High Costs High Rewards
By Martin Schultz
In the OTC market, private label is staking out a growing reputation for quality and innovation.
The over-the-counter (OTC) products category covers such diverse products as blood pressure kits, cough/cold remedies, ear drop treatments, laxatives, stomach acid relievers and wart removers. According to Chicago-based Information Resources Inc. (IRI), the market as a whole was slightly down (0.6 percent) in dollar sales from the past 52 weeks ending June 17, 2007. It also was more than 1 percent below 2006 totals for unit sales for this same time period.
Yet, if the OTC market appeared relatively flat overall last year, it hid a series of severe blemishes in individual segments. In dollar sales, for example, the most serious occurrences involved private label bedwetting treatments — a 52 percent decline — and total category chest rubs, which were down almost 13 percent. In each case, unit sales deterioration corresponded with dollar sales declines.
Despite such negative impressions, the market also experienced some very strong performances. And, in many cases, it was private label products that delivered the best-hitting records. Thus, private label cold sore remedies showed a 30 percent jump in dollar sales over the previous year. Private label wart remedies were up 26 percent, humidifiers gained 24 percent, motion sickness remedies jumped 20 percent, hemorrhoidal creams went up 15 percent, and private label ear care products increased almost 11 percent.
Less dramatic, but perhaps more fundamental to the category’s overall performance, is a large collection of private label products that lie between the severe decliners and the sharp risers. In general, these items have maintained an even keel over the years — wipes is one such segment.
“We’ve seen growth in the antibacterial wipe segment in recent years, due to increased germ awareness [among purchasers],” says Cathie Petak, product manager at Rockline Industries, Sheboygan, Wis. “Private label is growing in multiple segments, including moist toilet tissue, baby wipes and antibacterial wipes. This is particularly due to the addition of new and innovative private label offerings,” Petak explains.
No Reason for Heartburn
Agreeing with Petak that the key drivers in private label’s OTC surge are quality and product innovation is Len Smith, vice president of sales at Deseret Labs, St. George, Utah. He says the private label effervescent product segment — antacid treatments and denture pain relief — has surged 8 percent so far this year and denture pain relief 3 percent. This is after private label antacids grew more than 6 percent in dollar sales in 2006, according to IRI. In Smith’s view, the growth in these segments is due to the appearance of better quality and more innovative products on the shelves of drug stores and mass merchandisers.
“More people are buying private label products in the OTC category, particularly over the past three-to-five years,” Smith reports. In some segments, both the OTC market as a whole and the private label share have both exploded.
“Retailers are definitely looking for innovative private label offerings that have unique features beyond those offered by the national brands,” Petak says.
Some private label segments are doing well, less because of unique product features and more the result of market forces. This is the case with such specific remedies as cough/cold and stomach applications. “Stomach products in particular are doing phenomenally well,” says Beth Sobel, vice president of sales and marketing at Accumed, based in Lawrenceville, N.J. “The strength of the growth in this segment is due to the aging population, the generally poor nutrition in the population and the fact that more consumers are self-medicating.”
Supporting her argument, Sobel points to the strength of the Prilosec brand among consumers who need heartburn relief and do not see a healthcare professional. “When Prilosec went OTC, it inevitably began to trickle down to private label. That’s a $500-million business on its own,” she says.
As both Smith and Sobel acknowledge, the OTC category is intensely competitive. Brand manufacturers guard patents passionately, throwing up all kinds of legal roadblocks whenever a generic or private label product looks set to take market share.
“The bigger the segment they want to protect,” Sobel explains, “the bigger the roadblock. It could take the form of patent-infringement suits to protect the product, the manufacturing process, even the packaging.”
Regardless of such pressures, Smith says, store brands are showing significant growth in OTC products, “increasing by 6.7 percent in dollar sales so far this year, twice the rate of national brands,” he points out.
What’s more, Smith sees national brand sales as essentially flat or even decreasing. “In the pain relief segment, for example, the consumer searches the drug store shelves and reaches for the private label product because he recognizes the comparable quality, while the price is very competitive,” he observes. “We have a pricing advantage, even though we have raw material cost increases.”
Sobel looks at the pricing situation somewhat differently. The Food & Drug Administration’s (FDA) regulatory process is expensive and growing more so. “But more private label OTC companies are coming around to realize how important the process is. The private label segment is one of the most regulated in the OTC market,” she says.
Regulatory pressure, time-to-market and production costs — all of these factors have changed with the impact of the recall of toothpaste made in China. “The FDA rules were always in place, but enforcement wasn’t as strong as it is now,” Sobel says. “Because of FDA pressures, we have to scrutinize suppliers with tremendous care. We get retailers and consumers wanting to know where raw materials and ingredients are coming from, especially anything that’s ingestible,” she notes.
To bolster her point about heightened scrutiny, Sobel contends that the duration of a product’s shelf life is under pressure. The typical period before expiration for an OTC product is 24 months (although 30 or 36 months are not unusual). With additional regulatory scrutiny at the foreign manufacturing facility, the lead-time is reduced, sometimes by as much as three months. “In effect, the product’s shelf time is cut. Meanwhile, freight charges are going up [a factor related to rising oil prices]. So, revenues may be reduced while costs are going up. A whole new dynamic is changing supply chain economics.”
The Pressure to Innovate
Private label OTC manufacturers readily defend their stance on innovation. As Smith sees it, stores have to emulate the national brands and demand that their suppliers develop strong innovative products that can go head-to-head with the national brand. “We have no choice,” Smith contends. “We have to innovate, either in the manufacturing process or in the product and its packaging. If we can do all three, the result is both more efficient and likely to be more profitable.”
Sobel refers to a change not only in product performance, but also in retail strategy. “At one time, manufacturers would come out with a new OTC product and retailers would hand over the shelf space,” Sobel acknowledges. “Private label suppliers were not allowed to offer comparable products for between nine months and a year after the brand product’s release,” she explains. This was to enable the store to accrue sufficient sales data on the brand product.
The position today is radically different. Now, as soon as drug store chains get wind of a new branded product or line extension, retail buyers are on the phone demanding that private label suppliers come out with a comparable product, and quickly.
“Partly, this is because the market is margin driven,” Sobel says. “Partly because it is Wall Street driven and partly because the stores want a ‘differentiator product’.” In fact this is why, as Sobel explains, most drug store chains have private label teams in product development. “They are looking for partnering opportunities.”
To remain competitive, drug store chains and mass merchandisers lean very heavily on their private label suppliers. “They demand first and foremost product quality,” Smith says. “Second, they want timely delivery, and third they demand competitive pricing.”
To support his contention, Smith offers the example of an antacid product. A private label supplier will sell it to a drug store chain for $1.80. The store then will retail the product for $3.59. By comparison, Smith says, “The branded antacid will be sold to the store for $3.00. In turn the store will retail the product for $3.89.”
As Sobel puts it, why would a consumer pay $8.00 for a cough medicine when she can get the same formulation in a private label package for $2 to $3.00? “For the private label OTC industry, we understand that while the costs are bigger, so are the rewards.
“All the dynamics bode well for private label OTC. The aging of the population, the consumers with heart problems, diabetes, heartburn, the growing incidence of the flu and viruses, all these are potential consumers of OTC products,” Sobel contends.
Petak offers her own encouragement, “With the new and innovative offerings and high value that private label represents, store brands are expected to enjoy strong growth in the future.”