Managing the Role of Store Brands, Category-by- Category

Responding to recent manufacturer price hikes, Kroger CEO David Dillon recently told the Wall Street Journal, "I don't see it as a problem for us. It is a problem for them. Each national vendor must make a choice."

Reading between the lines, it is likely Kroger sees national brand price increases driving more consumers to shift to the company's own brands. In fact, managing store brands is seen as so crucial to Kroger that the company has recently been exploring the acquisition of a few private label manufacturers.

Private label has become a solid pillar for the most successful U.S. retailers, offering chains greater control over their own destinies. By aligning selection, quality and pricing more closely with their most important customer segments, retailers can develop store brands into a key growth driver.

However, effectively driving store brand performance without undermining the chain's image or much-needed national brand sales requires a systematic approach. In the informative white paper, Understanding and Improving Your Store Brand Performance, DemandTec lays out its recommended approach to private label development. Among the most important considerations is determining the role of store brands within each category.

Destination store brands
Retailers understand that the role of store brands is different than that of national brands when considered category-by-category. But how does one systematically determine how these roles affect profitability? DemandTec recommends plotting private label category lift relative to category sales -- in essence, the products' importance to customers vs. importance to the retailer.

With private label unit market share now in the mid-twenty percent range in the U.S., consumers often make the decision where to shop based on their favorite store brands. Truly winning store brands attract these shoppers while also performing favorably in the retailers' eyes. These are what DemandTec terms "image items." In the chart below, image items are positioned in the upper right quadrant, meaning they provide the greatest category lift while yielding the greatest dollar sales.

Other categories that may drive a lot of sales but aren't as influential with consumers fall into the "profit driver" quadrant. "Completer" categories are those which offer lift without producing a lot of sales, while "niche" categories provide neither much lift nor above average sales.

Of course, the role of store brands in each category is skewed when viewing their appeal relative to different shopper segments as well. With proper alignment of merchandising and marketing, retailers can maintain control of the way its most prized segments view its store brands.

Other essential tactics in a store brand playbook include: identifying the promotional levers that work best; and determining the optimum store brand/national brand price gap for each item.