February 23, 2009
BrainTrust Query: How is the economy affecting the value perception of brands?
By Devangshu Dutta, Chief Executive,
Third Eyesight
About seven months ago, a spat occurred between the leading retail company
in India, Future Group, and branded supplier Cadbury’s with respect to margins
offered to the retailer. (A friend described it as a Bollywood saga.)
Future Group had also previously had run-ins with other suppliers including
the likes of Pepsi.
Now, there’s a European film noire sequel in the making, in a battle
between the Belgian retailer Delhaize and European consumer goods big daddy
Unilever. Delhaize has suspended purchases from Unilever as, according to
Delhaize, Unilever is making "unacceptable demands" that the chain
stock more Unilever brands.
Like other branded suppliers, Unilever has obviously been impacted across
Europe and the U.S. as retailers have become more sophisticated in their
approach to private label, squeezing out brands that they have been able
to replace with their own products.
Given further weakening of the economic scenario, it is likely that consumers
would switch to cheaper private labels offered by retailers, and retailers
would be tempted to give over even more shelf space to their own labels where
they get higher margins than branded products – a continually losing spiral
for the branded FMCG (fast-moving consumer goods) companies.
According to a consumer survey carried out by an agency in Flanders in northern
Belgium, apparently 31 percent of shoppers
polled were choosing to shop at chains other than Delhaize, and another 19
percent were not happy with Delhaize’s decision (but there doesn’t seem to
be indication yet that they would switch). Most of the customers who said
they were remaining with Delhaize are either switching to other brands or
to Delhaize’s own label products.
However this brawl ends, and whether it turns out to be a win-lose or a lose-lose
situation, even this survey demonstrates that the retail store has the upper
hand — less than one-third of the surveyed customers displayed their hard-core
brand loyalty by switching to other stores.
That is obviously a worrying sign for branded suppliers who have invested
humongous sums of money and decades of effort in developing their brands.
But it also raises questions about whether the consumer really perceives
any value out of the billions in advertising and millions of man-hours spent
by the FMCG companies in developing the nth variation of toothpaste or detergent.
Tough times raise tough questions, and the ones that comes to mind are these…
Discussion Questions:
In recent years, fast-moving consumer goods (FMCG) companies have rationalized
their brand portfolios, but have they done it enough? Are FMCG companies
really clear about the value the remaining brands are delivering? Are
the retailers really playing fair when they build up so-called partnerships
only to take on board the product learnings and then develop own-label
copycat products (sometimes down to package
coloring and graphics)?
BrainTrust
Recent Discussions
Discussion Questions
Poll
Brands are the initiators of product and package innovation.
1. Until Private Label companies or a collaboration with retailers can fund research and development and spend back big dollars back against the brand, the brands will always have customers looking for their new products.
2.Retailers cannot give up the slotting fees that brands pay for shelf space. That is why many stores get more branded skus then they probably need.
3. I am not sold that manufactures can’t execute with creative accounting, “Brand partnership stores.” Retailers work on slim margins but as more retailers self manufacture there is AN opportunity to sell to yourself.
As indicated in the poll questions, there is sufficient blame on both sides. Retailers are dealing with manufacturers who force impractical line extensions through financial influence (incentives) detracting from a balanced category.
Private Label is skimming the cream of category sales and threatening to take a disproportionate amount of shelf space. Private Label also can trade down category average pricing through poorly thought-out pricing schemes that do not reflect the market place. The extreme in either direction reduces the optimization of the consumer-centric effort we are all chasing. Manufacturers are the Mecca of product innovation. Private Label merely mimics.
When we deviate from true innovation and the goal is to reduce the shelf space of competitors, everyone loses. The leap to Private Label is a result of cash-pinched consumers looking for a bargain.
Private Label has a place in retailer strategy, but it should not be the entire strategy. Nor should the overwhelming ownership of space by a single brand. The premium or angel customers will continue to buy brands that exhibit the features and benefits of quality and consistency. Which customers do we want to develop as our base? Angel customers or bargain hunters? By lowering standards, quality and differentiation, we move into a downward spiral into Heck. Manufacturers must put forth innovation and quality as the model. Retailers need to maintain the balance in the categories that maintains a profitable mix of customers.
