A Matter of Strategy
By KATHIE CANNING
A solid private label approach can play a critical role in a regional retailer's success — and enhance that retailer's ability to compete against the national chains.
Somewhere between the single-store mom-and-pops and the multi-store national giants you’ll find an enthusiastic breed of retailer with an especially loyal customer base.
That particular breed — the regional retailer — is very likely to cater to the unique needs and preferences of the shoppers in the geographic region in which it operates. And when shoppers believe that a store “understands” them, they’re likely to come back for more.
A solid private label program often plays a critical role in the regional retailer’s strategy — and its ability to meet its consumers’ needs. Even more importantly, such a program allows these retailers to stay competitive with larger national chains.
“I think first and foremost it provides us with a wonderful profit opportunity, because when you’re competing with some of the folks that are 10, 20, even 50 times your size, obviously you’ve got to be price-competitive on national brands,” says Steven Smith, president and CEO of Abingdon, Va.-based K-VA-T Food Stores Inc., which operates 95 Food City and Super Dollar Discount Foods outlets in Kentucky, Virginia and Tennessee. “I think the way we’ve embraced our corporate brand program ... allows us to have wonderful quality products that are well-accepted by consumers, and to enhance our margins so we can remain competitive on some of those national brand items you absolutely have to sell very cheaply.”
A spokesman for a Texas-based regional retailer that asked not to be identified echoes Smith’s sentiments.
“Our primary competitors are EDLP-type retailers who often price branded items at margins below our budgeted needs for the category,” he says. “In trying to stay competitive to these big box retailers, we are often forced to give up margin on national brands.
“Our private label products are not a lower-tier alternative, but rather national brand-equivalent, with quality being very important,” he adds. “We price our private label products at a comfortable margin with a focus on being a value compared to the national brand.”
With the margin enhancements that go hand in hand with store brand successes, it should come as no surprise that many regional retailers are looking to expand current private label penetration.
The Texas chain’s current private label penetration is in the 23 percent to 24 percent range, the spokesman says, and the company’s goal is to increase that number to 25 percent over the next year or two — and maintain that percentage without sacrificing gross profit dollars or margin.
“We do focus on private label with our in-store ad activity [and] merchandising,” he says, “and also feature private label items in our ads each week, often with a ‘compare to national brand [X].’”
As for K-VA-T, Smith calls private label one of the company’s “cornerstones,” and says its corporate brand program is fairly mature, with more than 6,000 product SKUs under the Food Club, Value Time, Top Care (HBC), Full Circle (organic) and other brand names. One goal going forward is to bring in unique products that work to differentiate its stores.
Speaking of unique items, the national players don’t have a monopoly on product innovation. Some of the most intriguing private label products are popping up on regional retailers’ shelves.
Consider K-VA-T’s latest addition to its salty snack lineup: Terry’s brand potato chips. The “new” store brand actually marks a resurrection, of sorts, of a regional favorite that disappeared about a dozen years ago — when the family-owned manufacturer went bankrupt.
“We saw an opportunity for a strong regional brand to come back,” Smith says, “so we acquired the brand, we acquired the name, and we partnered with the family that used to own them to get some of the recipes, the formulas, the spices and all that. ... We’re creating local jobs because we’ve got a potato chip plant here in our community that’s going to produce them. It’s a win-win.”
The line’s launch coincided with this year’s Super Bowl event, Smith notes. And it marks the second regional branding foray for K-VA-T — last summer the company acquired and re-introduced Kay’s brand ice cream, another popular regional brand that had gone bust. A co-packer produces the frozen favorite, he adds, which now accounts for more than 20 percent of the chain’s ice cream market share.
K-VA-T also boasts a three-tier fluid milk program that provides an opportunity to enhance its profit margin, Smith says. In addition to its Value Time “price-fighter” and its Food Club mid-tier milk items, the retailer sells a Food City premium milk packaged in an eye-catching white jug.
“We’ve got a foil seal on top of the milk, which differentiates it, and the packaging is somewhat upscale,” Smith says. “The label really conveys the message that this milk comes from our local farmers and so on, because we think local is important. The Food City premium has captured up to 20 percent of our milk sales, and retails for 80 cents to a dollar more.”
And a pourable 16-ounce salad dressing is making quite a “splash” for the Texas retailer and its private label lineup. With 15 flavors, updated artwork and packaging and a convenient squeeze spout, the dressing is enjoying brisk sales, the spokesperson says.
“With only minimal promotional activity, the line has taken over the number-one spot in the category, and our margins are solid,” he says. “As a result, the branded items are also focusing on more spending within the category to retain share.”
As you might expect, innovation in packaging and merchandising also is important to regional retailers’ store brand strategies.
Packaging is important in selling the consumer on a product’s quality and value, emphasizes the Texas chain’s spokesperson. But although updated packaging with “hot colors” and pleasing artwork can entice a customer, the quality and value better live up to the look.
As for merchandising, the Texas chain relies on a lot of shippers, pallet modules and in-house dump bins when it comes to private label, the spokesperson says.
