January 9, 2007
Long Live the Brands (But Which Ones?)
As the soon to be released book, Private Label Strategy: How to Meet the Store Brand Challenge (Harvard Business School Press, Feb. 2007), points out, national brands had their “golden age” in the U.S. around the middle of the twentieth century.
But as happens with all golden ages, the crowning period of the national brands came to an end. The vacuum created as brands began to wane came to be filled by a number of emerging retailers. Some chains such as Wal-Mart and Home Depot did not even exist at the zenith of national brand popularity. These and others were to become the true powerbrokers in the consumer marketplace and, in the process, lead what co-authors Nirmalya Kumar and Jan-Benedict E.M. Steenkamp have called the “private label revolution.”
Messrs. Kumar and Steenkamp recently took part in an e-interview with RetailWire.
RW: Why this book?
Kumar: After 15 years of working as consultants and academics in the field of private labels, we had some unique insights into the phenomenon, especially since much of this work was in Europe which is more advanced than the US with respect to retailer brands.
RW: What is the premise of your work and what does it mean for brand marketers?
Kumar: The recommendation for brand manufacturers is four fold:
- Fight selectively where they can win against private labels and add value
for consumers, retailers, and shareholders. This is typically where the brand
is one or two in the category or occupying a premium niche position. - Partner effectively by seeking win-win relationships with retailers through
strategies that complement the retailer’s private labels. - Innovate brilliantly with new products to help beat private labels. Continuously
launching incremental new products keeps the manufacturer brands looking fresh
but this must be punctuated by periodically launching radical new products. - Create winning value propositions by imbuing brands with symbolic imagery
as well as functional quality that beats private labels. Too many manufacturer
brands have let private label equal and sometimes better them on functional
quality. In addition. to have a winning value proposition the pricing needs
to be monitored closely to ensure that perceived benefits are equal to price
premium.
RW: What about retailers?
Kumar: When a customer wants to replace a faucet, do they think of Home Depot first or American Standard? The recommendation for retailers is to have a portfolio strategy with respect to private labels – occupying several levels of price positions and perhaps also category brands like Wal-Mart or Tesco do. In addition, they should upgrade their private labels in terms of quality and support higher prices.
RW: Is there such a thing as brand loyalty?
Kumar: Yes there is brand loyalty though it may not always be to manufacturer brands. Many consumers are store loyal first.
RW: What do you hope retailers will take away from your work?
Steenkamp: Our work offers a lot of hope to retailers. Retailers have been remarkably successful in developing their private labels, as evidenced by the fact that private label sales (globally) exceed one trillion dollars annually. Consider the success of 100 percent private label chains as Aldi, H&M, Victoria’s Secret, Ikea, and Zara; as well as the success of retailers like Wal-Mart, Target, and Tesco, all of which rely heavily on their private label investments for their success.
RW: Are there critical aspects of brands that retailers do not fully appreciate?
Steenkamp: There is a clear danger that retailers’ continued success with private labels undermines the economics of private labels, the basis underlying their success. As 1) private label assortments widen and widen, 2) as retailers are developing budget, standard, and premium private labels, as well as private labels for niches (health, kids, organic, etc.), 3) retailers are starting to advertise for private labels, and 4) move beyond copy-catting to becoming innovation leaders, their cost advantage is eroded. Strong manufacturer brands have economies of scale and scope and with increased investments in private labels, retailers may lose the cost edge. That is probably the biggest danger.
RW: Have branded items been mishandled by retailers in some ways?
Steenkamp: Retailers regard (strong) manufacturer brands as a must-have; customers expect it. However, carrying Coke, Budweiser or Pampers is not going to differentiate one retailer from the other. As such, retailers have little incentive to engage in (extensive) marketing/merchandising of branded items. Branded items do not make a consumer loyal to their chain (unless the retailer offers them at much lower prices than other retailers), private labels do… However, one key instance of omission is that there is a very significant proportion of cases that branded items are actually more profitable to retailers than their own private labels. This is due to the higher dollar margin (lower percentage margin, but on a higher price) and shelf turnover of (leading) manufacturer brands.
Discussion Questions: What do you see as the most significant development and/or issue in the national and store brand story? Do you see the popularity of national brands or store brands as a cyclical phenomenon with one rising and the other falling at various stages over time?
Mr. Kumar is professor of marketing, co-director of Aditya Birla India Centre and faculty director for executive education at London Business School. Mr. Steenkamp is a C. Knox Massey distinguished professor of marketing and marketing area chair at the University of North Carolina at Chapel Hill’s Kenan-Flagler Business School as well as executive director at global research center AiMark.