It is about strategy and thinking beyond next week. Ask John Galt.
I think Len’s comment about the difference between the USA and Europe is fair–in fact, I think it describes a difference between the US and many other markets.
A few years ago I was walking through Marks & Spencer’s food section with an American colleague who was in the UK for the first time. His shock–“You mean they have private label cola, and no Coke? That’s some power!”–probably describes this difference the best.
I’ll take on whether retailers are “playing fair” by copy-catting national brands/morphing them into private labels: 8-10 years ago, I would have cried foul; these days, it’s par for the course. Yet another reason why vendors have to keep their innovation pipelines full or risk being one private label switch away from extinction. Think of your retailer knocking you off as the sincerest form of flattery (if you can bear it)!
“SKU Rationalization” is a dangerous game…as the volume of sales per item does not necessarily reflect the impact to the brand as a whole.
The push-pull of private label vs. branded product has been going on a long time and it’s not stopping any time soon. While it’s possible to create an apparel store built solely on private label merchandise, I don’t believe it’s possible in FMCG. All those advertising dollars have, in fact, made a difference. It’s also true that not all private label merchandise is create equal. I might be okay with generic canned food, but there are other products that have a distinct difference in quality. Q-Tips, Band-aids, some cheeses come immediately to mind.
There’s a reason why book sellers carry slow movers. There’s a reason why apparel retailers buy a full compliment of colors, even if the percent contribution isn’t the same across all of them. Similarly, there’s a reason why FMCG retailers need to carry brands. It adds to their own brand credibility.
How many shoppers (in the US, anyway) would drive out of their way to get Unilever soap? Probably not too many. Price, proximity and shopping habits are stronger than most CPG loyalty. Higher ticket items, like durables, and higher involvement categories like skin care, have more resilience.
Retailers are understandably using the recession as a catalyst to drive sales of private label. Are they playing fair? Well, no.
Manufacturers are over a barrel, giving as much information as they can in order to stay in good standing with retailers. Further, some retailers have even used promotions that pull on national brand strength to promote private label. Publix Supermarkets ran a Buy-One-Get-One, where shoppers could buy a national brand (Thomas’s English Muffins) and get the Publix private label brand free. This drove trial – and presumably–conversion to their brand.
No, they aren’t playing fair. The question for national brands is how to stay relevant and on shelf.
Fast moving consumer goods companies still need to rationalize brand portfolios in many cases, as so many retailers are finding higher profits in reduced SKU counts, without losing shopper loyalty. Depending on how this shakes out with specific retailer strategies over time, this may or may not make room for more local brands and niche players in some instances. Private label is a whole different animal today than it was even four or five years ago. The top tiers are not just inferior substitutes for national brands; they are national brand equivalents (or better) and widely recognized as such by consumers who are switching, and are not likely to come back. As for retailers copycatting, that’s always been a factor. Sometimes retailer behavior is outrageous, but there are laws protecting trade dress, etc., and branded manufacturers frequently litigate, and win.
There is significant brand proliferation in FMCG. Think about cereal, ketchup, salad dressing or the myriad of other categories that have duplication on top of duplication. I led an industry wide study that proved retailers could remove 12 – 18 percent of the actual SKUs from a given category (almost across the board) and not lose sales–in fact retailers will grow their sales (by unit volume and revenue). Consumers want true variety and differentiation – not the same thing in the same size. How many red ketchups in the 24oz bottle do you really need on the shelf? In many cases, there should be a couple of national brands and the store brands.
The study also showed that the very large marketing dollars thrown at retailers to help promote products are in many cases not enough to cover all of the downstream costs and activities retailers engage in to accommodate duplication of brands. The inventory carrying costs alone are staggering. The FMCG companies will not want to hear this, but without fail, we found that there is too much duplication and with careful consumers, retailers should make sure they are offering the very best solutions for their customers while maximizing profits and opportunities.
