August 1, 2008
Ralcorp’s Post Deal Gives Company Dual Identity
Next week Ralcorp Holdings is expected to close its deal to acquire Post cereals from Kraft Foods. When it does, the company that has been built on creating store-brands will move into the national brand cereal business. In fact, one-third of its revenues will be generated by brands including Cocoa Pebbles, Grape Nuts, Honey Bunches of Oats and Shredded Wheat. Just how is Ralcorp going to make it work?
The Post division, according to a report in the St. Louis Post-Dispatch, will have a separate sales organization from the private label cereal business and will keep its headquarters in New Jersey. Ralcorp believes that splitting the two functions will allow the company to go to market without dealing with some of the inherent conflicts that arise in the store versus national brand debate.
“It gives us expertise on the items,” said David Skarie, co-chief executive at Ralcorp. “It’s very difficult to be an expert on all the categories we’re in.”
Discussion Questions: Are there inherent conflicts of interest in a national brand manufacturing private label products? How does a company that sells a national brand as well as private label deal with competition over shelf space that may arise at individual retail accounts?
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Long tradition of national brands providing private label as well, and not just in food. The main pitfall that I see in my day-to-day client interactions is that, when a supplier provides national brands, private labels and often, licensed brands within one category, retailers have the power to decide which brands matter where, and how much. At the retailers’ whim, a supplier’s brand and pricing portfolio can shift dramatically based on those decisions.
The good news for multi-brand suppliers is that they have the flexibility to “keep” the business though not always at a favorable margin. Suppliers that aren’t adept at portfolio management can find themselves in brandless, low margin commodity hell at the end of the day.
Correctly managed internally, I believe that a manufacturer can benefit from producing both Branded and Private Label products. They each have different strategies and need to be marketed that way but there are also synergies in production, logistics and customer efficiency. It requires strong senior management direction to effectively handle both!
Well, sure, there are conflicts of interest, but many vendors have been serving both sides of the fence for years. There’s internal fighting, but once a branded company starts with private label, or vice versa, you don’t see them backing away from it too often. Separate sales forces are smart, although the angst and internal memos flying back and forth will be a fact of life that somehow never seems routine. When I’ve been relatively close to this, I’ve seen it make companies stronger. Purchasing/production/logistics synergies, and a better understanding of the market, are all there. You cry a little less when your branded product is replaced by PL, although you cry just the same. It’s a delicate dance, not for the timid. I know companies with war stories that would curl your hair, and/or make you laugh out loud.
Companies can easily bring to market both national brands and private label without conflict as long as the process is managed with care.
There is only a conflict between Branded and Private Label if it is not managed. Years ago there was a company called Ralston-Purina, which manufactured Chex cereals and private label. It performed well for years until management was given financial stock price incentives that killed the company.
The branded side must aggressively develop new products and packaging. It was always “look to split and/or redefine the category.” Private Label has the same challenges. Most CPG companies don’t support Private Label as they are unable to manage competition within their own company. The branded companies observe this, which results in replacing brand managers with category managers. The opportunity is great for the company. They can sell retailers on buying Post and using them for Private Label. Combining both on the same delivery truck will greatly increase inventory turns and reduce warehouse inventory.
The idea of retailers making greater profit always sells.
Obviously Warren has been peaking into my war stories chest again. This issue becomes particularly irksome in the international arena, where “house brands” are often the lion’s share of the business–and almost always of the profits. The managers running the house brand business always feel like cash cows. The managers running the national brand business always feel like they can’t spend enough to adequately battle other national brand competitors who “don’t have to accommodate the house brand folks.” As Warren said, it is a battle that never ends.
One observation on the Post business however. Kraft divested Post because it is a distant third in the cereal market to Kellogg and Big G with little hope of catching up. Most of its products, especially the shredded wheat business, are already heavily private labeled. Perhaps Post could work as more of a “control brand” and eliminate the need for separate sales and management overhead.
Most private labels were created by branded companies that gave in to retailer pressure. It has to be less expensive to share manufacturing between PL and branded products than to create separate plants for each. Having branded and PL in the same house should return a little control to the manufacturers.
I don’t see the need for separate sales forces but if they feel more comfortable going to market that way, so be it. That way they will be able to integrate them later as a cost cutting initiative.
This is really no different from a manufacturer offering multiple brands (think P&G and laundry detergent). The brands, both national and private label, have to survive on their own individual merits (or they should perish).
I like the separate sales force suggestion, but don’t think it is necessary. A good sales force should be able to sell a tier of products.
Going forward, retailers will work more collaboratively with brand marketers to develop in store opportunities. Leveraging the power of consumer segmentation to target core shoppers for retailers, Ralcorp could be well positioned to develop category portfolios. The caveat remains that sound, consistent management is key.
We actually think that we will see more of this in the future, not less. Companies that produce great branded products are able to use their profits to create new technologies and bring these products to market. Once the R&D has been funded, and the technology exists, why not take full advantage of the investment, and if the capacity exists, create PL product as well as branded?
It is the old adage of any manufacturing concern; if the machines are sitting idle in the production facility, they are not making anyone any money. The more that packaging is purchased, the lower the cost from the supplier. The more ingredients that are purchased, the lower the cost. The economies of scale kick in, and can, if managed properly, create a more profitable company in the long-term.
The most significant problem Ralcorp will face is the internal mindset of a company structured to sell private label product vs. a company that markets branded products. The structure of the P&L alone will look dramatically different with advertising and promotion taking up 20% or more of the P&L.