Private Label Strategy: How to Meet the Store Brand Challenge will go on sale in hardcover next month. Amazon.com and Barnes & Noble are accepting pre-orders now.
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Most retailers’ revenues and profits come from selling many of the same brands offered by their competitors. But in order to survive in the dramatically changing marketplace of the future, retailers need to become brands themselves. This is not a new message — I have been exhorting retailers to brand themselves for years — but in a world of information overload, product overchoice and acute time-poorness, the importance of differentiating the retail brand cannot be overemphasized.
Positive brand equity is a major plus for any retailer today. But brand equity comes from customers’ experiences, not controlled communications such as names, logos, advertising or promotions (that’s why I’m skeptical of the current buzz surrounding “customer engagement”). Customers’ experiences, in turn, come from all interactions across all channels.
My prescription for profitable retail growth: brand your retail identity, and make every customer interaction an opportunity to reinforce and enhance that identity.
Amid all the significant events and influencing factors in the rise of retailer brands, the most important is quite simple. It was the day the retailer(s) stopped treating their private label as a cheap national brand knockoff and started treating it as a Proprietary Brand. This is probably the second most important event in the evolution of “Retailer as Marketer” — ranking second only to the day retailers realized that their store banner needed to be a differentiated franchise that represented something more than the availability of a certain type of merchandise.
The retailer trend toward own brands will continue in this country for several reasons.
1- This is an effective way to support the “Branding” of your stores with equivalent quality and premium store brands.
2- There are many underdeveloped categories in US retailers that should contribute significant growth in the future just as they have done in Europe.
3- Savvy retailers are staffing their marketing departments with experienced marketing people; many of them from Branded companies. These people are focusing on the store brands and applying many of the same principles that the branded companies have done to successfully build businesses.
Earlier comments about branded manufacturers recognizing the current business situation are on target as manufacturers recognize that they must work effectively with retailers who are building their own brands.
It seems to me that there are two key developments in this overall story.
>One is that store brands or own brands have come of age as brands and are not just retailer-exclusive products. President’s Choice is still probably the strongest retail brand in North America, and the only real surprise is that other food retailers have been “fast failures” in developing similarly strong own brands.
>The other is that some branded manufacturers are now finding a way to use the power of their brands to help retailers drive their own marketing initiatives. This didn’t come out strongly in the interview, but in our experience, it’s a big deal. While it’s not easy for the mega brands to consider exclusive arrangements or co-branding, every advertised brand can find ways to support some aspect of a retailer’s marketing strategy. They can do this, for example, by providing programs that deliver a unique shopping exposure in the store. When a manufacturer does this, it’s difficult for retailers to aggressively promote their own brands against that manufacturer’s brands.
Clearly, one of the main forces in eroding the power of manufacturer’s label is private label. But do retailers really do a good job testing consumer response to their brands? If you look at a typical retailer’s business intelligence, buyers cannot conveniently set up a controlled test. It is too cumbersome and time is too short. Instead, they devote their energies to developing pricing and visual merchandise advantages over manufactured brands. When sales are sluggish, they’ll promote their own brand because they are more personally accountable. You can’t get markdown money from a private label.
The performance of private versus manufacturer labels should be looked at through the objective lens of business intelligence. In the end the consumer will tell you which they like better with sustainable high-profit sales. The only way to improve your understanding of this trend is improve your feedback mechanism and to carefully trend full price private and manufacturer label sales as percent to total. That’s good use of business intelligence.
As private labels in the US changed from being the lowest cost product (with questionable quality) to a high quality product demanding a price that may be marginally lower than branded products, the marketplace shifted. If consumers can purchase the same quality (or higher) for a lower price, why would they consider a branded product?
Brands have always had to offer greater value than private label products to encourage consumers to purchase their products. Private labels have changed the playing field by offering high quality products. The challenge for brands remains the same: if the brands offer value that consumers perceive to be important then they will pay the higher price. The new reality is that the quality of the product or clever advertising are no longer the critical part of the value equation.
Branded products need to determine the elements of the value equation for consumers of a particular product. Then they need to ask themselves what value do they or could they offer that is important enough to consumers to make the consumers want to purchase the branded product? That value equation will change by product and means that manufacturers need to know their consumers or all the consumer segments purchasing their product and what is important to those consumers. If they don’t, then the private label becomes a better value to the consumer.
