FD Buyer: Pricing Your PL
By Bob Anderson
Bob Anderson, retired VP/GMM of private label at Walmart, is president
of Store Brand Consulting, Rogers, AK.
Through a special arrangement, presented here for discussion
is a summary of a current article from Frozen & Dairy Buyer magazine.
Today’s
private label products and packaging are as good as, or better than, the national
brands. Yet some retailers still treat their private labels as a stepchild. They
see the manufacturer as a piñata, and they beat out
every penny. And they go for quantity of SKUs, not quality of SKUs, sometimes
adding a store brand item simply as a bargaining chip with the national brands.
Too
many retailers fall into the trap of using private label as the opening price
point, or the “cheapest brand on the shelf.” Pricing too
low cheapens the perception of the private label. But pricing too high helps
make your private label just another brand, without the differentiation that
builds loyalty.
Here are some guidelines around PL development that worked
well for me:
- Above all else, always be sure the quality is equal to or better than the
targeted national brand. Always!
- Understand what the item’s cost and profit need to be as part of
the category and in the total mix. Maybe stiff price competition on the item
requires a retailer to make less here and increase pricing elsewhere to make
up the difference. If the numbers are just too tight, consider whether the
item is needed at all.
- Establish average costs, markups, profit and shelf prices for the total
category.
- Keep your penny profit on PL higher than both the national brand and the
category average.
- Know the true net cost of the product.
- Cost, and profitable retail, must be lower than the national brand.
- Margin must be higher than the national brand and category average.
- Be aware of the lowest retail on the leading national brand’s comparable
item, both in your stores and at your competition.
- Make sure your packaging looks as good as the national brand’s, and
represents the value of your brand.
- Merchandise private label next to the national brand, with promotions that
are in balance to the national brand.
- Give your private label as many facings as the leading national brand.
A personal favorite of mine: Treat your manufacturers fairly. If they’re
not in business, you won’t be either!
Discussion Questions: What would be some of your
key pointers around private label development? What other points would you add
to those mentioned in the article?
Really good retailers should price their PL to their perception of what is the true value of their PL. If you objectively know your PL is better than national brands, then aggressively market that perception. Consumers will feel your conviction and will respond to positive and consistently confident approach.
Private label packaging has the same requirements for effectiveness as national brands.
Shelf Impact – generate attention and consideration.
Variety Differentiation – make sure the consumer can distinguish one type from another.
Label Readability – communicate quickly, easily and accurately
Imagery – convey the attributes that are key in the purchase decision including a price/value proposition
Stimulate purchase – bring it all together to encourage sales at the point of sale
If retailers think they can get away without the five components above, they’re kidding themselves and not maximizing sales.
We’ve done some research in this area and have never found that PL prices were too high. I think this is a great area for retailers to explore. From a category management perspective, one goal is to maximize category profit. If PL is priced too low, that’s not happening. Get the manufacturers in a category to fund category pricing studies.
I don’t agree that you always put PL products next to their branded counterparts. We’ve done research that shows PL blocking can produce stronger category sales and profits. If the theory that PL buyers are PL buyers in a given category and that conversion from Branded to PL is relatively infrequent, making it easier to find PL products on the shelf can be a consumer benefit.
Some retailers have not one but two store brands. One to be the price leader (cheapest on the shelf), the other to be the quality leader (equal to or better than the national brand). In my mind, this is an opportunity to give the customer options and improve the quality of store brands while driving store brand sales and improving the margins.
Today’s smart private label retailers like Aldi and Great A&P have a variety of private labels in every part of their stores.
I agree that positioning is one of the keys to private label success. Aldi devotes their entire store to them.
Great A&P carefully places their very extensive private label offerings by category next to the national brands, at the endcaps, and with their Food Emporium Trading Co. offerings, in the international food aisle as well as integrated in other departments such as general merchandise and frozen.
Private label gets noticed by distinct packaging, quality, selection and price, all key elements in the consumer’s mind.
As I have said for years, having a 30% price gap when a retailer has achieved its share goal or has 50% or more private label share is borderline stupid. Honest comparison and a customer target goal are the foundation for a private label strategy, not percent of sales. Every private label SKU should have its pricing based on specific goals and the pricing should change over time.