For managers who have not spent anything on advertising, they will now see a new spending line that is measured in tens of millions of dollars. Logically, they will know it makes sense, but with any pressure on the P&L, that line will be the first one attacked.
To Ralcorp, Post is very important, and will receive critical attention. To Kraft, Post simply wasn’t a priority. This type of situation isn’t unusual. Brand management can be like portfolio management: sometimes a business is bought or sold, and thrives with a new owner. Sometimes it’s just another step leading toward decline. Sometimes the seller simply has better uses for the capital invested.
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Long tradition of national brands providing private label as well, and not just in food. The main pitfall that I see in my day-to-day client interactions is that, when a supplier provides national brands, private labels and often, licensed brands within one category, retailers have the power to decide which brands matter where, and how much. At the retailers’ whim, a supplier’s brand and pricing portfolio can shift dramatically based on those decisions.
The good news for multi-brand suppliers is that they have the flexibility to “keep” the business though not always at a favorable margin. Suppliers that aren’t adept at portfolio management can find themselves in brandless, low margin commodity hell at the end of the day.
Correctly managed internally, I believe that a manufacturer can benefit from producing both Branded and Private Label products. They each have different strategies and need to be marketed that way but there are also synergies in production, logistics and customer efficiency. It requires strong senior management direction to effectively handle both!
Well, sure, there are conflicts of interest, but many vendors have been serving both sides of the fence for years. There’s internal fighting, but once a branded company starts with private label, or vice versa, you don’t see them backing away from it too often. Separate sales forces are smart, although the angst and internal memos flying back and forth will be a fact of life that somehow never seems routine. When I’ve been relatively close to this, I’ve seen it make companies stronger. Purchasing/production/logistics synergies, and a better understanding of the market, are all there. You cry a little less when your branded product is replaced by PL, although you cry just the same. It’s a delicate dance, not for the timid. I know companies with war stories that would curl your hair, and/or make you laugh out loud.
Companies can easily bring to market both national brands and private label without conflict as long as the process is managed with care.
There is only a conflict between Branded and Private Label if it is not managed. Years ago there was a company called Ralston-Purina, which manufactured Chex cereals and private label. It performed well for years until management was given financial stock price incentives that killed the company.
The branded side must aggressively develop new products and packaging. It was always “look to split and/or redefine the category.” Private Label has the same challenges. Most CPG companies don’t support Private Label as they are unable to manage competition within their own company. The branded companies observe this, which results in replacing brand managers with category managers. The opportunity is great for the company. They can sell retailers on buying Post and using them for Private Label. Combining both on the same delivery truck will greatly increase inventory turns and reduce warehouse inventory.
The idea of retailers making greater profit always sells.
Obviously Warren has been peaking into my war stories chest again. This issue becomes particularly irksome in the international arena, where “house brands” are often the lion’s share of the business–and almost always of the profits. The managers running the house brand business always feel like cash cows. The managers running the national brand business always feel like they can’t spend enough to adequately battle other national brand competitors who “don’t have to accommodate the house brand folks.” As Warren said, it is a battle that never ends.
One observation on the Post business however. Kraft divested Post because it is a distant third in the cereal market to Kellogg and Big G with little hope of catching up. Most of its products, especially the shredded wheat business, are already heavily private labeled. Perhaps Post could work as more of a “control brand” and eliminate the need for separate sales and management overhead.
Most private labels were created by branded companies that gave in to retailer pressure. It has to be less expensive to share manufacturing between PL and branded products than to create separate plants for each. Having branded and PL in the same house should return a little control to the manufacturers.
I don’t see the need for separate sales forces but if they feel more comfortable going to market that way, so be it. That way they will be able to integrate them later as a cost cutting initiative.
This is really no different from a manufacturer offering multiple brands (think P&G and laundry detergent). The brands, both national and private label, have to survive on their own individual merits (or they should perish).
I like the separate sales force suggestion, but don’t think it is necessary. A good sales force should be able to sell a tier of products.
Going forward, retailers will work more collaboratively with brand marketers to develop in store opportunities. Leveraging the power of consumer segmentation to target core shoppers for retailers, Ralcorp could be well positioned to develop category portfolios. The caveat remains that sound, consistent management is key.
We actually think that we will see more of this in the future, not less. Companies that produce great branded products are able to use their profits to create new technologies and bring these products to market. Once the R&D has been funded, and the technology exists, why not take full advantage of the investment, and if the capacity exists, create PL product as well as branded?
It is the old adage of any manufacturing concern; if the machines are sitting idle in the production facility, they are not making anyone any money. The more that packaging is purchased, the lower the cost from the supplier. The more ingredients that are purchased, the lower the cost. The economies of scale kick in, and can, if managed properly, create a more profitable company in the long-term.
The most significant problem Ralcorp will face is the internal mindset of a company structured to sell private label product vs. a company that markets branded products. The structure of the P&L alone will look dramatically different with advertising and promotion taking up 20% or more of the P&L.
For managers who have not spent anything on advertising, they will now see a new spending line that is measured in tens of millions of dollars. Logically, they will know it makes sense, but with any pressure on the P&L, that line will be the first one attacked.
To Ralcorp, Post is very important, and will receive critical attention. To Kraft, Post simply wasn’t a priority. This type of situation isn’t unusual. Brand management can be like portfolio management: sometimes a business is bought or sold, and thrives with a new owner. Sometimes it’s just another step leading toward decline. Sometimes the seller simply has better uses for the capital invested.