Private Label Advice for Retailers from a CPG Leader

Private Label products are one of the few beneficiaries of today’s tough economic conditions.  Recent Nielsen data indicates private label is up on average +7.4% versus year ago, with an average share of 16.9%.  Retailers- from Wal Mart, to Safeway, to Kroger, to Super Valu- are wisely turning to private label to drive growth and profitability at this time.

However, many retailers are not yet taking a long term, holistic approach to the role that private label products should play in their business.  Here are eight suggestions for retailers to consider as they seek to profitably grow their private label businesses:

1. Remember to keep things simple for the shopper. Don’t proliferate sku’s just to fill shelf space.  Safeway is guilty of this in the pasta sauce category.  Besides carrying all of the national brands, Safeway has no less than three complete private label lines of spaghetti sauce- Safeway Select line, the Eating Right line, and O Organics line. (insert safeway spaghetti sauce pictures here).  Why would consumers need so many lines of pasta sauce, with little or no differentiation?
2. Don’t  launch private label into categories which aren’t big enough to merit it.  Wal Mart, for example, has tested a private label diabetic shake product to compete with Glucerna.  This is a relatively small category in absolute, and launching private label into it pulls down the velocity of all the sku’s in it- both branded and private label.
3. Play fair with the national brands.  Let’s face it, in times like these it is tempting to focus all growth on private label by unfairly disadvantaging the national brands in shelving, merchandising, etc.  But its important to take the long view here, and recognize that national brands have driven traffic to the category for years behind investing in building a relationship with consumers, product innovation, etc.  Its important to balance growth opportunities between both private label and national brands for the long haul.
4. Don’t leave money on the table.  It can be tempting to get VERY aggressive with private label pricing.  After all private label products frequently have less expensive ingredients, cheaper packaging materials, no marketing costs, and limited R&D expenses.  But its important to consider whether you are leaving money on the table by pricing the product lower than the consumer expects.  In this situation, you are hurting category $$ sales, and category profitability.  To effectively price private label products, its important to consider national brand prices, consumer expectations, and what other retailers you are truly competing with.
5. Take the time to develop attractive packaging.  Most retailers don’t spend enough time ensuring their private label products are attractively packaged, which often sells what’s inside the package short.  If it’s a food product, the graphics better produce appetite appeal.  Using bland packaging with lots of white space and a purely descriptive name like “Frozen Toaster Waffles” or “Dry Dog Food” conjures up images of the horrible generic products of the 80’s.  You may laugh, but many retailers still have packaging that’s not far away from that.
6. Choose a reputable supplier.  Its more important to select a supplier who will provide high quality product, on time, in the quantity and variety ordered, than it is to choose the cheapest supplier.  Remember you get what you pay for.  Squeezing too hard on price will result in substandard product or inconsistent supply.
7. Understand your target and what he/she is looking for.  Wal Mart’s Great Value line, works for the Wal Mart shopper, who will typically sacrifice bells and whistles to spend less.  But that wouldn’t fly at Safeway or Harris Teater.  On the other hand, a few years ago, Wal Mart tried to lead the market by launching private label organic baby formula before any branded organic formulas were out.  Predictably, it flopped.  Talk about not being in touch with your shopper.
8. Understand that over 60% of households have only one or two people in them.  It can be tempting to offer private label in large sizes to drive transaction size. That’s an acceptable strategy, but it is also important to keep in mind the growing number of smaller households, and be sure you are offering products which meet their needs.

Private label is an important part of most retailer’s product portfolios and following these tips can help to optimize its performance.  As always, I welcome your thoughts and comments.

Should Brand Companies Ever Manufacture Private Label?

You would have to have spent the last 18 months lost in the jungle not to know that the economy is in dire shape, and that times are extremely tough for CPG companies. Leaders are looking under every rock for ways to deliver profitable growth to their business. You can only cut your way to greatness for so long and most companies have already passed that precipice.  

So as you evaluate opportunities to grow your business, should you consider manufacturing private label products? Branding purists would say absolutely not. After all, private label products go completely against the core premise of a consumer brand—of investing to build an authentic, holistic relationship with your consumers—and instead catch a free ride on the backs of the national brands.

