Kroger Looks to Manufacture Store Brand Opportunities
The trend in
grocery retailing is for merchants to contract out production for private
label items. One of the exceptions to that rule would be Kroger, which
today manufactures roughly half of the 14,400 private label products
it sells.
By manufacturing
its own items, Kroger believes it has better control over production
decisions and pricing.
“Speed to market
is a benefit,” Krista Faron, a senior analyst for market research firm
Mintel International, told The Associated Press.”To the extent
that you can control your production and manufacturing and getting it
on your shelf faster, that helps.”
“We’re growing
significantly in what we make,” said Calvin Kaufman, president of Kroger
manufacturing. “We are adding shifts as well as adding people, and we
keep getting more efficient to add to capacity.”
Discussion
Questions: What do you see as the pros and cons of retailers manufacturing
private label goods themselves versus contracting production out? Will
we see more companies follow Kroger’s lead and increase manufacturing
operations or go the other way instead?
Kroger is large enough and has the wherewithal to manufacturer some of its own private label goods. However, I don’t expect to see too many followers in other retail chains. Walgreens once had a manufacturing operation of its own.
Truth is, when it’s all said and done, the savings to the retailer will be minimal because it’s actually very expensive to make your own goods and there are a number of expenses that go far beyond the obvious. Private label suppliers know this all too well.
The other question is, where do you start and where do you draw the line? How many different items can you possibly manufacture, and in how many facilities, and how many lines, and with what types of tooling? Can you maintain quality? Can you do it all, including all the packaging in one facility? Best idea is to leave it to private label companies that have the expertise in any given space.
Kroger has extensive product manufacturing capabilities and facilities. They have had these assets for many decades. During the dozen or so years I headed up Kroger’s private label operations, we always made “make or buy” decisions before initiating any self-manufacturing.
If Kroger stores could generate enough volume to produce efficient, in-house manufacturing of a viable product, and the cost of manufacturing was less than bids received from outside suppliers, Kroger would manufacture. Otherwise, they’d procure from outside sources capable of meeting their high quality standards. That process is appropriate today.
Kroger’s expertise and dedication allowed them to made substantial profits from their self-manufacturing operations in my era. I would assume the same is probably still true today.
Great A&P, at one time, operated the largest private-label production facility in North America at Horseheads, NY. They operated it for 18 years, before closing it in 1982. Since then, they have contracted out their private label production to other manufacturers, primarily Canadian.
Kroger, at the same time, increased private label manufacturing. With Turkey Hill, they have a high-quality manufacturer of their ice cream products. Running dairies and other factories helps keep quality control in check and reins in raw material costs.
So which is better? It all depends on the product, I suppose. Kroger can be efficient in dairy, ice cream, sodas, etc, but there are other products like cookies and crackers, where private label bakeries would be more proficient.
Great A&P relies on manufacturing ties in the NYC area, so their deli products are locally sourced in Brooklyn. Of course, imported items such as Via Roma Italian pasta and other products need to be manufactured elsewhere. Same for HBAs; it would be much more efficient and cost effective to have private-label drug manufacturers and private-label shampoo and soap firms providing the various private-label SKUs, same for condiments and soups.
Gene raises a good point. Kroger has a long history of competence in sourcing and manufacturing. Retailers with less experience rightfully should be a little cautious about jumping into manufacturing.
The manufacturing facilities were integral to Kroger’s growth. Their experience makes the difference for success; Safeway also has a large manufacturing group that supports their organization.
Key to success is what to make and and what to source from others, as Gene Hoffman has discussed. Both organizations have a long history in perishables–meat, dairy, etc, as well as further processing. Their understanding as retailers of the quality/choice level that satisfies their target consumers is critical. Loblaws’ growth can be tracked to the success of Presidents Choice product sales across North America in the late 1980s–all through contract manufacturing–their skills in product development, quality assurance and sourcing made them leaders in several categories.
In today’s economy, retail-owned manufacturers are at a distinct advantage–speed to market as mentioned and the widest scope of product range and packaging options for consideration.
As Private Label continues to grow I see retailers exploring this option more seriously. Agreed, not all retailers are large enough to manufacture their own PL, but working through groups like TOPCO, retailers can work together to create a branded private label that all retailers within the group can use. This is being done today and I see the trend growing.
Willard Bishop just hosted a webinar on September 29th that touched on this as well as other areas confronting retailers and CPGs related to private label and Co-Opetition. The panel included executives from Supervalu, Giant Food Stores, BI-LO and a recently retired executive from Kroger. Their white paper should be available next week on the Willard Bishop web site. This webinar and research were funded by a company I am currently consulting for. I can also email you a copy of the white paper if you are interested.
