2015 State of the Industry Research Study: Eye on differentiation

Research by Debra Chanil, Analysis by Kathie Canning

In January of each year, Store Brands surveys representatives from retailer, wholesaler and supplier companies who have decision-making responsibilities for store brands. Our goal is to get a sense of the challenges, opportunities and goals that currently exist within the store brand industry — and how those challenges, opportunities and goals have changed from those of the previous year.

What follows are some highlights from both the retailer/wholesaler and supplier portions of our 2015 State of the Industry Research Study. (To see the article and its charts as printed in our magazine, please click here: http://magazine.storebrands.com/i/477073-mar-2015/30)

Stepping it up

Retailer/wholesaler survey participants were asked to compare the pace of their companies' own-brand product development in 2014 to that of 2013. The majority of respondents (63.6 percent) said they had stepped up the pace within the last year, only slightly below the percentage who said the same thing last year (66.1 percent). This finding suggests continued interest among retailers/wholesalers in growing their own-brand programs.

Among the numerous reasons cited for increasing the pace of store brand product development were to "build brand loyalty," "give the customer a better value at a lower price," "increase sales and profits" and "protect our investment in distribution." And several retailer/wholesaler respondents indicated differentiation as the goal here.

Only 4.5 percent of respondents indicated that they decreased the pace of store brand product development, a number that is similar to the 3.2 percent in 2014's study.

The increased pace of development brought with it positive sales results. The majority of respondents (68 percent) said 2014 brought with it an increase for private label's share of sales in comparison to 2013. The number is slightly higher than the 65 percent who said the same thing in last year's study.

Slightly more than a quarter of respondents (26 percent) said store brand share of unit sales stayed about the same, compared to 31 percent in 2014's study. Only 6 percent pointed to a decrease, slightly higher than last year's 4 percent.

When asked about the role store brands play within their companies — ranking each role from most important to least important — retailer/wholesaler respondents chose "to serve as a differentiator that drives traffic to stores and builds customer loyalty" as the most important, matching the findings of the 2014 study. However, they selected "to provide loyal shoppers with a lower-cost alternative to the national brands" and "to allow the company to earn higher margins" as the second and third most important roles, respectively. In last year's study, those roles were reversed in the ranking order, but the results were close to a tie in both years. Coming in last was "to compete against national brands."

When asked what other important role store brands play within their companies, retailer/wholesaler respondents had a lot to say. Among the numerous responses were "brand recognition — having products with our brand 'out in the wild' is a form of supplemental advertising," "demographic pull, "enhance store image," "moves impulse shopping to destination shopping" and "better allows us to understand the market conditions behind the cost of goods and packages."

Multi-tier programs rule

More than half of respondents (56.9 percent) indicated that their companies run a multi-tiered private label program, compared to 66.1 percent in last year's study. A two-tier program is most common, with 39.7 percent of respondents reporting such a structure, on par with the 39.3 percent from the 2014 study. Continuing a multi-year trend, fewer respondents reported having a three-tier program than did in 2014 — 17.2 percent vs. 21.4 percent. But more respondents said they had a one-tier program than did in 2014 — 43.1 percent vs. 33.9 percent.

And niche store brands that fall outside of the core tier structure remain important to the majority of retailer/wholesaler companies. For the 2015 study, 66.1 percent of respondents said their companies had niche brands in addition to their core brands, compared to a similar percentage, 67.9 percent, in 2014.

The top area cited for niche offerings was natural and organic, with 52.5 percent of respondents indicating store brand participation here. Natural and organic also came out on top in last year's study. Also matching last year's results, gluten-free offerings came in second, followed by eco-friendly items and then other mentions. Highlights among the other mentions this year were "clean" foods, vegetarian products, salt- and sugar-free offerings, and ethic items.

When asked about their companies' tier-related focus compared to that of two years ago, 78 percent of retailer/wholesaler respondents said they had stepped up development within one or more tiers, compared to 75 percent in last year's study. Like in the 2014 study, the premium/upscale tier came out as the No. 1 area of product development interest, with about a third of respondents (32.2 percent) statin that they are doing more in this area. This finding jibes with the oft-cited trend toward store brand differentiation.

