Grocery Store Brands: Growth, Opportunities, and Issues
By Al McClain
There was a lot of buzz at the Food Marketing Institute convention this week around private label (PL), which some prefer to refer to as store brands. Just about everyone seems
to agree that PL is hot, but there is some disagreement as to what that means and what to do about it.
There is plenty of evidence of growth for PL, but here are a few tidbits:
- Over 88 percent of consumers buy private label at least once per month. (Source: FMI)
- A recent Meyers Research Center study of 300 consumers tasting national brand items versus PL items across 12 categories found that consumers preferred the PL product 51 to
49 percent over the national brand. (Source: PL Buyer magazine) - Seventy-seven percent of U.S. shoppers surveyed say that “private label brands are a good alternative to other brands.” (Source: ACNielsen study via PL Buyer magazine)
- Nine of 10 consumers feel comfortable serving PL to guests. (Source: ACNielsen)
- Almost half of consumers say they would buy more PL if a larger variety were available. (Source: ACNielsen)
At the Daymon Worldwide Forum, “Partnering in a Smaller World,” that preceded the convention, ACNielsen Senior VP Todd Hale shared these insights, among others:
- Heavier PL shoppers offset their branded spending with PL buying – enabling consumer savings and allowing retailers to compete in a “value-oriented” environment.
- Heavier PL buyers shop more often, providing opportunities to increase store loyalty.
- There is an opportunity to narrow the price gap between PL and branded items.
- Consumers spending the most have a weaker PL commitment – providing an opportunity to focus on premium PL offerings.
There seems to be an emerging consensus that shoppers are more comfortable with PL than they used to be, that PL is a good way for retailers to remain price competitive, and that premium PL represents a large growth opportunity.
Of course, all of this growth is not without controversy:
- If there is a problem with a single PL SKU, how do retailers ensure that shoppers aren’t turned off to the entire store brand portfolio?
- Since branded CPG companies have the bulk of the R & D dollars, and are the new item innovators, in many cases, how does the industry keep the new product pipeline flowing if branded companies are receiving less of the benefit?
- When manufacturers of branded products get in to private label, how do they maintain the value of their brands, with consumers and retailers?
- If retailers use PL to stay price competitive with discounters, will consumers care that many of these retailers are only price competitive when comparing an entire basket, and not necessarily competitive on national brands that they do buy?
- What’s needed in terms of sourcing best practices to ensure that inferior product doesn’t find its way into the pipeline, potentially destroying a store brand’s reputation?
- How do you optimize assortment and optimize pricing to ensure the right mix of national, PL, and regional brands?
Moderator’s Comment: What would you advise supermarkets and other types of retailers on how to leverage their results in this area? How should national
brand manufacturers approach PL? – Al McClain – Moderator
The stronger the retailer’s brand is, the narrower the gap can be. Retailers do need to treat their corporate brands as a brand: THEIR BRAND! The best way to build a strong brand is to provide an offering of quality, value and innovation. Retailers also should look at their categories and look at SKU proliferation and which items are not adding value to their categories or their customer’s experience in their store. Think about this in any section and ask your self how many ____________s do I need?
There are two completely different private label strategies: (1) knock off the national brand at a lower price and (2) innovate using products and packaging that aren’t copycats. Most retailers’ heavy investment is #1 “knock-off.” The great customer loyalty win and financial home run is #2: “innovation.”
The execs who are great commodity buyers (#1) often aren’t innovators (#2) and vice-versa. Either strategy requires a long-term investment in the right people. And both strategies will incur mistakes. Nothing stops a retailer from using both strategies simultaneously, but it’s unlikely that the same person can do both well. Very few retailers make a long-term commitment to #2. Most think private label means knock-off.
Todd Hale’s work makes some great points – particularly that the price gap between store brands and national brands may be too large.
Among store brand buyers, there is less comparison shopping (on price) than many manufacturers believe. These buyers have bought into the PL concept – it’s not a decision each time they go to the shelf.
Retailers with strong store brands should consider narrowing the price gap between their products and national brands.