Technology and collaboration should be helping to solve this problem, and it is a problem that existed before the current downturn and will continue when the recovery comes (hopefully very soon!!). If the retailer can show empirically that the new product lines do nothing to add to the profit mix, or worse do something to harm it, at the store, the supplier should yield and remove or not introduce the items. If the manufacturer can show empirically that the new product lines work to bolster the profit mix at the store level, the retailer should yield and add the items. This may be over-simplifying the situation, and there will always be exceptions, but without collaboration both retailers and suppliers are going to lose and the shopper will suffer as well.
First, you seem to be talking more about Europe than the U.S. and that’s a different animal.
However, given the universality of the question, I’d say first that the best and worst of people and companies come out during hard times. The best redouble their efforts to build meaningful long-term relationships with their trading partners. Unfortunately, it seems that most are simply trying to squeeze an extra penny or two out of the other.
To your specific question–No! CPG companies are only starting to rationalize their portfolios. There are still way too many products out there simply for the sake of putting their name out there–not because the product moves. Some manufacturers are starting to cut back on their lines, but I suspect much more is needed.
As to developing private label, what do you expect? Retailers have been copycating for years. But I think consumers have gotten wise to the fact that just because it looks like a brand doesn’t mean it has the same quality. And to any retailer who can’t do any more than copy, shame on them!
It’s hard for me to feel for both retailers and vendors when they obviously do what’s best for themselves, regardless of the long-term impact. In this case though, I would tell Unilever to go aggressive and pull all their lines from Delhaize. Then up the marketing of these lines with a cooperative marketing program involving the other retailers.
Let Delhaize try to survive with shelves full of private label products and see how long they last.
Let’s start with arguing the basic premise–that as the economy continues to be weak, consumers will shift to store brands. There is little evidence for this, and past recessions have shown a strengthening of branded products. The rationale has been that in tight times, consumers want to spend their money on products they can depend on. That vast numbers of shoppers are not leaving Delhaize is not an indication of brand weakness–many other factors (convenience, substitutable products, etc.) play into that decision.
All that said, of course companies haven’t fully rationalized their portfolios or fully communicated the value their brands bring. But it’s not an economy issue or a retailer-manufacturer dispute issue. It’s that nobody has fully done these things yet.
For FMCG, a CPG firm must ensure they have a brand strategy to address the intended audience. Most will say they have that, but the truth is that they try to “cover the Earth” with a wide assortment to capture any and all consumers they can. In these economic times, there will tend to be even less “rationalization,” so to speak, since CPG firms will try to grab any demographic who is spending money.
Of course, regions vary in their propensity to embrace things like private label, however there are great examples across the globe of deep penetration of P/L, some of which have already been mentioned, and also Trade Joe’s in the US. P/L success has more to do with intentions of the retailer, rather than the line of products, specifically.
Where’s the data? Which consumers are buying which products? Which ones are not selling so well? Where’s the demand?
Both sides can play the win-lose drama as long as they like and both will lose.
There were several reports on http://www.just-food.com last week out of the Consumer Analyst Group of New York (CAGNY) conference in Florida about what some of the bigger brands plan to do about rationalizing their portfolios. Some were particularly interesting and relevant to this discussion.
As for the sub-debate about differences between the US and the ROW (rest of the world)–also very interesting and relevant especially when looked at in the context of globalization vs consumer preferences for locally produced food (a subject on which there is still much to be said as it cannot possibly be, in my view, an either or proposition).
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Brands are the initiators of product and package innovation.
1. Until Private Label companies or a collaboration with retailers can fund research and development and spend back big dollars back against the brand, the brands will always have customers looking for their new products.
2.Retailers cannot give up the slotting fees that brands pay for shelf space. That is why many stores get more branded skus then they probably need.
3. I am not sold that manufactures can’t execute with creative accounting, “Brand partnership stores.” Retailers work on slim margins but as more retailers self manufacture there is AN opportunity to sell to yourself.
As indicated in the poll questions, there is sufficient blame on both sides. Retailers are dealing with manufacturers who force impractical line extensions through financial influence (incentives) detracting from a balanced category.