Almost a third of respondents (30.5 percent) also said they are doing more in the "niche" area, a slight increase from last year's finding of 25 percent, while 27.1 percent are doing more in the national-brand-equivalent (NBE) area, on par with last year's findings. Less than a quarter of respondents (22 percent) indicated that they are doing more in the value tier, also similar to last year's findings. The same percentage, meanwhile, reported that they have not changed their tier-related focus.

The perimeter holds appeal

We also asked retailer/wholesaler respondents which product categories are of most interest to them in terms of future store brand product development. In a ranking of 14 categories, the store's perimeter is of high interest. Deli items came out on top, with fresh-prepared foods/foodservice items, bakery items, refrigerated and frozen prepared foods, and niche items rounding out the top five. This year's top-five focus areas differ somewhat from last year's, which saw refrigerated and frozen prepared foods come out on top, followed by deli items, fresh-prepared foods/foodservice items, niche products and center-store items. 

The two categories of least interest for new product development are alcoholic beverages (ranking 13th out of 14) and over-the-counter medicines/preparations (ranking dead last). The same two categories ranked lowest in last year's study, albeit in reverse order.

And when it comes to trends being pursued on the store brand side, "organic" and "gluten-free" came out on top this year, with more than half of respondents indicating they were actively responding to these trends. "All-natural" or "natural," "better-for-you" and "premium/gourmet" followed closely behind, with 40 percent or more of respondents indicating these as areas of interest. Interestingly, "local sourcing," the No. 2 area of interest cited in the 2014 study, ranked sixth in importance in this year's study.

More engaged in self-manufacturing

When it comes to creating their companies' store brand products, 56.9 percent of retailer/wholesaler respondents pointed to at least some self-manufacturing activity, compared to 39.6 percent in last year's study. Of this subset, 31.4 percent said they manufacture 5 percent or less of the own-brand mix, while 9.8 percent manufacture between 6 and 10 percent. Another 5.9 percent manufacture between 11 and 25 percent of store brand products, while 9.8 percent manufacture more than 25 percent.

Bakery products represent the largest self-manufacturing category, with 62.1 percent of the self-manufacturing subset reporting participation here. And prepared foods represent the next-largest category, with 55.2 percent of the subset active in this area.

More than half of respondents (52.2 percent) said their companies plan to expand store brand manufacturing capabilities in the future. Notably, no respondents indicated plans to downsize capabilities here.

All of the respondents, however, also rely on outside suppliers to manufacture store brand items. Although the number of suppliers varies by company, the mean number for this year's study is 43.9.

Notably, almost a quarter of retailer/wholesaler respondents (24.5 percent) said they rely on more suppliers now than they did a year ago to produce own-brand products. This number is slightly above that for last year (21.6 percent) and meshes with the stepped-up emphasis on store brand product development overall. Only 7.5 percent indicated that they rely on fewer suppliers vs. a year ago, while 67.7 percent rely on approximately the same number of suppliers.

When it comes to collaborating with suppliers for new store brand product development, the majority of this year's respondents (55.8 percent) indicated that it is more important or slightly more important than it was a year ago, but that number was below the 66.7 percent who said so in last year's study. Still, only 1.9 percent of respondents said it was less important.

Like in the 2014 study, a strong quality assurance program came out on top when retailer/wholesaler respondents were asked to rank attributes important in store brand supplier selection. Coming in second, however, was new ideas for product concepts, which did not appear on the attribute list in last year's study. Rounding out the list, in order of importance, were "a proven track record in terms of deliverables," "the ability to partner with us on everything from store brand innovation to in-store merchandising and promotion," "the lowest cost," "the ability to deliver custom formulations, products or packaging" and "a strong commitment to environmental improvement." The other rankings match those of last year's study, except that "the lowest cost" and "the ability to partner with us on everything from store brand product innovation to in-store merchandising and promotion" were reversed in order of importance.