The unasked and unanswered set of issues are not the retail response to the opportunity of developing their private label portfolios. The Tesco strategy implements three tiers of products that effectively target major segments of their clientele. Other retailers are following that strategy, and specialists are improving their niche private label products that support their banners – Trader Joe’s and Whole Foods.
The dilemma is the branded response. No one argues that P&G should develop win-win strategies that include Colgate in the marketing of toothpaste — but they do suggest that P&G develop a win-win strategy for the larger competitor: private label. Any new innovations can be copied after being proven successful. How do you cooperate with your largest competitor?
The retailer can try innovating but in many categories all they need to do is to wait for the successful new products and copy them. Suppliers generate about 33,000 new products each year and 1,500 are somewhat successful. The retailer can wait, copy, and target successful launches.
As suggested above, the branded suppliers may become branded retailers, but this is a risky low-return strategy. Other solutions are rarely mentioned in the industry literature.
Modern grew out of mass production. Efficiency from economy of scale. Brands were a way of distinguishing one mass produced product from another. But with the help of computers, the economy of scale from large has faded away. On and off brand could be used for a little sales pitch, but Brand is dead.
Many dynamics.
Large retailers are consolidating, offering fewer partnering options for brands — it’s all or nothing in many cases. Retailers are developing exclusive lines/labels with established brands as well as their own private label products. Mass merchants are demanding access to upscale brands.
Some fast-growing retailers ARE the brand, such as H&M, Chico’s and Zara.
Established brands, on the other hand, are opening more company stores, and in many cases, are selling directly to the consumer on the internet, also.
Bottom line, neither the brand nor the retailer wants to become too dependent on the other.
Today where a product is purchased is becoming more important than who made it! As Chuck Rubin, President of North American retail for Office Depot said last year to WSJ.Com:
“We’re the ones that have the relationship of trust with the customer…There’s no better way to assure that than to make it ourselves.”
Therefore, as retailers (forever) continue to chase volume, value and margin, own brand IS the center stage for growth. And what an opportunity, especially when you consider that (on average) in Europe, own brand makes up over 50% of a retailer’s business in comparison to the US at around 22% average.
But for both sides of the pond, the key challenges remain; stand out on a cluttered shelf, especially as own brand becomes more sophisticated and further tiered across good, better and best. Thus, retailers are already starting to feel the need to make own brand more consistent and simple as they look to see where the best opportunities are to increase own brand share.
Over the past 10 or 15 years, many manufacturers neglected to consider Private Label as a competitor. Some retailers split their Private Label into two: one low price tier brand, and one high price tier brand. And in some cases, they even marketed the premium brand as a point of differentiation in their stores (for example, Presidents Choice). Some retailers also innovated to the same level, or more than, their national brand competitors.
What is the result? Previously, Private Label was typically a lower end brand that was focused on a good value for the consumer. Quality was not an expectation when most Private Label products were purchased. But now, Private Label satisfies the price conscious consumers who are looking for a good deal, as well as the consumers looking for quality products. Therefore, there is a greater potential to switch consumers over to Private Label, because it is satisfying two different consumers.
National brands have their place in retail, and will continue to do so. But marketing departments need to better understand Private Label, and the interaction with both current brands and segments within a category, as well as with new product launches. This also ties in with understanding the consumer demographics of the different brands and segments within a category, including Private Label. If there is not differentiation from Private Label products, selling in these new products is going to be difficult to do.
Private label should grow strongly since the retailers with greater private label commitments are more likely to remain profitable, given the better margins. Biggest obstacle to brand name sales growth: almost no growth in potential retail outlets. For example, Whole Foods, Trader Joe’s and Wild Oats are opening more new stores, proportionately, than conventional supermarkets like Pathmark, Food Lion, or Safeway. The conventional (legacy) supermarkets merge, but don’t build many new locations. In the apparel business, brand names build sales growth by opening their own stores (Ralph Lauren, Jones New York) instead of depending on nonexistent department store location growth. For many apparel brands, the sales from company-owned outlets could exceed their wholesale volume. So is the “national brand” turning itself into “private label”?
As retailers consolidate and obtain the critical mass necessary to become brand marketers, their own brands become more important as well. The retailers who figure out that manufacturer brands and retailer brands appeal to different consumers and that the manufacturer brand consumer in one category might be a retailer brand consumer in another category will win, as Loblaw, Wegmans and H-E-B have shown. Manufacturer brands and retailer brands can coexist and even compliment each other in the same category as they each have their role to play to appeal to the different consumer tastes in that category.