Private Label is skimming the cream of category sales and threatening to take a disproportionate amount of shelf space. Private Label also can trade down category average pricing through poorly thought-out pricing schemes that do not reflect the market place. The extreme in either direction reduces the optimization of the consumer-centric effort we are all chasing. Manufacturers are the Mecca of product innovation. Private Label merely mimics.
When we deviate from true innovation and the goal is to reduce the shelf space of competitors, everyone loses. The leap to Private Label is a result of cash-pinched consumers looking for a bargain.
Private Label has a place in retailer strategy, but it should not be the entire strategy. Nor should the overwhelming ownership of space by a single brand. The premium or angel customers will continue to buy brands that exhibit the features and benefits of quality and consistency. Which customers do we want to develop as our base? Angel customers or bargain hunters? By lowering standards, quality and differentiation, we move into a downward spiral into Heck. Manufacturers must put forth innovation and quality as the model. Retailers need to maintain the balance in the categories that maintains a profitable mix of customers.
It is about strategy and thinking beyond next week. Ask John Galt.
I think Len’s comment about the difference between the USA and Europe is fair–in fact, I think it describes a difference between the US and many other markets.
A few years ago I was walking through Marks & Spencer’s food section with an American colleague who was in the UK for the first time. His shock–“You mean they have private label cola, and no Coke? That’s some power!”–probably describes this difference the best.
I’ll take on whether retailers are “playing fair” by copy-catting national brands/morphing them into private labels: 8-10 years ago, I would have cried foul; these days, it’s par for the course. Yet another reason why vendors have to keep their innovation pipelines full or risk being one private label switch away from extinction. Think of your retailer knocking you off as the sincerest form of flattery (if you can bear it)!
“SKU Rationalization” is a dangerous game…as the volume of sales per item does not necessarily reflect the impact to the brand as a whole.
The push-pull of private label vs. branded product has been going on a long time and it’s not stopping any time soon. While it’s possible to create an apparel store built solely on private label merchandise, I don’t believe it’s possible in FMCG. All those advertising dollars have, in fact, made a difference. It’s also true that not all private label merchandise is create equal. I might be okay with generic canned food, but there are other products that have a distinct difference in quality. Q-Tips, Band-aids, some cheeses come immediately to mind.
There’s a reason why book sellers carry slow movers. There’s a reason why apparel retailers buy a full compliment of colors, even if the percent contribution isn’t the same across all of them. Similarly, there’s a reason why FMCG retailers need to carry brands. It adds to their own brand credibility.
How many shoppers (in the US, anyway) would drive out of their way to get Unilever soap? Probably not too many. Price, proximity and shopping habits are stronger than most CPG loyalty. Higher ticket items, like durables, and higher involvement categories like skin care, have more resilience.
Retailers are understandably using the recession as a catalyst to drive sales of private label. Are they playing fair? Well, no.
Manufacturers are over a barrel, giving as much information as they can in order to stay in good standing with retailers. Further, some retailers have even used promotions that pull on national brand strength to promote private label. Publix Supermarkets ran a Buy-One-Get-One, where shoppers could buy a national brand (Thomas’s English Muffins) and get the Publix private label brand free. This drove trial – and presumably–conversion to their brand.
No, they aren’t playing fair. The question for national brands is how to stay relevant and on shelf.
Fast moving consumer goods companies still need to rationalize brand portfolios in many cases, as so many retailers are finding higher profits in reduced SKU counts, without losing shopper loyalty. Depending on how this shakes out with specific retailer strategies over time, this may or may not make room for more local brands and niche players in some instances. Private label is a whole different animal today than it was even four or five years ago. The top tiers are not just inferior substitutes for national brands; they are national brand equivalents (or better) and widely recognized as such by consumers who are switching, and are not likely to come back. As for retailers copycatting, that’s always been a factor. Sometimes retailer behavior is outrageous, but there are laws protecting trade dress, etc., and branded manufacturers frequently litigate, and win.
