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Walking the Private Label-National Brands Tight Rope

May 10, 2011
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Walking the Private Label - National Brands Tightrope
Finding the optimum mix of PL and national brands is like walking a tightrope. One wrong step and you drive away customers-or lose millions in national brand promotional dollars. Here are tips for successfully navigating that high wire and growing your bottom line.

“Step with care and great tact And remember that life’s  a great balancing act.”
- Dr. Seuss
U.S. food retailers should relate to that Dr. Suess quote. While consumers have been slammed by The Great Recession and slowly have started to recover, traditional food retailers have been trying to balance their offerings between well-known national brands and their growing private label stables to achieve maximum bottom line results and to fend off increasing competition from superstores, dollar stores and a host of others.

More traditional supermarket operators are beginning to realize that their private labels provide them with marketing points of distinction in today’s cluttered food retail landscape.

So they’re introducing new PL lines and moving up and down the value chain with more premium private label, more lower-priced lines and more niche offerings such as organic PL (see page 14 for more on brand tiering).

Will they reach a saturation point when it comes to private label? The knee-jerk reaction from PL advocates is to say no, pointing to European private label penetration rates in the 30-50 percent range or higher, far above where most U.S. retailers stand today. The average PL penetration rate for PLBuyer’s Top 30 list of North American retailers of all kinds was 23 percent in 2009.

Another easy answer is to point to the success of Whole Foods, Trader Joe’s or Save-A-Lot , retailers where private label predominates, as proof that there’s a long way to go before most food sellers reach the private label saturation point.

But such quick answers miss the complexity of the topic and could lead retailers to make private label choices that eventually come with high costs-lost customers, lost national brand promotional dollars, or both.

“They’re walking a tightrope because they know they need to promote private label but at the same time they get a lot of funding to promote national brands,” says Carl Munyon, a former vice president of purchasing with Aldi and a member of the PLBuyer editorial advisory board.

To determine the most profitable mix long-term, retailers should look at their customers, their market area, specific categories and the type of new customer they want to attract. This goes well beyond SKU rationalization. That’s a concept that dealt with cost cutting and supply chain issues. This is marketing and strategic business decision-making.

“There is no optimal penetration rate,” posits Natalie Berg, research director with PlanetRetail, a London-based research firm that compiles PLBuyer’s annual Top 30. “This will vary by format, market and retailer.”

Agrees Leon Nicholas, senior vice president with Kantar Retail, a Cambridge, Mass.-based research firm, “You have to view [your] portfolio strategically, there is no optimal mix.”

Certainly a major private label player such as Target isn’t being hurt in terms of receiving fewer national brand bucks because of its PL expansion efforts (see PLBuyer, November, 2010). An analysis of its most recent 10K filing with the Securities and Exchange Commission shows it received $216 million in vendor ad support dollars in 2010, roughly 17 percent of its overall ad spend, says Nicholas, who crunched those numbers. “Vendors are funding close to one in five Target advertising dollars,” he notes.

Kroger and Safeway, two publicly owned traditional supermarket operators who have been leaders in private label, also still manage to get large chunks of national brand support. A look at Kroger’s most recent 10K shows it received $6.4 billion in vendor allowances in 2010, a year when its net earnings were $1.1 billion. Its 2010 vendor allowance was a $700 million increase from the $5.7 billion it received in 2009 which was up from $5.2 billion in 2008, the Cincinnati-based company reports.

Kroger’s private label penetration rate is well over 30 percent today, contends Munyon. Kroger “has promoted private label and had a strong assortment of private label for years,” he notes.

Safeway, which had net earnings of $589.8 million in 2010, received $2.9 billion in vendor allowances that year compared to $2.6 billion in 2009 and 2008. It notes in its 10K that for 2010, 90 percent of the vendor allowance it received was for promotional allowances and 5 percent for slotting fees which essentially allow brands to buy shelf space for their products.

Some PL experts contend that the more aggressive a retailer gets with private label, the more likely national brands will be to offer more rather than fewer promotional bucks to keep their products moving at that retailer. In that scenario, growing private label penetration can actually be used as a lever to gain more national promotional money. “Private label is what’s driving the promotional dollars up,” says Martin S. Meloche, associate professor of food marketing at St. Joseph’s University, Philadelphia. “A lot of the promotional dollars that are out there are being brought on by the threat of private label. Brands have to get more aggressive and their idea of more aggressive is more promotional dollars.”
It’s the Customer

If worries about promotional dollars don’t figure into the discussion of how much private label to sell, then what should?

“It’s easy to forget about the most important part of this equation-the customer,” says Berg. “The most important thing for the retailer is balancing the assortment to make sure that they’re offering the right products for their shoppers, whether that’s private label or national brands. If they’re not, shoppers can vote with their feet, leaving retailers to risk losing an entire basket.”

