes to pricing strategies?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Are the price differences between private label and national brands still too extreme?

Comments:

I see two schools of thought. First, we are still in a recession and we should leave private label pricing alone for now. Second, on an item by item basis conduct elasticity analysis to determine how much more can we raise the price of a priviate label item until the consumer swichtes to a national brand. This will determine how much money is being left on the table. At the same time the retailer must also be aware of the competition pricing of their private label so as not to lose the shopper completely.

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Frank Riso, Principal, Frank Riso Associates, LLC

For years I have been saying the Private Label/Branded gap is way too big. Retailers have been leaving millions in profit on the table. The right way to do this is to decrease the gap as the Private Label items close in on their target sales objective.

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W. Frank Dell II, CMC, President, Dellmart & Company

Traditionally, private label has been viewed as the less-expensive alternative for shoppers and had the perception of possibly offering a lower quality. Industry insiders know, of course, that most private label products are produced by the same companies that produce the brands -- often offering the exact same ingredient list.

Over time, giving credit to brand marketers, private label products have started to be perceived not only as a less-expensive option, but also as a good quality option. That said, now may be the time for marketers to reap greater profits from the category.

The decision whether or not to take the plunge to more competitive private label pricing will depend largely on the brand image and industry category. Outside of food, for example, I was surprised to see the very high price points on Saks Fifth Avenue's private label line of apparel.

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Debbie Hauss, Editor-in-Chief, Retail TouchPoints

This isn't a question for discusson; it is one for math. This is a clear demand curve question in my opinion. What is the right pricing strategy to optimize sales of private label as I'm assuming each retailer has a target mix of sales and or margin contribution. The MATH should dictate this one.

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Robert DiPietro, GVP Product Strategy & Business Development, Affinion Group

Agree with Frank Dell. Every time we've tested smaller price differences between private label and branded products, we see same or better sales for private label. Retailers are definitely leaving money on the table in a number of categories.

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Dr. Stephen Needel, Managing Partner, Advanced Simulations

All eyes are focused on Walmart. It doesn't matter what any of the experts think. Walmart dictates the price policy among most competitors.

David Livingston, Principal, DJL Research

Like many issues in retail, it is easy to argue this either way. Will closing the gap hurt PL share too much? Is money being left on the table? Does it differ by retailer? How different by product? There is no overarching answer. The only answer is to test much more aggressively, category-by-category and item-by-item, to see how consumers really behave when prices change.

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Jonathan Marek, Senior Vice President, Applied Predictive Technologies

I don't feel this is a problem, actually. As PL penetration increases in the US, it still has a huge gap to close on penetration, not price, when compared to the penetration in other countries. Raising PL prices will not help close that penetration gap.

The increased sales volumes and increased gross margin need to make up for any pricing differentials.

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Ralph Jacobson, Global Consumer Products Industry Marketing Executive, IBM

In the UK, price gaps between PL and NB products have narrowed to the point where some premium and venture products are more expensive than the NB. It will be interesting to watch the journey American PL takes to see if it ever reaches the point where, as in Switzerland and UK, PL is arguably the primary product and can dictate the appropriate price-point.

Jeremy Whinnett, Principle, Retail Brand Solutions

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