There is significant brand proliferation in FMCG. Think about cereal, ketchup, salad dressing or the myriad of other categories that have duplication on top of duplication. I led an industry wide study that proved retailers could remove 12 – 18 percent of the actual SKUs from a given category (almost across the board) and not lose sales–in fact retailers will grow their sales (by unit volume and revenue). Consumers want true variety and differentiation – not the same thing in the same size. How many red ketchups in the 24oz bottle do you really need on the shelf? In many cases, there should be a couple of national brands and the store brands.
The study also showed that the very large marketing dollars thrown at retailers to help promote products are in many cases not enough to cover all of the downstream costs and activities retailers engage in to accommodate duplication of brands. The inventory carrying costs alone are staggering. The FMCG companies will not want to hear this, but without fail, we found that there is too much duplication and with careful consumers, retailers should make sure they are offering the very best solutions for their customers while maximizing profits and opportunities.
Technology and collaboration should be helping to solve this problem, and it is a problem that existed before the current downturn and will continue when the recovery comes (hopefully very soon!!). If the retailer can show empirically that the new product lines do nothing to add to the profit mix, or worse do something to harm it, at the store, the supplier should yield and remove or not introduce the items. If the manufacturer can show empirically that the new product lines work to bolster the profit mix at the store level, the retailer should yield and add the items. This may be over-simplifying the situation, and there will always be exceptions, but without collaboration both retailers and suppliers are going to lose and the shopper will suffer as well.
First, you seem to be talking more about Europe than the U.S. and that’s a different animal.
However, given the universality of the question, I’d say first that the best and worst of people and companies come out during hard times. The best redouble their efforts to build meaningful long-term relationships with their trading partners. Unfortunately, it seems that most are simply trying to squeeze an extra penny or two out of the other.
To your specific question–No! CPG companies are only starting to rationalize their portfolios. There are still way too many products out there simply for the sake of putting their name out there–not because the product moves. Some manufacturers are starting to cut back on their lines, but I suspect much more is needed.
As to developing private label, what do you expect? Retailers have been copycating for years. But I think consumers have gotten wise to the fact that just because it looks like a brand doesn’t mean it has the same quality. And to any retailer who can’t do any more than copy, shame on them!
It’s hard for me to feel for both retailers and vendors when they obviously do what’s best for themselves, regardless of the long-term impact. In this case though, I would tell Unilever to go aggressive and pull all their lines from Delhaize. Then up the marketing of these lines with a cooperative marketing program involving the other retailers.
Let Delhaize try to survive with shelves full of private label products and see how long they last.
Let’s start with arguing the basic premise–that as the economy continues to be weak, consumers will shift to store brands. There is little evidence for this, and past recessions have shown a strengthening of branded products. The rationale has been that in tight times, consumers want to spend their money on products they can depend on. That vast numbers of shoppers are not leaving Delhaize is not an indication of brand weakness–many other factors (convenience, substitutable products, etc.) play into that decision.
All that said, of course companies haven’t fully rationalized their portfolios or fully communicated the value their brands bring. But it’s not an economy issue or a retailer-manufacturer dispute issue. It’s that nobody has fully done these things yet.
For FMCG, a CPG firm must ensure they have a brand strategy to address the intended audience. Most will say they have that, but the truth is that they try to “cover the Earth” with a wide assortment to capture any and all consumers they can. In these economic times, there will tend to be even less “rationalization,” so to speak, since CPG firms will try to grab any demographic who is spending money.
Of course, regions vary in their propensity to embrace things like private label, however there are great examples across the globe of deep penetration of P/L, some of which have already been mentioned, and also Trade Joe’s in the US. P/L success has more to do with intentions of the retailer, rather than the line of products, specifically.
Where’s the data? Which consumers are buying which products? Which ones are not selling so well? Where’s the demand?
Both sides can play the win-lose drama as long as they like and both will lose.
There were several reports on http://www.just-food.com last week out of the Consumer Analyst Group of New York (CAGNY) conference in Florida about what some of the bigger brands plan to do about rationalizing their portfolios. Some were particularly interesting and relevant to this discussion.
As for the sub-debate about differences between the US and the ROW (rest of the world)–also very interesting and relevant especially when looked at in the context of globalization vs consumer preferences for locally produced food (a subject on which there is still much to be said as it cannot possibly be, in my view, an either or proposition).