Do More For Less
By examining every area of their store brand programs with a sharp eye, retailers could uncover a number of ways to do more for less money.
Over the past few years, companies across every industry have had to make sacrifices to cope with the troublesome economy. Businesses ranging from gargantuan automakers to small mom-and-pop restaurants have had to learn to do more for less — or else risk going under.
Retailers, too, have faced this predicament — especially when it comes to their store brand programs. Challenges ranging from rising commodity prices to brand development costs give store brand executives — who already manage on a shoestring budget — a reason to stay awake at night. But by examining every area of their private label programs with a sharp eye, these folks could uncover a number of ways to do more for less money.
The commodity conundrum
One of the most problematic areas of private label program development and management today lies in product sourcing. Scott Kern, associate partner with The Parker Avery Group, an Atlanta-based retail consultancy, says commodity prices have been soaring faster than consumer prices over the past few years, making sourcing a difficult and expensive task.
"Companies have been faced with eroding margins as their components have become more expensive," he explains. "But due to the simultaneous global economic downturn, they have not been able to match these cost increases with equivalent price increases."
And when commodity costs rise, store brand manufacturers — and thus, retailers — tend to feel the pressure sooner than national brand manufacturers, says Jim Wisner, president of Wisner Marketing Group, a Libertyville, 111.-based retail consulting firm. Why? Because national brand manufacturers tend to have greater economies of scale.
To avoid these price hikes, Kern says retailers should forecast product demand and place orders early with their suppliers based on these forecasts.
"[This tactic] will provide them with improved visibility to future costs and will enable them to plan their margins and effectively develop products to meet profitability targets," he says.
How to cope
But when they cannot avoid price hikes, retailers could make tradeoffs with their suppliers to cope with rising costs. To "hold the line" on pricing, Wisner says retailers could employ a number of cost-offsetting measures.
For example, store brand executives could add more SKUs to their purchase orders, Wisner explains. Executives also could allow for longer lead times or commit to receiving only full-truckload shipments.
Moreover, retailers could turn to sourcing software to help keep costs low when commodity prices are on the rise. Brian Miller, vice president of services with Intesource, a Phoenix-based provider of spend-management software, says his company's e-sourcing software develops lists of potential suppliers and shows which ones provide the most cost-efficient solutions.
"And in some cases, [the software removes] the middlemen who ... claim to negotiate on behalf of the retailer" but end up adding an unnecessary layer of cost, he explains.
Invest in innovation
No doubt, finding ways to spend less during the sourcing process is critical for store brand success. However, Wisner says retailers actually could save money in the end if they were to invest more in product R&D. A truly unique product that meets people's wants and needs draws customers.
"I can sell more products and retain more customers this way — and build my total private brand business better," he points out.
But manufacturing innovative private label products tends to be more costly than simply copying the national brands. Therefore, retailers have to be willing to fork over some extra dough — or convince their supplier partners to take a risk in the name of innovation.
Wisner says many manufacturers are willing to take such a risk if retailers can prove that a product will provide enough incremental volume to offset added development costs. If a new product is a success, demand for it will increase, which will require larger orders. And larger orders spell reduced costs for the supplier.
Of course, innovation investments should not be limited to product development. If retailers cut corners on functionality related to product packaging, for example, demand could drop and orders could shrink. And as a result, orders become more costly.
Wisner says some retailers, for instance, will refuse to pay an extra three cents to add a flip-top lid to a store brand beverage can. True, three cents per can adds up to a lot of cash. But the cost savings aren't worth potential consumer rejection.
"[Retailers] say they're trying to drive the cost down," he explains. "But some of the studies we've done say ... as much as 40 percent of the market will now reject that product because it doesn't have that feature. Providing a competitive ... product applies not only to what's inside the package — it also applies to the package itself."
Minimize materials
Savings opportunities can be found, however, in packaging material reductions — so long as the packaging's functionality isn't compromised. And with packaging material costs on the rise, retailers could offset inflated costs by such packaging reductions, says Carol Spieckerman, president of retail consulting firm newmarketbuilders.
Wisner agrees. On the national brand side, he explains that Kraft Foods cut materials out of the carton for its 8-ounce Philadelphia cream cheese a couple years ago to save money.
"The box is a little more square now — not quite as flat or rectangular," he says. "It's not a difference that you notice that much, but it probably saved them 10 or 15 percent on their packaging."
Brand with care
However, retailers will not want to cut back on the amount of time they spend creating a new brand. Michael Goldberry, managing partner with Boom Island, a Minneapolis-based retail brand agency, says they need to make sure they put plenty of thought into a brand's purpose before the design stage.
"Whether we come in from the get-go to create a brand or come in to refresh an existing one, the more thought the retailer has given to what they need from the store brands ... can help save a lot of time at the design agency," he says.
Retailers also need to know how many products they wish to introduce or refresh, Goldberry points out. Moreover, they need to determine who the key internal decision-makers are and the role each of them will play in the design process.
"This level of planning can help reduce creative time significantly and lower the overall creative cost for the store brand launch," he says. "The store shelf needs to be a workhorse for store brands, and getting it right from the beginning is important in the short — as well as the long — run."
Mind the gap
Retailers also need to make sure they're pricing their own-brand products correctly. Dave Harvey, senior director of the Global Analytics and Insights Network of Stamford, Conn.-based Daymon Worldwide, says many retailers don't realize they could lessen the price gaps between store brands and national brands in a number of categories without suffering customer backlash. By examining their store brand operations on a product-by-product and category-by-category basis, he believes retailers could figure out where they could shrink the gaps and still maintain an attractive cost differential.