It is the integration of the strengths of each brand from a consumer point of view that allows a category at one retailer to be more relevant to all consumers and helps that retailer win versus the other retailers in the market
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Most retailers’ revenues and profits come from selling many of the same brands offered by their competitors. But in order to survive in the dramatically changing marketplace of the future, retailers need to become brands themselves. This is not a new message — I have been exhorting retailers to brand themselves for years — but in a world of information overload, product overchoice and acute time-poorness, the importance of differentiating the retail brand cannot be overemphasized.
Positive brand equity is a major plus for any retailer today. But brand equity comes from customers’ experiences, not controlled communications such as names, logos, advertising or promotions (that’s why I’m skeptical of the current buzz surrounding “customer engagement”). Customers’ experiences, in turn, come from all interactions across all channels.
My prescription for profitable retail growth: brand your retail identity, and make every customer interaction an opportunity to reinforce and enhance that identity.
Amid all the significant events and influencing factors in the rise of retailer brands, the most important is quite simple. It was the day the retailer(s) stopped treating their private label as a cheap national brand knockoff and started treating it as a Proprietary Brand. This is probably the second most important event in the evolution of “Retailer as Marketer” — ranking second only to the day retailers realized that their store banner needed to be a differentiated franchise that represented something more than the availability of a certain type of merchandise.
The retailer trend toward own brands will continue in this country for several reasons.
1- This is an effective way to support the “Branding” of your stores with equivalent quality and premium store brands.
2- There are many underdeveloped categories in US retailers that should contribute significant growth in the future just as they have done in Europe.
3- Savvy retailers are staffing their marketing departments with experienced marketing people; many of them from Branded companies. These people are focusing on the store brands and applying many of the same principles that the branded companies have done to successfully build businesses.
Earlier comments about branded manufacturers recognizing the current business situation are on target as manufacturers recognize that they must work effectively with retailers who are building their own brands.
It seems to me that there are two key developments in this overall story.
>One is that store brands or own brands have come of age as brands and are not just retailer-exclusive products. President’s Choice is still probably the strongest retail brand in North America, and the only real surprise is that other food retailers have been “fast failures” in developing similarly strong own brands.
>The other is that some branded manufacturers are now finding a way to use the power of their brands to help retailers drive their own marketing initiatives. This didn’t come out strongly in the interview, but in our experience, it’s a big deal. While it’s not easy for the mega brands to consider exclusive arrangements or co-branding, every advertised brand can find ways to support some aspect of a retailer’s marketing strategy. They can do this, for example, by providing programs that deliver a unique shopping exposure in the store. When a manufacturer does this, it’s difficult for retailers to aggressively promote their own brands against that manufacturer’s brands.
Clearly, one of the main forces in eroding the power of manufacturer’s label is private label. But do retailers really do a good job testing consumer response to their brands? If you look at a typical retailer’s business intelligence, buyers cannot conveniently set up a controlled test. It is too cumbersome and time is too short. Instead, they devote their energies to developing pricing and visual merchandise advantages over manufactured brands. When sales are sluggish, they’ll promote their own brand because they are more personally accountable. You can’t get markdown money from a private label.
The performance of private versus manufacturer labels should be looked at through the objective lens of business intelligence. In the end the consumer will tell you which they like better with sustainable high-profit sales. The only way to improve your understanding of this trend is improve your feedback mechanism and to carefully trend full price private and manufacturer label sales as percent to total. That’s good use of business intelligence.
As private labels in the US changed from being the lowest cost product (with questionable quality) to a high quality product demanding a price that may be marginally lower than branded products, the marketplace shifted. If consumers can purchase the same quality (or higher) for a lower price, why would they consider a branded product?
Brands have always had to offer greater value than private label products to encourage consumers to purchase their products. Private labels have changed the playing field by offering high quality products. The challenge for brands remains the same: if the brands offer value that consumers perceive to be important then they will pay the higher price. The new reality is that the quality of the product or clever advertising are no longer the critical part of the value equation.
Branded products need to determine the elements of the value equation for consumers of a particular product. Then they need to ask themselves what value do they or could they offer that is important enough to consumers to make the consumers want to purchase the branded product? That value equation will change by product and means that manufacturers need to know their consumers or all the consumer segments purchasing their product and what is important to those consumers. If they don’t, then the private label becomes a better value to the consumer.
The unasked and unanswered set of issues are not the retail response to the opportunity of developing their private label portfolios. The Tesco strategy implements three tiers of products that effectively target major segments of their clientele. Other retailers are following that strategy, and specialists are improving their niche private label products that support their banners – Trader Joe’s and Whole Foods.