Interestingly, when asked about the importance of cost in store brand supplier-related decisions, 41.2 percent of retailer/wholesaler respondents said it is more important than it was a year ago, compared to only 2.1 percent in last year's study. And only 5.9 percent said cost is less important now, compared to 33.3 percent in last year's study.

Looking to grow

Looking ahead, store brand growth remains a goal for the majority of retailers/wholesalers. Eighty percent of respondents pointed to a goal of increasing store brand penetration in 2015, with 46 percent of those respondents aiming to do so by 3 percent or more. Those figures are almost an exact match to those in 2014's study.

In-store signage and displays will continue to be important as store brand growth tools, with retailer/wholesaler respondents ranking it No. 1 in importance in getting the store brand-related message to shoppers. (It ranked No. 1 in last year's study as well.) Like in last year's study, weekly printed circulars and merchandising a greater assortment came in second and third, respectively, in importance. But sampling, which ranked seventh in importance in last year's study, rose to fourth place in this year's study.

But retailers/wholesalers face challenges in meeting store brand growth goals. Among the many challenges cited by this year's respondents were "adequate shelf space," “balancing the number of items in the mix," "cost and freight," "competition," "finding the right partner that provides quality and reliability," "innovation," "keeping up with in-store promotions and signage," "promotional dollars available," "supplier consolidation and loss of nimble/flexible trade partners" and "training our associates to be loyal to our brands so our customers become brand-loyal."

Suppliers weigh in

In the supplier study, store brand growth also came out as a theme. The majority of supplier respondents (73.2 percent) said store brand-related unit sales increased in 2014 in comparison to 2013. This number is similar to that in last year's study, 77.3 percent. Moreover, almost a quarter of respondents (22 percent) reported sales gains here of more than 15 percent.

But 14.6 percent of suppliers saw store brand-related unit sales fall in 2014, compared to 11.4 percent in last year's study.

For 2015, the majority of supplier respondents (87.8 percent) pointed to a goal of increasing store brand related dollar sales, a small decline from the 94.1 percent who said the same thing in the 2014 study. (Of note is that 87.2 percent of respondents said their companies manufacture both private label and name brand products, a number that is slightly higher than the 71.3 percent who indicated the same thing last year.) Almost a quarter of respondents (24.4 percent) said the goal is to increase dollar sales by 11 to 15 percent, while 14.6 percent cited more than 15 percent growth as the goal.

Only 2.4 percent reported a goal of reducing store brand-related dollar sales to concentrate on other areas of business, similar to last year's findings. In fact, 92.9 percent of supplier respondents said the store brand side of the business will be very critical (61.9 percent) or somewhat critical (31 percent) to their companies' operations in 2015.

But suppliers also face challenges in achieving their growth goals. In a ranking of key manufacturing-related challenges, supplier respondents selected rising commodity costs as No. 1, with logistical issues outside of fuel costs, keeping up with regulatory changes, hiring/retaining employees and keeping up with necessary plant upgrades rounding out the top five. The top challenge differs dramatically from last year's study, which saw high fuel come out on top, but fuel prices were, of course, much higher then.

When asked to choose their greatest challenge related to working with their retailer partners, supplier respondents selected a "cost over quality emphasis on the part of the retailer" as the top issue (with 35 percent of respondents selecting that answer); the ranking matches that in last year's study. Tied for second were the "the retailer bid process" and "talk of collaboration but no real action on the part of the retailer," followed by "retailer preference for short-term contracts," "retailer switching suppliers post-R&D/product launch" and other write-in mentions that include "getting good forecasts," "distribution" and more.

And when asked what specifically needs to change in the retailer-supplier relationship for store brands to succeed and grow in North America, supplier respondents were very vocal. Among the numerous responses were "better transparency between retailer and supplier, "focus on mutual benefit during a period of short supply and higher costs," "increased financial support and marketing effort by retailers— store brand shelf placement is often allowed to be dictated or modified by brands," "retailers must develop a firm strategic plan for their own brand products and communicate it clearly to all involved — retailer staff, supplier partner, broker reps," "retailers need to promote and focus on private brands like the national branded companies" and "the retailer has to be willing to help with innovation."