Private Label is nearing a crossroads. There is an explosion in the number of store brands, yet in 27% of the categories, Private Label provides negative profit contribution. Part of the current interest infatuation is large gross margins — note: unlike Home Meal Replacement, bakeries and deli’s before. Unfortunately, this is not translating into profits. The biggest failure is not having a comprehensive Private Label strategy that supports the corporate strategy.
Retailers who are serious about growing their Private Label sales and Branding their stores with their name or brand on these items need to partner better with the Private Label manufacturers who make the products. Squeezing the last nickel out of the price through auctions and bids can work against the retailer when the manufacturer has to cut into the muscle of their organization to remain profitable.
Many PL manufacturers have category management expertise, know how best to promote store brand items and categories and are more than willing to work with retailers to drive sales and grow category profits. The retailers who collaboratively plan and execute with their suppliers and brokers do a much better job than the average retail operator. There is still much work to do to drive the penetration level of store brands in the US but this is a real opportunity for retailers who do it right to prosper.
There is still significant upside for PL in the USA. Supermarkets can continue to use packaging as a value component. In addition to improved product quality over the last decade – packaging graphics and shelf impact has been the most important differentiator for PL brands. In fact, the newer premium PL brands at Target and Meijer have focused on taking packaging graphics to a new level. The next big opportunity is to focus on increasing package functionality around consumer trends like, portable, convenient, microwave, on-the-go, enhanced sustainability, etc. And on the CPG or Brand Owner side, they too, need a wake up call and their biggest opportunity is also packaging! They need to continue to focus on the Three Moments of Truth for Packaging, especially the First and Second Moment of Truth (initial on shelf and usage). CPG’s need to think about how packaging can enable the product by providing more real and perceived benefits, like freshness, performance, safety, quality, premium, etc. Packaging can enable all these benefits and more. So wake up CPG’s and get going, because if PL does this first, you wont be able to get the share loss back!
Private Label versus Brand products is certainly becoming more and more of a battle at the shelf. At every opportunity retailers look to mimic strong branded products and consumers are now becoming aware of the increased quality of PL lines that were once considered the poor or low value option by many shoppers. Tesco in the UK have leveraged PL extremely well with their Tesco Finest foods, a situation that has certainly made major manufacturers sit up and take notice. The only way manufacturers can fight back is by bringing price points closer together, as Stephen suggests, or by increasing branded variation. One excellent example was Nestle. When they launched the new Nescafe Original brand, 3 or 4 years ago, they patented the shape of the jar to prevent retailers introducing a similar PL offering; this kept their brand identity strong and reduced customer confusion.
Let me be the first on this forum to comment on the irony of Private Label turning out to be the biggest story at an FMI show, which has traditionally been the showcase for national brands.
By all accounts the Daymon event was very persuasive to many. “Price gap” tactics are on their way out, to be replaced by more sophisticated approaches to store brand merchandising based on demand modeling. My advice to retailers: retake control of category management, use demand data to support strategic decision making. Manage store brand programs to support your price image, not just your margins.
My advice to brand marketers: Let go of CM as a basis for your retailer relationships and refocus on customer insights, need states, shopper marketing, customer experience and moments of truth. 100% ACV distribution always was a false goal. Now brands must learn to be in the right stores at the right times to meet the right customers.
Private Label offers uniqueness, differentiation, and value to the consumer and establishes a foothold for the retailer engaging more consumers in their brands. It needs to start with the retailers who need to better partner with suppliers of private label. The process must evolve to focus on the big picture and collaborate together on how all can deliver better, unique products and packaging for their supermarkets to increase penetration and value profitably for both the retailer and the supplier. Retailers need to move away from just focusing on cost and look at the other components of the process with suppliers like supply chain efficiencies and innovation. As we saw from the studies at the Forum, Private brands are well accepted by the consumer today. PL will continue to grow and eventually the US penetration will be at 20%-30%. However, it will be driven by those retailers who partner in a smaller world with suppliers to continue to bring innovation, uniqueness, and value to the consumer.