I would argue the answer is sometimes—if a core set of conditions can be met—it can make sense for branded CPG companies to manufacture private label products.  First let’s consider the potential benefits of manufacturing private label:

•  It can strengthen your company’s relationship with key strategic trade customers, thus increasing your influence with the customer. Don’t believe it? Let’s assume your brand has a 30% share of the category, and accounts for 25% of your buyer’s profits. Now assume private label accounts for 20% of the category and 30% of your buyer’s profits.  If you manufacture private label for your strategic customer, you are now responsible for 50% of his category and 55% of his profits—of course your influence is going to go up.
• It can increase your capacity utilization, thus strengthening profitability.
• It can appeal to a new set of shoppers who may not purchase your branded products.
• It can drive top and bottom line growth. Don’t forget that private label products require much less overhead- there is no marketing spend, and minimal incremental costs associated with making private label.
• It can increase your ability to control the relationship between private label and your branded product.  For example, you have greater ability to influence the timing of when new innovations on your branded products are brought to private label.

 So what are the core conditions that I believe must be met to consider manufacturing private label?

1. You must have available capacity that isn’t likely to be filled by branded product in the near future.
2. You must be able to earn a reasonable margin. Two things to keep in mind here: (1) PL products have no marketing overhead associated with them, and (2) you don’t necessarily have to offer the lowest price—more and more retailers are placing a premium on quality and reliability even on private label.
3. Don’t lead retailers into new private label categories; only agree to manufacture private label in categories they are already in or have made a definitive decision to enter.
4. Only manufacture private label for key strategic customers—these customers have the scale to make it worth the effort.
5. To keep things simple for your supply chain, create one master formula that you make available to your customers; don’t create a different formula for each of them. Make sure that formula is not the same as your national brand formula, and in fact is slightly behind your national brand in consumer appeal.
6. Agree up front with retailers that innovations on the national brand will not be brought to private label for at least 12-18 months after your national brand launches them.
7. Have a contract in place that spells out that the retailer covers incremental costs such as packaging, and ensures that the retailer must take all inventory so you don’t get stuck writing anything off.
8. Have a single point of contact who is in charge of managing the private label side of the business.  This ensures that private label does not distract from the branded portion of the business.

In my experience, when the above conditions are followed, it is possible for national brands and private label to profitably coexist in the same company. Look for one more post on private label in the near future, this time offering advice to retailers. Thanks for stopping by, enjoy the Thanksgiving Holiday and, as always, I welcome your comments.

Are Brand Marketers Facing a Perfect Storm When It Comes to Private Label?

There’s no denying that private label continues to grow. In fact, Nielsen 52 week data thru July 11, 2009 shows that private label is up +7.4% across the Food, Drug, and Mass Merchandiser channels, with an average share of 16.9%. But why is that?

We all know it’s a tough economy, with consumers eating at home more often in an effort to save money. So when the economy improves, we should expect to see private label shares return to historical levels, right? Well, not exactly. Consider the following: 

• Private label shares in the U.S. have historically been well below those of Europe and Canada, and even with the recent share increase in the U.S., that gap remains.
• The “social embarrassment” associated with buying private label appears to have disappeared recently. Consumers used to “hide” private label products in recipes, while trying to avoid letting others know they use them. That is no longer the case. This is part of a larger overall trend going on in our country today where being thrifty and seeking simplicity is now seen as a good thing, and is being embraced by the masses.
• The quality gap between private label and national brands is narrowing. This is dangerous for brands, as once consumers try a private label product, and determine there is minimal difference from the national brand, they become less willing to pay the premium that brands are used to commanding.
• In today’s hypercompetitive, slow growth marketplace, many retailers share a common strategy of actively seeking to grow their private label businesses, as they are typically able to earn higher margins from private label versus national brands.
• The line between private label and national brands is blurring. Well managed private label products are becoming “brands” to consumers. Well designed offerings like Safeway’s O Organic and Eating Right lines, as well as Wal Mart’s Parents Choice products, are often viewed by consumers as brands.
• Departing from historical practices, retailers are beginning to broadly advertise their private label products beyond their weekly circular, with Wal Mart’s Great Value brand television campaign being a prime example.

Frightening, isn’t it? So what can brand companies do to stay competitive in this new reality?

1. First, continue to invest in brand equity, being sure to build an authentic relationship with your target consumers while stressing your brand’s point of difference.
2. Second, innovate, innovate, innovate. Staying ahead of private label products (and other branded competitors for that matter) gives your consumer a reason to pay a premium and maintain a relationship with your brand.
3. Understand how much your brand interacts with private label. Studies have shown that premium brands, with strong brand equity, often have less switching with private label products than second tier brands. This is important as you can then sell the retailer on how your brand attracts a different shopper and helps maximize the category closure rate for the retailer.
4. Understand and manage the price gap. In most categories, consumers are still willing to pay more for national brands versus private label. Where brands get into trouble is when they try to command a larger premium than the consumer thinks the national brand is worth.

Next time we’ll look at whether it makes sense for branded manufacturers to be in the private label business. Thanks for stopping by, and as always, I’d welcome your comments.