November 15, 2007
Study Predicts Major Share Gain for Store Brands
A McKinsey & Co. study presented at the Private Label Manufacturers Association (PLMA) Annual Conference in Chicago this week revealed that $55 billion in annual sales could shift from national brands to private label if retailers concentrate their resources on the effort. The result of the shift could move private label’s dollar market share to 24 percent from about 16 percent in 10 years.
The McKinsey report, titled New World of Brands: The Next Wave of Private Label, starts by identifying the retailers who “have successfully used private label as a key differentiator and to build consumer loyalty,” including the usual suspects – Wegmans, Safeway, H-E-B and Kroger. These retail leaders have an average private label dollar share of 22 percent, well above the industry average of 16 percent. Moreover, these “share leaders” have posted higher levels of overall sales growth versus non-leaders, 5.3 percent versus 3.4 percent over the last three years.
According to the research, “the bulk of retailers” are lagging behind, with a dollar market share of less than 16 percent. If these lagging chains, which include Albertson’s and Winn-Dixie, begin to emulate the private label share leaders and boost their store brands to drive growth and build consumer loyalty, part or all of the $55 billion in annual sales could move from national brands to private label.
Among the categories that hold the greatest opportunity for store brands, according to McKinsey, are natural cheese, bottled water, snacks/ nuts, cereal, paper towels, batteries and soap.
Brian Sharoff, president of the PLMA, said in a press release, “What we are seeing today is the transformation of food retailing from regional and local grocery chains to national supermarkets, supercenters, warehouse clubs, and specialty gourmet chains that are committed to making their own brands into nationally-known brands. And they are succeeding beyond anyone’s estimation.”
“The launch this week of Tesco’s new Fresh & Easy stores in California is one more indication of this trend,” Mr. Sharoff said.
Discussion Questions: How do you think the market for store brands will change over the next decade? What categories are most likely to see the biggest shift from national brands to private label? What will a major shift to store brands mean for the operating models of supermarkets in the U.S.?
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Retailer’s private label strategies have to tie in to the overall category role, strategy, and tactics within each category. Sometimes private label strategies conflict with some of the overall category roles and strategies. Or, one category manager has category responsibilities and another has private label responsibilities (resulting in conflicting objectives & goals internally). These issues need to be addressed in order for Retailers to grow their private label brand.
For the foreseeable future, private label brands can and should gain in certain market segments. McKinsey has picked commodity areas (for the most part) where private labels can make the fastest inroads. Don’t count the other brands out so fast, though. They are not going to lie down and watch their brands wither. As they reposition their brands to compete with the private label brands, the private label brands will lose some of their edge. As the gap closes and the difference in margins is not as great as it can be today, private label brands will lose some momentum.
So much has been said, written, and researched on the topic of private label since the early 1980s when private label represented less than 3% of the total consumer goods marketplace. However, in order to make a very long topic very short, here are a few conclusions I have made after 30 years in national brands, private label, niche, licenses, etc:
a) Private label’s greatest strength is that it’s a retailer controlled branding process.
b) Private label’s greatest weakness is that it’s a retailer controlled branding process.
1. Companies that focus in on private label as a niche within itself have done well and will continue to thrive. Examples: Trader Joe’s, Whole Foods, Aldi, etc.
2. Companies that treat private label as strictly an economic price brand alternative for value-minded consumers have done well, and will continue to do well, provided they maintain quality standards while continuing to support the national brands that drive the standard, the information, and the comparison within the category.
3. Premium private label has gone nowhere, and will continue to go nowhere, without niche, focus, and proper funding for total marketing. And there lie the problems, the funding and the marketing. Companies that manufacture these goods lack the funding for marketing because retailers are very aggressive about achieving margins, which is also why retailers fail to fund the marketing necessities to make these private brands succeed.
So much more can be analyzed and explained on this topic but the bottom line is that over the next ten years private label will almost definitely maintain its current share and grow some, but unless Trader Joe’s replace Kroger stores and Safeway stores (not going to happen) in 50% of all the existing strip malls, not to mention C-stores, drug stores, and discounters, (uh, like Wal-Mart) then the potential numbers in 10 years will remain one thing, “potential.”