Todd Hale, senior vice president, consumer & shopper insights with New York-based Nielsen, also spoke about the need for retailers to examine their private label price gaps. In a Sept. 27, 2011, presentation at the Food Marketing Institute's Private Brands Summit in Chicago, he said a one-cent decrease in price gaps across the industry could put a whopping $400 million extra in retailers' pockets.
Market for less
Marketing, too, represents an area ripe for cost-cutting. Retailers long have relied on newspaper advertising to promote both store brand and national brand merchandise. But marketing through print media puts a huge burden on retailers' budgets.
"It's expensive; it requires long lead times; it uses lots of raw materials — the list goes on and on," Wisner says.
Today, it is not as necessary to spend loads of money to get promotional messages out. More retailers are turning from print advertising to digital advertising, Wisner says. As an example, he points to Mariano's Fresh Market, a Chicago-area banner of Milwaukee-based Roundy's. The retailer runs ads in Chicago-area papers only every other week, but it e-mails a flyer every week to customers who opt in to receive it. The flyer links to a page showcasing personalized promotions and product suggestions based on the recipient's loyalty card data.
On the private label side, retailers could custom-tailor digital promotions to include store brand products based on the cardholder's shopping history, Wisner says. Such e-mails also make organizing everything from shopping lists to family dinners much easier.
Retailers also are connecting more with consumers via social media platforms. Facebook and Twitter, in particular, allow them to quickly send out messages and promotions related to their store brands for no cost (see "Social media sayings" sidebar, page 16). Both platforms also let retailers listen to their customers' desires, praises and complaints — and respond to them quickly and effectively.
Beyond digital marketing, event-based marketing is an excellent way for retailers to promote own-brand products while keeping costs low, Spieckerman says.
For example, The Great Atlantic & Pacific Tea Co. (A&P) of Montvale, N.J., held its Woodson & James tailgating cook-off before the New York Jets-San Diego Chargers football game on Oct. 23, 2011. A&P said it sponsored the event at MetLife Stadium, where six contestants had 90 minutes to prepare the Woodson & James Angus steaks the retailer provided.
Spieckerman also points to one retailer that got more than it paid for with a unique marketing initiative that incorporated own brands. In June 2011, Safeway, Pleasanton, Calif., built the world's largest picnic table to promote its Open Nature line of all-natural foods. The retailer broke the Guinness World Record for its effort, and both the retailer and its Open Nature brand received free publicity from media outlets nationwide.
"It is a great example of how out-of-store event marketing can drive private brand awareness, community involvement and localization simultaneously," she says,
Get it to the shelf faster
What if you could increase a product's speed to market by 50 percent, thereby increasing your profit margin? With a strong accountability system, it's certainly possible.
Bruce Kern, president of Logix3, a Jacksonville, Fla.-based workflow software provider, says his company has developed web-based technology that improves retailers' and suppliers' efficiency in partnering to bring store brand products to market. It does so by holding all project members accountable for their actions.
"The first way you achieve a higher degree of efficiency is by making ... people feel significantly more accountable for [their] success or failure," he explains.
A retailer could save a substantial amount of money by employing this technology. Say the retailer is looking to introduce 200 store brand SKUs, and each SKU is expected to contribute $200,000 annually — a total of $40 million per year. If the profit margin is 20 percent, the retailer could make $8 million in profit per year on those SKUs, Kern explains.
"So if you can improve that by 50 percent ... there's a potential of driving $4 million in additional net profit to the bottom line if you did this faster," he explains. "So that's the value proposition."
Here's how the software works: A retailer identifies the various people (or "touchpoints") involved in the supply chain — on both the retailer and supplier sides — and the role each one of them plays, Kern says. Those roles are then prebuilt into the software, showing who is supposed to sign off on what part of the project.
Each time the project hits a certain touchpoint, the person is expected to perform a certain task within a certain timeframe. The task could be anything from answering a question to reviewing or uploading a relevant document. Until the task is performed and the person hits the "submit" button, the program displays a red light for everyone involved in the project to see.
"You're going to go in there, do your job and hit the 'submit' button because you want people to think you're as efficient as everyone else," Kern says.
Social media sayings
Social media platforms such as Facebook and Twitter are an excellent way for retailers to connect with consumers — and they cost nothing to use. Here are some examples of how retailers recently discussed their store brands with Facebook fans and Twitter followers:
- Ina Feb. 2 post on its Facebook page, Sunbury, Pa.-based Weis Markets shared a link to a recipe for Buffalo chicken cheese steaks. The recipe featured a number of store brand products as ingredients. The next day, the retailer shared a link to a recipe for Buffalo chicken dip that included coupons for several Weis brand products.
- Ina Feb. 14 tweet on its Twitter page, The Fresh Market of Greensboro, N.C., asked followers to tweet back the name of their favorite store brand product from the retailer.
- Ina Feb. 3 post on its Facebook page, Salisbury, N.C.-based Food Lion promoted the "Food Lion Store Brand Super Sale," which was held Jan. 11 through Feb. 7. By using their personal MVP card, customers could save up to $10 on their next shopping trip by purchasing Food Lion products.
- Ina Feb. 7 post on its Facebook page, Walmart, Bentonville, Ark., tells fans it "just made it easier to make healthier food choices" by posting a link to a YouTube video that educates viewers about the retailer's new front-of-package "Great For You" icon. The icon will appear on select Great Value and Marketside items in U.S. stores this spring.