“These items are sometimes surveyed to our retail stores; but often we have automatic distributions to the retail stores with suggested placement in marketing notes sent to the stores,” he says. “Many of our placement requests are mandatory at the store level. The presentation of our store brands is vital to our financial performance.”
Merchandising also is “extremely important” to K-VA-T, Smith says.
“I think when a lot of us think about merchandising, we think about this display or that display, but merchandising involves a lot more than that,” he stresses. “It involves communicating the value of the product, the quality of the product, to the consumer — whether it’s shelf tags, advertising or in-store signage. I think that’s one of the things that we do well — merchandise to the consumer our message of corporate brands and the savings and the quality you get.”
Partnering for Success
Although a strategic private label program is essential to many regional retailers’ success, many of these retailers would find it difficult to build such a program without a bit of help. Unlike the national giants, they often are not large enough to develop, source and market the breadth of products they need.
That’s where partners such as Topco Associates, Skokie, Ill., and the Arlington Heights, Ill.-based Federated Group come in. These solution providers work closely with members (Topco) and customers (Federated) to address their specific shopper-based needs. (See the sidebars on p. 21 & 22.) Like other such solution providers, both boast a large assortment of brands that fill in private label needs across the country.
“Being a regional retailer, one of the challenges is making sure that we’re on top of the changes that are taking place in the private label arena,” Smith says. “Probably the biggest challenge is making sure that we’ve got the right assortment of products that match up well with the national brands — to make sure the quality is there.”
Smith says Topco not only helps K-VA-T stay on top of current trends, but also brings the product and packaging innovation needed to differentiate its stores from the rest of the pack. Topco even played an integral part in K-VA-T’s Terry’s chip launch, Smith stresses, helping ensure the flavor profiles and packaging were on target.
“Topco is a member-driven organization that exists for the benefit of our member-owners,” explains Randy J. Skoda, the company’s executive vice president. “That makes us unique in our approach as we source more than 43 different brands, including Topco-owned brands and member brands, as well as other items for our members.”
For its part, Federated provides its customers with what it terms the Federated Edge, notes Dave LaPlante, the company’s president and CEO.
“We work with regional retailers by providing them with brands, if they aren’t big enough to have their own,” he says. “We will also, depending on the size of the retailer and their resources, help them develop their own brands. ... And then we provide them with programs and services to help them compete today.”
Such programs and services range from making marketing dollars available to customers through the collection of commissions to assuring the quality of products specified from a manufacturer, LaPlante adds.
Although Federated helps the Texas-based regional retailer meet its private label needs, the retailer also knows how to improvise when the need arises.
“We have also developed some labels internally and then worked with manufacturers to produce the item,” the spokesman says. “At times, there may not be enough volume for Federated to get a large vendor’s support for an item, but we have been able to work with smaller regional manufacturers to get new items rolling. This has been an important addition to our private label initiatives.”
No matter how wonderful the partnership — as well as the products, promotions and displays — it ultimately is up to the regional retailer to build and maintain store brand awareness and loyalty.
“The challenges are many,” says the Texas chain’s spokesperson. “The dominant concerns are ... keeping retail engaged with [the] program and receiving full commitment and support for all of our endeavors, and competing with branded items [that] have incremental funds to promote.”
PL Buyer asked Randy J. Skoda, executive vice president for Skokie, Ill.-based Topco Associates, how the 63-year-old Topco helps its regional retailer member-owners build and maintain a winning private label program.
PL Buyer : Topco has been in a particularly strong growth mode during the last five years or so. Talk about some of your efforts that led up to this growth and how a larger Topco benefits its member-owners.
Skoda : The number of Topco members has grown, in part, because our members have brought others into Topco. Additionally, the membership itself has increased the volume of purchases they make through Topco. That’s in part due to their own growth, and in part due to Topco’s offering of innovative brands and business solutions that meet customer demands.
Additionally Topco’s introduction of programs such as the Overall Nutritional Quality Index (ONQI), EZ-PIC (a paperless instant coupon program), TopSource (Topco’s not-for-resale purchasing solution) and Topco’s Fuel program have encouraged increased participation and helped fuel our growth.
Today, Topco members collectively represent more than $110 billion in retail sales volume, making Topco the second-largest entity in the grocery industry. Our size and scope provide Topco with a national footprint and the ability to help our members find business solutions like a national company would, but to deliver them locally in the manner that best meets the needs of the customer.
PL Buyer : What can Topco offer its members on the natural and organics side? In the growing specialty products arena?
Skoda : The natural and organics arena continues to grow at a rapid pace. Fortunately, Topco, with our Full Circle brand, has been well-positioned for several years to take advantage of this growth. Full Circle offers Topco members more than 700 items covering the full range of product areas, including produce, center store grocery, dairy and meat. Recent additions in the Full Circle brand include smoothies, fish filets, vitamins, minerals and supplements, as well as household products and cleaning solutions.