All good points. I see PL growing moderately, with the best growth still coming out of “best practice” retailers. It’s been crystal clear to Wall Street for some years that higher PL penetration at retail generally goes hand in hand with higher profitability. Retailers that are lagging are in many cases the ones who still make their money on the buy instead of on the sell. They are reluctant to ease back on slotting, MDF, street money, etc., and drain manufacturer pockets instead of trying to meet the needs of their shoppers.
It’s obvious which group will prevail over the long haul, but this doesn’t change overnight. Ten years might be a realistic time frame to reach an industry average in the low to mid 20s, with best practice retailers considerably higher than that. In the shuffle, secondary and regional brands will have a tough go of it, unless they offer something really distinctive. I’d add Costco to the list of retailers with a great private label program.
As for which categories will grow in PL, McKinsey’s list is okay, but I also see good opportunity in perishables. PLMA itself, a couple years ago, pointed out a huge opportunity in wine (low brand recognition, consumer confusion, etc.) which still exists.
What kinds of customer do store brands attract as opposed to national brands? As retailers shift to more store brands, it is vital that retailers stay aligned with their best and most loyal customers. To answer this question, retailers need to look at a couple of new metrics through their customer data base.
For example, you’d want to know the average spend of store brand purchasers and the contribution of store brand vs. national. How frequently are they buying? What margin are you earning over six months? A year?
It is also important to track these metrics as trends. Are store brand customers increasing their share as you invest more in store brand merchandise?
You’d be smart to segment your customers into four groups: national brand purchasers, store brands, tweeners, and, if you have them, generic brands. What is the make up of these in your tier one customers? Tier 2? How about your new customers?
Extracting data from your customer data base will provide additional insights that will help crystallize your message, pricing, and promotional strategy. You want to correlate store brand trends with age and family demographics, and lifestyle.
Without doing these analytics in the background, the move to more store brands is a mindless quest for more margin. You want to you know more about your business than your competitor does about their business. Otherwise, your push for more store brands is not a sustainable advantage.
There are different private label states. The Dominant Commitment State = folks like Trader Joe’s, Macy’s, JC Penney, and Target, who use superior design to improve their margins and want private label ultimately to be the majority of their assortments. The Commodity Pricers = most conventional supermarkets and drug chains (such as Pathmark, CVS, and Walgreens) who use private label to beat national brand pricing.
The #1 private label driver: better margins. The #2 driver: it’s a lot harder for national brands to prove obvious superiority these days. That’s why national brands like Heinz have been selling off certain lesser brands, like College Inn and the baby food business.
It’s surprising to me that certain huge players such as Home Depot, Lowe’s, Wal-Mart, and Best Buy don’t make a higher commitment to private label.
Private Label can see tremendous growth in retailers that understand themselves as a brand and understand how brands do jobs for consumers; these retailers also happen to be retailers that tend to take the money that manufacturers give them in terms of net landed cost, not in fixed costs.
For retailers still addicted to trade dollars, particularly in slotting and fixed costs for ads, they will talk a good game for PL and make some strong efforts, but will always come back to the branded manufacturer for their ‘fix’. When these retailers make PL pushes, they make progress and they see topline growth; then they look at their category bottom-line and see a nice margin percentage, but fewer dollars, and they see their MDFs fall as accruals drop due to the shift to PL that they caused. If they have charge-backs in place for the PL buyer and his staff, they see even greater erosion of the bottom line, and have to come back to the branded manufacturer for an even bigger ‘fix’. This nasty cycle will suppress PL development in many retailers, particularly food retailers.
The bottom line is that private label is huge and in the next decade you will see all categories have PL alternatives. What is interesting is how house brands are becoming associated with high quality and, in some cases, are actually overtaking sales and shelf space of the name brand. House brands are growing so fast that some of the items available are unique and have no national brand equivalent.
It’s up to the retailer to capitalize on this trend by putting more marketing and merchandising focus on their own lines. Example: Loblaws comes out with ‘The Insiders Report’ every quarter to showcase new and exciting products but you will only find President’s Choice products in that report (President’s Choice is Loblaws own brand of products that range in every category).
The big discussion between my associates this time of year is whether or not you have tried the new President’s Choice ice cream flavour! They really are that good! Private label is really the only way to make decent margins in retail and chains are coming to that realization as big brands struggle with rising production costs.