Gene, of course, is uniquely qualified to address this question of “will others increasingly make or buy?” based on his Kroger experience. For the most part, this is a purely economic issue for everyone else too; as consolidation continues, there will be more retailers able and willing to self-manufacturer.
The more strategic, competitive issue is another story, however. It is not at all clear that anyone has a compelling strategic competitive advantage vision, given current thinking in the industry, by self-manufacturing. Perhaps some day, one will emerge (most likely beyond our lifetimes). Until then, however, the issue remains a purely economic one.
Companies logically do what they do well. Kroger’s top management sponsors their manufacturing program and it obviously works for them. One pro of keeping manufacturing in-house is that it enables the retailer to create its own quality, taste, and product offering that could become synonymous with the store brand. Using a manufacturer that is shared with other retailers increases the likelihood that the product will be very similar to other private label brands. With that approach the objective is just to offer a lower price compared to CPGs rather than establishing a unique store brand.
Consider Trader Joe’s, who has successfully created a depth and breadth of unique private-label products that embody the brand and make the store a destination.
The number of retailers operating their own manufacturing plants for private label has been on the decline for years. One only needs to remember how many supermarket chains operated their own dairy, and how few do today. Self-manufacturing should be a simple capital evaluation. If your volume is sufficient and achieves a sufficient return on investment, then you should operate your own manufacturing facility. Too many times the alternative demand for capital is opening more stores.
Another argument I have heard is to stay within your core competence. If your core does not include manufacturing, why are you in the business? The downside for many retailers is the tail starts wagging the dog. They want the plant to be profitable so they have it make products that take up shelf space and do not sell. Retail is a customer-focused business. Only manufacturer products consumers want and that you can make a profit on.
A deli or bakery in-store is manufacturing. The positive benefits are freshness, the ability to tailor selection to local demand, and a reduction in shipping costs.
Trader Joe’s is a great example of high-quality private-label foods. I have never been disappointed with a Trader Joe’s product.
O organics is the Safeway private label that has been a success. Most are manufactured under contract. Quality varies and needs better review. Safeway has considered exporting O organics to Latin America; does any one know if this has been implemented?
Another part of the cost vs. benefit analysis is the use of disabled workers, veterans, and the homeless where there are tax benefits for each individual hired as well as training monies. Doing good has benefits for all parties.
In summary, manufacturing your own private label has many variables and Kroger finds that this works for them.
George asked for “the pro’s and con’s” and so far there seems to be a great weight in favor of the “pro’s” in the comments. With good reason no doubt. But here’s a “con” for you.
One serious downside to self-manufacture of private label is that the retailer becomes so absorbed in maximizing what amounts to a very handsome profit stream that they make poor merchandising decisions
Carol Wentworth of True Value related one very compelling example as part of her keynote at the In-Store Marketing Institute’s Expo this morning. The category was paint–critical to the traffic draw of hardware stores, but the self-manufactured private-label only assortment at True Value was not doing the job. Management was so protective of the triple margin play (conversion, distribution and retailing) of the True Value paint line that it refused to carry the national brand offering that would bring in the paint shopper. A partnership with Sherwin-Williams fixed that and Ms. Wentworth reported very good results.
So bake that bread and bank that dough–but make sure you meet the shopper’s needs or she won’t show!
I don’t want to belabor what has already been said, but to point out that retailers are just that: retailers. All of us can do other things, but that doesn’t mean we do them as well as those who are specialists. Right now, the Private Label movement is on a crest of the wave, but as we all know, most aspects of business are cycles that ebb and flow.
Self-manufacture means being efficient and skillful at processes that change, often rapidly. Are you, as the retailer, prepared to invest in the new technologies required to stay current in your product category, or will you be tempted to coast and “get by”? It’s easy to be a leader if you make a particular line of product(s), but being a leader over ALL or even a majority of product lines means having the expertise and financial resources to compete against companies for whom this is their primary line of business.
Years ago, we negotiated a license for Good Humor-Breyers in the confection category, and the VP of marketing told me later how he should’ve kept the product in-house instead of licensing it to a company that knew the candy business and how to deal with the “interesting” marketing practices of some companies who will remain anonymous. I looked him straight in the eye and said “you’d never have gotten the product out of the R&D stage, and the big guys in the candy channel would have eaten your lunch.”