The key here is commitment to the program. If all that PL represents to the retailer is a low-cost margin builder, the customer will view it (and the retailer) in the same way. If the retailer is proud of the product (for legitimate reasons), it can become a true differentiator. Whole Foods and Publix, for example, have taken this path with very solid results.
Actually, I’ve never seen retailers take private brand more seriously than they are right now. If anything, I would say that private brand is getting the lion’s share of attention these days as retailers staff up their private brand organizations (Family Dollar, Sears, Safeway and others), revamp and expand core private brands (Walmart’s Great Value, Target’s Up & Up), create multi-category master brands where once there were none (Kmart’s Smart Sense), and put real beyond-the-shelf marketing muscle behind the brands rather than leaving them to bask in whatever dim light might be thrown off by a neighboring national brand.
That’s one spoiled stepchild!
In light of the PLMA trade show currently taking place in Chicago, it’s a great time to reflect on the state of private label.
When I wrote the Shop Talk column for PL Buyer Magazine, our own BrainTrust panel member Warren Thayer, then editor of the magazine, taught me to offer a prescription in each edition for how PL needs to be approached. One of the realities I learned about was that different retailers view the “purpose” differently for private label. Candidly, not all retailers desire to have their own “brand.” Some retailers want strictly to provide a low cost value alternative for consumer.
However, for those retailers that do desire to create, maintain, and deliver on a “real brand,” these are my baker’s dozen top line recommendations:
1. Treat the brand like a “real brand.”
2. Choose package design that doesn’t understate or overstate the promise.
3. Consider “value” beyond only a low price. Consider quality and quantity value alternatives.
4. Dare to be different but be careful not to re-invent the category or segment.
5. Conduct your marketing efforts within the domain of marketing experts. This is not a job for buyers or small manufacturers that make the products for retailers.
6. Create fanfare for the brand in the stores and in your ads.
7. Don’t price the products so low that they lose credibility.
8. Go take a walk through Trader Joe’s.
9. Don’t blatantly imitate the look of the leading national brands. Don’t confuse!
10. Use cross-merchandising methods to enhance the entire effort of your program.
11. Avoid apologizing or justifying the brand as being strictly the “alternative.”
12. Have a productive working relationship with your suppliers. Those that can win the “reverse auction” are not always the most capable business development and marketing partner.
13. Keep this in mind! Your private label program speaks volumes for your store’s identity.
I have told this private label story before, but it is a perfect time to repeat. I think the important lesson is “All generalities, including this one, are false.” Specifically, the PL strategy must be tailored to the category.
In this case, I was walking the store with the VP of sales when we came across the detergent section. The PL Woolite competitor was priced significantly below the Woolite brand. The VP said the price was wrong because people use these products to wash their valuable clothing. By setting the price point too low (even though the profit margin was still there), the merchandiser had cheapened the image of the PL product. No one was going to want to risk their fine clothing in a product that might ruin their favorite sweater from Grandmother.
Good observation.
Wow, adding anything to Bob Anderson’s super-expert comments is daunting. So, let me come at it from a different direction. Begin with the understanding that Private Labels aren’t just in center store. In fact, the most important PL items are in the perishables departments around the perimeter of the store. Fresh meat, produce, fresh bakery, slicing deli, fresh seafood, and foodservice are mostly PL, and are at the very top of the list of important attributes for every shopper. This part of a store’s PL image is, of course, extremely important and is usually supported by superb marketing (David Biernbaum’s #5 and #6).
But not the center-store PLs. Are there ways to leverage the image of a store’s fresh PLs to support and improve the image of the center-store PLs? Of course there are. It begins with consistent and creative communication to shoppers that they will find the same quality in center-store that they find in the various fresh departments. Merchandise center-store and perimeter products together. Make it clear that center-store PL ingredients are used in foodservice items. Actively use PL cleaning products throughout the store in plain sight of customers – and even comment on their effectiveness. With this mind-set, more and more possibilities will occur to retailers.
Every product that is a high quality/long lasting product that goes out with a Safeway or a Kroger name on it is a branding opportunity. Every time you open the Fridge and see Kroger butter it is sublime and powerful reminder of the brand.
Private label pricing and merchandising are always specific to the category. The one common thread is higher margins.