Private label is a huge opportunity in today’s economy. Consumers are not giving up on purchasing “stuff,” they are just trying to reduce the cost of it. An easy way to do that is to substitute a comparable private label. The challenge is that brands are also trying to maintain a price point. As high energy prices cause brand managers to rethink everything from ingredients to packaging, the private label manager must keep pace. Quality is a key factor and the failure of one product can turn the consumer off to others. The tiered approach offers the opportunity to segment private label products but the overall reputation of the retailer rides on each product.
There is another very subtle aspect to the private label opportunity for large retailers. While “menu pricing” has provided some latitude in the discounts brand manufacturers can offer, they must make those discounts available to everyone. Private label contracts allow a lot more room for negotiation.
PL products are not your Mother’s store brand products any more. These products are fun to buy and delicious to enjoy and use.
From the likes of Trader Joe’s to the inventor of PL, Great A&P, PL brands are what the smart shopper looks for, appreciating the high quality and terrific value.
Who could beat the quality and value of the Master Choice line, for instance? Top notch ingredients, freshness and a value price makes Master Choice a consumer top choice. Likewise, America’s Choice gives top quality and great value to the consumer. This follows a proud tradition when Ann Page, Bright Sail, White House, Sunnyfield, Sunnybrook, Jane Parker and other fondly remembered PL’s were the staple of America’s households.
I can pack my lunch made with Master Choice Artisan bread, piled high with Master Choice honey ham or roast beef along with my choice of Master Choice or America’s Choice condiments. That’s one terrific sandwich, one that Dagwood Bumstead would be proud of.
Don’t talk like a brand, act like a brand. Bring in people who specialize in branding and marketing your own brand. Understand spending to build the brand and understand brand equity not just price. Invest in risk. You have to understand the risk benefit relationship. Identify your own brand’s relationship by segment with the customer.
Set 1, 3 and 5 year financial and penetration goals for your own brand. Identify your own brand enemies and reevaluate assortment. The biggest reasons retailers fail at own brand is they are great retailers not branding agents.
The attitude outside the US is so very different. Sure, once upon a time own label was seen as the cheap alternative and packaging was very basic. Some stores had better quality than others. But over the years, most of the major supermarket chains have stuck with their own brands and introduced several versions of differing price and, presumably, quality. Marks & Spencer have never sold anything other than their own brand and food has been their best selling product range through all the bad times they’ve had recently.
I think most people know that own label products are frequently made by the same people who make the best known, most advertised brands although obviously you can’t tell (other than making an educated guess) whose hand was on the factory conveyor belt. What you can do is decide by a combination of price and taste which you prefer. All the better, I think, for consumer and retailer. And better, if they cooperate, for the big brand owners because they’re still making money if they are the ones to be supplying own label. If they don’t play the game and consumers insist on buying own label then it is the big brands, and only they, who will suffer in the long run.
Forgot to mention – I saw this today on Planet Retail: “Speaking at a recent marketing event, Asda marketing and brand director Richard Hodgson described it as his job to ‘undo’ the marketing of brands sold in Asda stores and to drive consumers to the retailer’s private label offering instead. Mr. Hodgson went on to claim that Asda’s own-label products were not only of better quality than branded rivals, but also more profitable. He cited the example that Asda makes more money from selling an own-label bottle of cola than it does from Coca-Cola.”
This is an interesting conundrum for manufacturers who need to collaborate and compete with their retail partners. Think strategically for a minute: Why are retailers so interested in private label products? Usually it is one of two reasons: they can offer products at a better price point that is attractive to their consumers OR to create customer loyalty to their retail store. Competing on price points is probably not the best route for national brand manufacturers, although when some of the additional services they performed are calculated using activity based costing the retailer can, at times, make more money with the national brands. The second reason, however, is something manufacturers need to think about strategically. If the retailers are trying to create store loyalty what could you do? Could it be that there is some special bundling that could be done with products that might be attractive to consumers that is only available in your retail outlet? For instance, I once saw Pringles bundled together with Budweiser which was an attractive package to consumers. Or could you come up with a special flavor, size, or version of your product that is exclusive to a particular retailer? Both of these alternatives achieve one of the goals of private label products: creating loyalty with the retailer and have the added advantage of creating loyalty to the manufacturer. In addition, there is the opportunity to provide specific items that appeal to different consumer groups in specific locations. If you think strategically here, there are a LOT of opportunities.