I am very curious as to the variables considered in the McKinsey study. While the 24% gain might be possible in some categories where commodities and regional brands dominate, I find it hard to believe that non-commodity national and even regional brands will simply fold to pressure from Private Label. Additionally, the Private Label model has a cost/benefit juncture that it must follow and will not allow it to maintain pace with the innovations of branded products. I anticipate the growth to be in the commodity categories.
Although the article does take a deep look at this phenomenon, this is hardly breaking news. The consolidation of regional retailers into national players has given retailers powerful distribution networks, which has allowed them the scalability to successfully develop and market ‘Retailer Owned brands’ (you can hardly call them Private Label now, Private Label makes me think of loaves packaged in white with ‘Bread’ stamped in large letters on the side).
An excellent book on this topic ‘Private Label Strategy: How to Meet the Store Brand Challenge’ has pointed out that these store brands are no longer just a cheap alternative to national brands. There are store brands that compete with nationals on price and there are store brands that compete on quality but are priced almost at par with national brands. The book advises retailers to have a balanced portfolio of national and store brands. It makes sense for retailers to target categories that are high margin and are not dominated by a few major brands.
Unless retail distribution dynamics radically change over the next few years, we are going to see categories that are dominated by high margin and low equity brands yield share in a major way to store brands.
In 2016 we could hear Store Brands say, “I beg your pardon, National Brands, I didn’t recognize you–I’ve changed a lot.” And so the trend of PLs to gain market share should continue, not only in the seven categories listed above but also in more perishable items too. This could be further accelerated with any initial success of Tesco’s Fresh & Easy stores.
No question, Private Label will increase share. The McKinsey estimate is low. They have not factored in the globalization effect which will bring foreign Private Label manufacturers to our shores. Couple this with retailers finally moving toward Target Markets and understanding that they must be different than their competition, and I see larger market share increase.
Private label store brands are quality products, value priced, without the national brand markup.
Where private label store brands excel is within their product line niches.
I am a true believer of store brands, having grown up with Ann Page, Jane Parker, Sultana, Cheeri-aid, Iona, Penguin, Cap’n John and the rest of the A&P brand family.
Today, Master Choice and America’s Choice are my favorite brands.
You just can’t beat the quality and value of Master Choice Organic canned veggies, their pasta products, or America’s Choice Spray Shower cleaner, to single out a few.
Great house brands make for customer loyalty. Why pay extra when you can get the same or higher quality with many private label brands?
National Brands that fail to deliver innovation and superior benefits will continue to lose share to private label. A potential blind spot for retailers is that shoppers won’t switch outlets because of a cheaper private label product.
A Private Label program that delivers superior value to national brands like Trader Joe’s and Kirkland Signature will succeed.
I think it all comes down to the quality/ value relationship. Those private label manufacturers that deliver consistently high quality at a better value will continue to win in the marketplace.
In my opinion, a lot of the three tier private label programs built on good, better, best price points just contribute to brand proliferation and an attempt by retailers to control a greater percentage of the shelf with their store brands.
The key is differentiation and delivering a superior benefit. There are a lot of national brands that have not invested in innovation and they will continue to see their business erode.
If stores are going to convert share from established brands and labels to private label programs, I believe the opportunity is at premium price points, with quality and brand equity being core components of the initiative.
In other words, if we’re talking good/better/best, I believe the opportunity is in better and best. Therefore, it can’t be just a price point and margin play, it needs to be a strategy to capture market share from established brands on the basis of quality, fashion and intrinsic value.
The PL discussion makes the most sense to me in the context of the Big Head vs. the Long Tail. When retailers make most of their money from margin (shoppers), it makes no sense to offer massive brand offerings, and the move to PL is inexorable–since that way lies margin. However, the economics of the brand are very different than for the retailer in terms of the long tail. Selling a case a year of product across tens of thousands of stores can be a good business, where selling a case a year in an individual store makes no sense at all.
This is where the brands have an unassailable advantage, because they can make things work with the long tail that a retailer can’t. So their best bet (for now) is to be the name brand alternative to PL in big head stores like Fresh & Easy, and manage that business differently than they do the long tail elsewhere.