The dilemma is the branded response. No one argues that P&G should develop win-win strategies that include Colgate in the marketing of toothpaste — but they do suggest that P&G develop a win-win strategy for the larger competitor: private label. Any new innovations can be copied after being proven successful. How do you cooperate with your largest competitor?
The retailer can try innovating but in many categories all they need to do is to wait for the successful new products and copy them. Suppliers generate about 33,000 new products each year and 1,500 are somewhat successful. The retailer can wait, copy, and target successful launches.
As suggested above, the branded suppliers may become branded retailers, but this is a risky low-return strategy. Other solutions are rarely mentioned in the industry literature.
Modern grew out of mass production. Efficiency from economy of scale. Brands were a way of distinguishing one mass produced product from another. But with the help of computers, the economy of scale from large has faded away. On and off brand could be used for a little sales pitch, but Brand is dead.
Many dynamics.
Large retailers are consolidating, offering fewer partnering options for brands — it’s all or nothing in many cases. Retailers are developing exclusive lines/labels with established brands as well as their own private label products. Mass merchants are demanding access to upscale brands.
Some fast-growing retailers ARE the brand, such as H&M, Chico’s and Zara.
Established brands, on the other hand, are opening more company stores, and in many cases, are selling directly to the consumer on the internet, also.
Bottom line, neither the brand nor the retailer wants to become too dependent on the other.
Today where a product is purchased is becoming more important than who made it! As Chuck Rubin, President of North American retail for Office Depot said last year to WSJ.Com:
“We’re the ones that have the relationship of trust with the customer…There’s no better way to assure that than to make it ourselves.”
Therefore, as retailers (forever) continue to chase volume, value and margin, own brand IS the center stage for growth. And what an opportunity, especially when you consider that (on average) in Europe, own brand makes up over 50% of a retailer’s business in comparison to the US at around 22% average.
But for both sides of the pond, the key challenges remain; stand out on a cluttered shelf, especially as own brand becomes more sophisticated and further tiered across good, better and best. Thus, retailers are already starting to feel the need to make own brand more consistent and simple as they look to see where the best opportunities are to increase own brand share.
Over the past 10 or 15 years, many manufacturers neglected to consider Private Label as a competitor. Some retailers split their Private Label into two: one low price tier brand, and one high price tier brand. And in some cases, they even marketed the premium brand as a point of differentiation in their stores (for example, Presidents Choice). Some retailers also innovated to the same level, or more than, their national brand competitors.
What is the result? Previously, Private Label was typically a lower end brand that was focused on a good value for the consumer. Quality was not an expectation when most Private Label products were purchased. But now, Private Label satisfies the price conscious consumers who are looking for a good deal, as well as the consumers looking for quality products. Therefore, there is a greater potential to switch consumers over to Private Label, because it is satisfying two different consumers.
National brands have their place in retail, and will continue to do so. But marketing departments need to better understand Private Label, and the interaction with both current brands and segments within a category, as well as with new product launches. This also ties in with understanding the consumer demographics of the different brands and segments within a category, including Private Label. If there is not differentiation from Private Label products, selling in these new products is going to be difficult to do.
Private label should grow strongly since the retailers with greater private label commitments are more likely to remain profitable, given the better margins. Biggest obstacle to brand name sales growth: almost no growth in potential retail outlets. For example, Whole Foods, Trader Joe’s and Wild Oats are opening more new stores, proportionately, than conventional supermarkets like Pathmark, Food Lion, or Safeway. The conventional (legacy) supermarkets merge, but don’t build many new locations. In the apparel business, brand names build sales growth by opening their own stores (Ralph Lauren, Jones New York) instead of depending on nonexistent department store location growth. For many apparel brands, the sales from company-owned outlets could exceed their wholesale volume. So is the “national brand” turning itself into “private label”?
As retailers consolidate and obtain the critical mass necessary to become brand marketers, their own brands become more important as well. The retailers who figure out that manufacturer brands and retailer brands appeal to different consumers and that the manufacturer brand consumer in one category might be a retailer brand consumer in another category will win, as Loblaw, Wegmans and H-E-B have shown. Manufacturer brands and retailer brands can coexist and even compliment each other in the same category as they each have their role to play to appeal to the different consumer tastes in that category.
It is the integration of the strengths of each brand from a consumer point of view that allows a category at one retailer to be more relevant to all consumers and helps that retailer win versus the other retailers in the market