Let’s take Al’s questions in reverse order.
We addressed the question of how national brand owner’s should confront the growth in Private Label in a recent issue of DHC Viewpoint — the article is titled “The Keys to Battling Private Label.” In it we laid out four key points that I can briefly summarize.
1. Stop calling it “private label.”
These are brands that happen to be owned by retailers. Nothing less.
2. Fight like a Brand!
Deliver unique benefits through superior innovation.
3. Choose your Battleground
Keep the battle outside of the store as much as you possibly can. Build as much brand equity as possible before the consumer reaches the shelf.
4. Protect your flanks.
Insulate your brand in every way possible — including achieving “low cost producer” status.
Now to the first question of how retailers should leverage Proprietary Brands. How many sales people and marketing types out there remember being in this scenario? You are in one of those sales calls where you were pushing the benefits of your brand hard and telling the retailer what he or she should do to maximize their sales. The buyer stands up and invites you outside into the parking lot, where they then point to the name on the building and say something to the effect of “when the name on the store says (Your Brand Here) you can tell me how to run my business.” What retailers have to do to win with proprietary brands is to simply apply this parable in reverse.
Simply put, remember that it IS your name on that package. Whether it is Ann Page or Safeway Select or President’s Choice, consumers know that is YOUR brand. Make sure it lives up to the image you want consumers to have of your store, and all will be well.
If retailers want to reach higher penetration levels of PL, and they do, they need to treat their PL like a brand and promote/merchandise it that way. Demos are especially important to induce trial, since there are still some skeptics out there in higher-end products especially.
The price gaps between PL and national brands are often horrible. Retailers need to sit down, look at it, and get a better handle on price elasticity, too. They’re leaving money on the table, and fueling the fires of mistrust among shoppers who think that “if it’s that cheap, it can’t be any good.
Michael Richmond’s points are all well taken. I’d only add that retailers should by now have the wake-up call, in recent P&G legal action over packaging knock-offs that come too close to trademarked packaging. Go after the benefits of what packaging can do for you, but be fair and avoid legal entanglements.
Retailers also need to watch the timing of their promotions, of brand vs. private label. Promoting pantry loading on the brand, and then a week later promoting PL (or vice versa) doesn’t make sense, but I see it a lot.
Plan the work, and work the plan. I’m finding that a lot of expectations on both sides of the fence aren’t met because, when the deal was made, neither buyer nor seller spelled out exactly what was expected. My suspicion is that the seller was so happy to make the sale, that he/she, at the moment of truth, just stood up, shook the hand of the buyer and walked out quickly for fear the buyer would change his/her mind. If you don’t nail everything down at the time of the sale, you’re looking for poor execution, deductions and all manner of various vileness.
Some store brands are pretty good and some I would never use. In most cases center store store brands are not as good as national brands. I think retailers like them because they make more profit on them because they squeeze the makers for lower and lower costs. There is no way that a manufacturer is going to make a store brand as good as the original. It wouldn’t be profitable for them, therefore they use inferior ingredients and packaging to save money. Also, there are way too many “knockoff” PL items on the shelf now, which only hurts the consumer because there is not enough space to offer the variety they are looking for. Don’t forget, it is the major brands that do all of the advertising and drive consumers to the categories to purchase products. PL benefits without any of the cost of advertising. Let’s not forget that the branded companies invest in all the technology and development costs, while PL in most cases just “tries” to duplicate after all the work is done. I admire the retailers who have taken store brands to a new level with new and unique offerings. However, let’s not forget that the majority of people prefer the national brands and you need both to prosper. If economic times were better, you wouldn’t be seeing the same growth in store brands.
My 2 cents worth regarding why retailers should drive their private label programs:
Being intimately involved with developing our customer’s private label program, our customer here in SA sees the value in growing these products for 2 main reasons:
Firstly, the retailer makes more margin, and the supplier who manufactures private label doesn’t pay listing fees on these items…a significant saving.
Secondly, there are a significant amount of manufacturers who ONLY manufacture private label… hence a prior comment by one of your readers stating that the quality of private label goods is usually inferior to that of national brand products holds no water.