The successful strategy for the supermarket is to mirror that brand strategy by realizing they are actually managing two different stores in one building. Part of the store needs to be big head and meet Tesco and all other comers (there will be many) on that ground and economic model. There, leverage with the shoppers (and brand economics) will come from the added value of having the long tail elsewhere in the store. Stirring the two businesses together indiscriminately is a sure fire formula for continuing erosion by those who offer only the big head, or those who manage them distinctly–HEB Central Market is the best I have seen so far.
Have you seen Fresh & Easy? That’s the future, right there.
Our guess was, if you took out wine and beer, over 80% of the store is private label. Now, that’s guts! But after a quick trip across the street to a Von’s, you quickly understand that it’s not so risky after all: clutter, confusion and general malaise hits you right in the face, and what customer wants that?
Is your brand strong enough to stand alone? If not, there’s the first thing on your to-do list. That, of course, goes for retailers AND manufacturers.
I see a CPG orientation to these postings. A way to gain some perspective is to forget CPG for a minute and think about other areas where you see vertically integrated retailers, such as apparel. Consider Victoria’s Secret or Banana Republic. Consider Ethan Allen furniture. Think about Coach. What is different is that the implicit blink association with private label and price/quality trade-off does not occur for consumers or for analysts. The big challenge that faces manufacturers might not be the commoditization of products but the fact that Procter’s biggest high quality competitor might switch from Unilever to Tesco (as an example). I think that your competitors changing was referred to by Andy Grove (Intel) as a “Strategic Point of Inflection” meaning you need to re-define your business.
This is very, very real, IMHO.
One point I take out of the comments so far is a need to separate private labels in their genesis/purpose–not sure what the right term is. There is private label like Trader Joe’s and there is private label like Kroger–two fundamentally different worlds, perhaps appealing to different consumers. Trader Joe’s is more like Joel describes–a branded private label with its own outlet. The growth path for this type of product is likely to be different from the potential for Kroger canned corn.
When retailers make the decision to stop focusing on NBE, and start focusing on product that exceeds the value proposition of the brands, then and only then will Private Label grow to the levels suggested by McKinsey. Look at Trader Joe’s as an example. Consumers who shop their stores do so not because the product is less expensive, but because they feel that the quality is superior of other branded products.
This same strategy needs to be executed by convention retailers, and when done properly, their PL sales will increase substantially. This is true on food, personal care products, etc. Quality will always sell better than price over the long-term.
This is not ‘breaking news’. It is no secret that private label will continue to grow in popularity and dominance. If I can take a page out of the pharmaceutical book of business, generics now dominate the landscape. It is realistic to presume that store brand could grow to 50% of all retail sales in the relative near future.
Keys to the success of store brand include: reliability of the product; guarantees of satisfaction; possible tiers of store brand (premium and value); and promotion/loyalty.
Private label products are here to stay and will continue to grow in popularity. There are an increasing variety of products available in fresh, grocery and frozen products. Natural and organic products are on the rise.
One of the keys to success seems to be the retailer’s ability to differentiate its products from others on the shelf. Trader Joe’s does a particularly good job in sampling their private label products on a daily basis and showing how they can be turned into simple meals for consumers. This has great appeal and also hits price conscious consumers as well.
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Retailer’s private label strategies have to tie in to the overall category role, strategy, and tactics within each category. Sometimes private label strategies conflict with some of the overall category roles and strategies. Or, one category manager has category responsibilities and another has private label responsibilities (resulting in conflicting objectives & goals internally). These issues need to be addressed in order for Retailers to grow their private label brand.
For the foreseeable future, private label brands can and should gain in certain market segments. McKinsey has picked commodity areas (for the most part) where private labels can make the fastest inroads. Don’t count the other brands out so fast, though. They are not going to lie down and watch their brands wither. As they reposition their brands to compete with the private label brands, the private label brands will lose some of their edge. As the gap closes and the difference in margins is not as great as it can be today, private label brands will lose some momentum.
So much has been said, written, and researched on the topic of private label since the early 1980s when private label represented less than 3% of the total consumer goods marketplace. However, in order to make a very long topic very short, here are a few conclusions I have made after 30 years in national brands, private label, niche, licenses, etc:
a) Private label’s greatest strength is that it’s a retailer controlled branding process.
b) Private label’s greatest weakness is that it’s a retailer controlled branding process.