Topco’s World Classics Trading Company brand allows our members to compete in the rapidly growing specialty products arena, offering their customers unique products from around the world at competitive prices. World Classic Trading Company is positioned as a “fun and adventure brand,” appealing to consumers looking for new and differentiated products.
PL Buyer : Talk about Topco’s QA program — what assurances does it provide its members?
Skoda : Over Topco’s 63-year history, quality assurance has always been at the foundation of the company. Topco’s quality assurance department provides our members with a key level of protection. Each product procured by Topco, whether for a Topco brand or for a member label, is subject to Topco’s stringent quality assurance process. As Topco and the industry continue to face new challenges in procuring product in an increasingly global economy, Topco will continue to adjust our QA policies and procedures to make certain we meet or exceed the expectations of our members and their customers.
PL Buyer : What are some other forms of support that Topco offers its member-owners?
Skoda : Today, Topco is able to offer our members innovative business solutions that meet the needs of their customers. TopSource is one important example. The not-for-resale spend is a significant number in our industry, representing about 10 percent of total expenditures. Having a dedicated organization like TopSource is an important benefit for our members, as it helps them achieve, on average, 20 percent savings for each initiative undertaken.
TopSource isn’t the only innovative solution Topco offers its members. From our fuel programs to our Aggregated Pharmacy Initiative to our perishables and national brands programs, Topco helps members stay at the forefront of innovation in meeting consumer needs.
PL Buyer : What are some of Topco’s goals going forward?
Skoda : Purchasing will continue to be a core area of Topco’s focus. However, we will also continue to be opportunistic in adopting innovative business solutions that meet the changing needs of our members and their customers. As our members continue to increase their participation in Topco, the sky will be the limit in what we can achieve together.
The Essential Edge
PL Buyer asked Dave LaPlante, president and CEO of the Arlington Heights, Ill.-based Federated Group, about the unique private label solutions 80-year-old Federated brings to its customers.
PL Buyer : Federated provides brands, helps retailers develop brands and offers programs and services to help promote those brands. What else makes Federated unique as far as its approach to store brand solutions for its retail customers?
LaPlante : I think the biggest thing is our consolidation. We found that, over the years, the manufacturing community has had a lot of consolidation, and through that consolidation, many of them continue to increase their minimums shipped. So where they used to ship a small amount, now they ship a larger amount. Well some of these small regional players can’t afford to buy everything in large quantities. So that’s why we developed a consolidation facility.
Two years ago, we didn’t consolidate any dry products at all. Today we consolidate about 35 manufacturers representing about 550 items and 19 of our customers. Quite frankly, we have seen a tremendous increase in sales because we’re now selling about 20 percent more private brand SKUs to those customers than they could handle before consolidation started.
PL Buyer: Talk about Federated’s brands — how do they satisfy various regional retailer requirements?
LaPlante : If the regional retailer uses his store brand program properly, he can satisfy all of his demographics with one program. We offer a premium and organic tier of items that will help retain customers who are looking for those types of good-for-you items. We have a full and complete line of what we call NBE, or national brand-equivalent. Those are all those products they need to show consumers a value choice between buying a higher-priced national brand product and a value-priced store brand product. And then we have a full line of what we call ELPP — entry level price point — products that are available for the customer who only has a certain amount of money to spend in a shopping trip. It discourages them from making a special trip to the dollar store and encourages them to stop in that store.
PL Buyer: Talk about Federated’s QA program — what assurances does it provide its members?
LaPlante : We work with each and every one of our manufacturers on a contractual basis, so we have written agreements stating what we will do for them and what they will do for us. And then we ensure that when they produce that product, we take a look at it to make sure it matches that specification.
We do retail audits. Our field employees are out in customer locations, and they shop in their customers’ stores once a month. They buy products and they ship them to us. We compare those products to their specifications and to the national brand. So we’re looking at about 5,000 products a year. ... And then we rate them; we communicate to our customers what’s going on; we communicate to vendors.
We also require our vendors to submit a third-party plant audit yearly. We have five or six companies that we use that are approved to do third-party plant audits. We also have a consumer concerns department right here in Arlington Heights. We get phone calls, faxes, e-mails, whatever, and we track those consumer concerns. [So, for example], if we get five consumer concerns on canned green beans in one month from one specific supplier, we will be pulling more retail audits and asking that supplier to submit samples to find out what’s going on.
PL Buyer: What are some of Federated’s goals going forward?
LaPlante : All along we’ve been much more than a broker. We have a very big foodservice business, where we have foodservice distributors that use us as a buying group, and we aggregate volume and have promotional allowances that allow them a lower cost of goods. We have a design group that not only does the design for Federated’s brands, but also for a lot of outside businesses. And then we have this huge business in supply chain services that not only has our dry consolidation and our frozen consolidation, but does all the frozen food consolidation for one of the largest foodservice distributors in the country.
So where I see us in five years is growing substantially each and every one of those pieces of business, and bringing in more services to assist our customers, make them more competitive and able to resist what’s going on in the industry.