Indeed, Kusum L. Ailawadi, a marketing professor at Dartmouth, has studied the experiences of four retailers-two in the States and two in Europe-and determined that too much private label can cost a retailer its more profitable customers. Rather than look at penetration rate by share of what a retailer is selling, she examined private label as a share of a consumer’s shopping basket. When PL is more than 35-40 percent of a shopping trip, “then loyalty [to the retailer by the consumer] goes down,” she says. Her research showed that as private label rose above that level, retailers began attracting more private label shoppers who are price-sensitive and so more likely to cherry-pick sale items and go wherever they find the lowest price rather than remaining loyal to a specific retailer, Ailawadi says. She coauthored a report on her research entitled Private-Label Use and Store Loyalty which appeared in the November 2008 issue of the Journal of Marketing.

If retailers “start pushing private label too much, they’re headed into direct competition with Trader Joe’s and Aldi, you can’t get there,” she warns. Retailers “need to start with the customer,” she advises.
PLBuyer private label retailer of the year Publix Super Markets Inc. does just that, says Maria Brous, director of media and community relations with Lakeland, Fla.-based Publix.  “A retailer’s scope of store brand offerings should be consistent with the reasons their customers shop their stores,” Brous says. “We believe we know what makes Publix different than our competition and work hard to align our store brand product offering with our brand position.”

Publix has moved well beyond using private label merely as a low-cost promotional tool, notes Bill Emerson, president of Emerson Advisors, West Palm Beach, Fla. Not only has the Florida chain invested in quality packaging for its private label lines but it has  also selectively expanded private label into categories that would provide growth opportunities, he says.

It’s the Category

The categories which have been seeing the fastest private label growth in recent days include refrigerated products, salads, meat entrees, vegetables, seafood and frozen products, notes James Rushing, a partner with Symphony Consulting, Chicago. In addition, such nonfood categories as OTC medications have grown as national brands suffered repeated recalls.

All of those categories present retailers opportunities to grow their private label sales, Rushing and others agree. Another approach to increase private label penetration is to look to products that consumers see as commodities-sugar, flour, etc.-with little brand distinction, Rushing and others note.

“You have to look at it category by category,” says Carol Spieckerman, president, newmarketbuilders, a Bentonville, Ark.-based marketing firm. Target has been doing that, filling in gaps it had in its private label offerings while at the same time expanding at the premium PL level, she says.

As you expand PL into new categories, keeping rather than completely replacing a leading national brand can provide benefits, says Nicholas. “For a retailer, the national brand gives them two things, they get to bask in the glow of the national brand and they can use the national brand to say ‘see I’m at or cheaper than my competitor,” he says. That’s why experts expect to see major national brands survive PL expansion at U.S. retailers while second and third tier brands are shunted aside.

It’s the Market

Another consideration in determining your optimum private label penetration rate is to look at individual markets, or market areas you serve, to see in more detail what shoppers in those markets want. Again, a one-size-fits-all approach will likely not work.

“I think there’s a balance that says it depends on where you’re competing,” says Emerson. A market with low-income shoppers, for example, may be ready for a retailer with a high level of private label penetration. That’s certainly what Save-A-Lot, Aldi and others are hoping as they expand smaller footprint stores into so-called urban food deserts.

“It’s definitely market by market and chain by chain,” says Meloche abo
ut the optimum private label mix.

Markets in which one retailer dominates tend to be ripe ones for private label expansion by that retailer, notes Tom Pirovano, vice president, industry insights, at Efficient Collaborative Retail Marketing (ECRM).

It’s Brand Building.

The more retailers discuss markets, categories and marketing messages for their private label, the more they sound like traditional brand marketers. And that’s exactly what they need to become to grow private label beyond its low-cost alternative roots.

When you develop new private label “you can let suppliers do it [but] at some point, someone has to become an overall brand manager. Who develops the packaging? What is our marketing plan? How does it integrate into the planograms,” asks Emerson.

Someone also needs to champion private label expansion internally since chances are a retailers’ buying organization will resist anything that decreases its interaction with national brands, Emerson says.

At Publix, “our store brand program is part of our overall go-to-market strategy and we are transparent to our suppliers. We try hard to ensure that national brand suppliers have a great opportunity to be successful with their products. While it costs a lot for manufacturers to come to market with their products, it is a huge expense to Publix when we add items,” says Brous.

Already, some retailers such as Safeway, “have internal brand teams populated with people from the brand side,” says Spieckerman. “Once you build those sorts of infrastructure, you’re very invested” in private label development, she adds.

Where does all this leave you as you search for your perfect mix? With the need to experiment while you listen closely to your markets, Emerson and others agree.

“I believe quite firmly that the winners are going to be the ones that are able to differentiate themselves from the competition. I think private label offers a very powerful option toward doing that,” says Emerson.
So stay up on that tightrope and keep balancing.

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