1. Companies that focus in on private label as a niche within itself have done well and will continue to thrive. Examples: Trader Joe’s, Whole Foods, Aldi, etc.
2. Companies that treat private label as strictly an economic price brand alternative for value-minded consumers have done well, and will continue to do well, provided they maintain quality standards while continuing to support the national brands that drive the standard, the information, and the comparison within the category.
3. Premium private label has gone nowhere, and will continue to go nowhere, without niche, focus, and proper funding for total marketing. And there lie the problems, the funding and the marketing. Companies that manufacture these goods lack the funding for marketing because retailers are very aggressive about achieving margins, which is also why retailers fail to fund the marketing necessities to make these private brands succeed.
So much more can be analyzed and explained on this topic but the bottom line is that over the next ten years private label will almost definitely maintain its current share and grow some, but unless Trader Joe’s replace Kroger stores and Safeway stores (not going to happen) in 50% of all the existing strip malls, not to mention C-stores, drug stores, and discounters, (uh, like Wal-Mart) then the potential numbers in 10 years will remain one thing, “potential.”
All good points. I see PL growing moderately, with the best growth still coming out of “best practice” retailers. It’s been crystal clear to Wall Street for some years that higher PL penetration at retail generally goes hand in hand with higher profitability. Retailers that are lagging are in many cases the ones who still make their money on the buy instead of on the sell. They are reluctant to ease back on slotting, MDF, street money, etc., and drain manufacturer pockets instead of trying to meet the needs of their shoppers.
It’s obvious which group will prevail over the long haul, but this doesn’t change overnight. Ten years might be a realistic time frame to reach an industry average in the low to mid 20s, with best practice retailers considerably higher than that. In the shuffle, secondary and regional brands will have a tough go of it, unless they offer something really distinctive. I’d add Costco to the list of retailers with a great private label program.
As for which categories will grow in PL, McKinsey’s list is okay, but I also see good opportunity in perishables. PLMA itself, a couple years ago, pointed out a huge opportunity in wine (low brand recognition, consumer confusion, etc.) which still exists.
What kinds of customer do store brands attract as opposed to national brands? As retailers shift to more store brands, it is vital that retailers stay aligned with their best and most loyal customers. To answer this question, retailers need to look at a couple of new metrics through their customer data base.
For example, you’d want to know the average spend of store brand purchasers and the contribution of store brand vs. national. How frequently are they buying? What margin are you earning over six months? A year?
It is also important to track these metrics as trends. Are store brand customers increasing their share as you invest more in store brand merchandise?
You’d be smart to segment your customers into four groups: national brand purchasers, store brands, tweeners, and, if you have them, generic brands. What is the make up of these in your tier one customers? Tier 2? How about your new customers?
Extracting data from your customer data base will provide additional insights that will help crystallize your message, pricing, and promotional strategy. You want to correlate store brand trends with age and family demographics, and lifestyle.
Without doing these analytics in the background, the move to more store brands is a mindless quest for more margin. You want to you know more about your business than your competitor does about their business. Otherwise, your push for more store brands is not a sustainable advantage.
There are different private label states. The Dominant Commitment State = folks like Trader Joe’s, Macy’s, JC Penney, and Target, who use superior design to improve their margins and want private label ultimately to be the majority of their assortments. The Commodity Pricers = most conventional supermarkets and drug chains (such as Pathmark, CVS, and Walgreens) who use private label to beat national brand pricing.
The #1 private label driver: better margins. The #2 driver: it’s a lot harder for national brands to prove obvious superiority these days. That’s why national brands like Heinz have been selling off certain lesser brands, like College Inn and the baby food business.
It’s surprising to me that certain huge players such as Home Depot, Lowe’s, Wal-Mart, and Best Buy don’t make a higher commitment to private label.
Private Label can see tremendous growth in retailers that understand themselves as a brand and understand how brands do jobs for consumers; these retailers also happen to be retailers that tend to take the money that manufacturers give them in terms of net landed cost, not in fixed costs.
For retailers still addicted to trade dollars, particularly in slotting and fixed costs for ads, they will talk a good game for PL and make some strong efforts, but will always come back to the branded manufacturer for their ‘fix’. When these retailers make PL pushes, they make progress and they see topline growth; then they look at their category bottom-line and see a nice margin percentage, but fewer dollars, and they see their MDFs fall as accruals drop due to the shift to PL that they caused. If they have charge-backs in place for the PL buyer and his staff, they see even greater erosion of the bottom line, and have to come back to the branded manufacturer for an even bigger ‘fix’. This nasty cycle will suppress PL development in many retailers, particularly food retailers.
The bottom line is that private label is huge and in the next decade you will see all categories have PL alternatives. What is interesting is how house brands are becoming associated with high quality and, in some cases, are actually overtaking sales and shelf space of the name brand. House brands are growing so fast that some of the items available are unique and have no national brand equivalent.
It’s up to the retailer to capitalize on this trend by putting more marketing and merchandising focus on their own lines. Example: Loblaws comes out with ‘The Insiders Report’ every quarter to showcase new and exciting products but you will only find President’s Choice products in that report (President’s Choice is Loblaws own brand of products that range in every category).
The big discussion between my associates this time of year is whether or not you have tried the new President’s Choice ice cream flavour! They really are that good! Private label is really the only way to make decent margins in retail and chains are coming to that realization as big brands struggle with rising production costs.
I am very curious as to the variables considered in the McKinsey study. While the 24% gain might be possible in some categories where commodities and regional brands dominate, I find it hard to believe that non-commodity national and even regional brands will simply fold to pressure from Private Label. Additionally, the Private Label model has a cost/benefit juncture that it must follow and will not allow it to maintain pace with the innovations of branded products. I anticipate the growth to be in the commodity categories.
Although the article does take a deep look at this phenomenon, this is hardly breaking news. The consolidation of regional retailers into national players has given retailers powerful distribution networks, which has allowed them the scalability to successfully develop and market ‘Retailer Owned brands’ (you can hardly call them Private Label now, Private Label makes me think of loaves packaged in white with ‘Bread’ stamped in large letters on the side).
An excellent book on this topic ‘Private Label Strategy: How to Meet the Store Brand Challenge’ has pointed out that these store brands are no longer just a cheap alternative to national brands. There are store brands that compete with nationals on price and there are store brands that compete on quality but are priced almost at par with national brands. The book advises retailers to have a balanced portfolio of national and store brands. It makes sense for retailers to target categories that are high margin and are not dominated by a few major brands.
Unless retail distribution dynamics radically change over the next few years, we are going to see categories that are dominated by high margin and low equity brands yield share in a major way to store brands.
In 2016 we could hear Store Brands say, “I beg your pardon, National Brands, I didn’t recognize you–I’ve changed a lot.” And so the trend of PLs to gain market share should continue, not only in the seven categories listed above but also in more perishable items too. This could be further accelerated with any initial success of Tesco’s Fresh & Easy stores.
No question, Private Label will increase share. The McKinsey estimate is low. They have not factored in the globalization effect which will bring foreign Private Label manufacturers to our shores. Couple this with retailers finally moving toward Target Markets and understanding that they must be different than their competition, and I see larger market share increase.
Private label store brands are quality products, value priced, without the national brand markup.
Where private label store brands excel is within their product line niches.
I am a true believer of store brands, having grown up with Ann Page, Jane Parker, Sultana, Cheeri-aid, Iona, Penguin, Cap’n John and the rest of the A&P brand family.
Today, Master Choice and America’s Choice are my favorite brands.
You just can’t beat the quality and value of Master Choice Organic canned veggies, their pasta products, or America’s Choice Spray Shower cleaner, to single out a few.
Great house brands make for customer loyalty. Why pay extra when you can get the same or higher quality with many private label brands?
National Brands that fail to deliver innovation and superior benefits will continue to lose share to private label. A potential blind spot for retailers is that shoppers won’t switch outlets because of a cheaper private label product.
A Private Label program that delivers superior value to national brands like Trader Joe’s and Kirkland Signature will succeed.
I think it all comes down to the quality/ value relationship. Those private label manufacturers that deliver consistently high quality at a better value will continue to win in the marketplace.
In my opinion, a lot of the three tier private label programs built on good, better, best price points just contribute to brand proliferation and an attempt by retailers to control a greater percentage of the shelf with their store brands.
The key is differentiation and delivering a superior benefit. There are a lot of national brands that have not invested in innovation and they will continue to see their business erode.
If stores are going to convert share from established brands and labels to private label programs, I believe the opportunity is at premium price points, with quality and brand equity being core components of the initiative.
In other words, if we’re talking good/better/best, I believe the opportunity is in better and best. Therefore, it can’t be just a price point and margin play, it needs to be a strategy to capture market share from established brands on the basis of quality, fashion and intrinsic value.
The PL discussion makes the most sense to me in the context of the Big Head vs. the Long Tail. When retailers make most of their money from margin (shoppers), it makes no sense to offer massive brand offerings, and the move to PL is inexorable–since that way lies margin. However, the economics of the brand are very different than for the retailer in terms of the long tail. Selling a case a year of product across tens of thousands of stores can be a good business, where selling a case a year in an individual store makes no sense at all.
This is where the brands have an unassailable advantage, because they can make things work with the long tail that a retailer can’t. So their best bet (for now) is to be the name brand alternative to PL in big head stores like Fresh & Easy, and manage that business differently than they do the long tail elsewhere.
The successful strategy for the supermarket is to mirror that brand strategy by realizing they are actually managing two different stores in one building. Part of the store needs to be big head and meet Tesco and all other comers (there will be many) on that ground and economic model. There, leverage with the shoppers (and brand economics) will come from the added value of having the long tail elsewhere in the store. Stirring the two businesses together indiscriminately is a sure fire formula for continuing erosion by those who offer only the big head, or those who manage them distinctly–HEB Central Market is the best I have seen so far.
Have you seen Fresh & Easy? That’s the future, right there.
Our guess was, if you took out wine and beer, over 80% of the store is private label. Now, that’s guts! But after a quick trip across the street to a Von’s, you quickly understand that it’s not so risky after all: clutter, confusion and general malaise hits you right in the face, and what customer wants that?
Is your brand strong enough to stand alone? If not, there’s the first thing on your to-do list. That, of course, goes for retailers AND manufacturers.
I see a CPG orientation to these postings. A way to gain some perspective is to forget CPG for a minute and think about other areas where you see vertically integrated retailers, such as apparel. Consider Victoria’s Secret or Banana Republic. Consider Ethan Allen furniture. Think about Coach. What is different is that the implicit blink association with private label and price/quality trade-off does not occur for consumers or for analysts. The big challenge that faces manufacturers might not be the commoditization of products but the fact that Procter’s biggest high quality competitor might switch from Unilever to Tesco (as an example). I think that your competitors changing was referred to by Andy Grove (Intel) as a “Strategic Point of Inflection” meaning you need to re-define your business.
This is very, very real, IMHO.
One point I take out of the comments so far is a need to separate private labels in their genesis/purpose–not sure what the right term is. There is private label like Trader Joe’s and there is private label like Kroger–two fundamentally different worlds, perhaps appealing to different consumers. Trader Joe’s is more like Joel describes–a branded private label with its own outlet. The growth path for this type of product is likely to be different from the potential for Kroger canned corn.
When retailers make the decision to stop focusing on NBE, and start focusing on product that exceeds the value proposition of the brands, then and only then will Private Label grow to the levels suggested by McKinsey. Look at Trader Joe’s as an example. Consumers who shop their stores do so not because the product is less expensive, but because they feel that the quality is superior of other branded products.
This same strategy needs to be executed by convention retailers, and when done properly, their PL sales will increase substantially. This is true on food, personal care products, etc. Quality will always sell better than price over the long-term.
This is not ‘breaking news’. It is no secret that private label will continue to grow in popularity and dominance. If I can take a page out of the pharmaceutical book of business, generics now dominate the landscape. It is realistic to presume that store brand could grow to 50% of all retail sales in the relative near future.
Keys to the success of store brand include: reliability of the product; guarantees of satisfaction; possible tiers of store brand (premium and value); and promotion/loyalty.
Private label products are here to stay and will continue to grow in popularity. There are an increasing variety of products available in fresh, grocery and frozen products. Natural and organic products are on the rise.
One of the keys to success seems to be the retailer’s ability to differentiate its products from others on the shelf. Trader Joe’s does a particularly good job in sampling their private label products on a daily basis and showing how they can be turned into simple meals for consumers. This has great appeal and also hits price conscious consumers as well.