Full speed ahead
Each year, we survey retailers/wholesalers and suppliers to get a sense of changes, concerns and opportunities within the store brand industry. Store Brands solicits input from industry players on topics that range from prior-year sales results and short-term sales goals to marketing efforts and industry challenges. What follows are some highlights from both the retailer/wholesaler and the supplier portions of our 2014 State of the Industry Research Study.
Picking up the pace
On the retailer/wholesaler side, the pace of own-brand new product development continues to rise, with 66.1 percent of respondents telling us they increased the pace of development in 2013 in comparison to 2012 (up from 61.7 percent in our 2013 survey). Similar to last year (3.7 percent), only 3.2 percent of respondents said they had decreased the pace of development. Among the many reasons cited for the escalation in new product development were “better margin on private label products,” “a core driver of loyalty and differentiation for our banners” and “greater consumer acceptance.”
The increase in product development brought with it a rise in store brand sales overall. In fact, 64.6 percent of respondents reported an upswing in private label’s unit share of sales in 2013 over 2012, similar to last year’s findings (63.3 percent). Of those respondents, 10.4 percent saw an increase of more than 10 percent. Only 4.2 percent reported a decrease (down from 7.6 percent in our 2013 survey).
With the gains come lofty goals for the near future. More than three-quarters (79.2 percent) of retailer/wholesaler respondents said they have a goal to increase private label penetration in 2014, similar to last year’s findings (81.0 percent). And 25.0 percent of those respondents aim to boost store brand penetration by more than 5 percent. Although 20.8 percent of respondents indicated a goal of maintaining existing penetration, no respondents said they wanted to decrease penetration.
Differentiation critical
When asked to rank the importance of four specific roles store brands typically play within companies, retailer/wholesaler respondents selected “to differentiate/build loyalty to their stores” as the most important — just as they did in last year’s study. Following closely behind — but switching in order of importance from last year — were “to achieve higher margins” (number 2) and “to provide shoppers with a lower-cost alternative to the national brands” (number 3). Coming in last was “to compete against the national brands.”
Additional roles retailers and wholesalers offered ran the gamut from “a strong marketing role” and “a major traffic driver” to “a future growth driver” and “an avenue for cause marketing.”
A tiered private brand approach appears to be a means to differentiate for many respondents. Two-thirds (66.1 percent) of respondents said their companies have a multi-tiered program, down from 2013 study findings (75.3 percent). The most common scenario is a two-tier program featuring national-brand-equivalent (NBE) and value brands (23.2 percent). Fewer respondents reported having a three-tier program than in 2013 (21.4 percent vs. 28.0 percent).
Niche brands could be another way retailer/wholesalers are setting themselves apart within the store brand space. More than two-thirds of respondents (67.9 percent) said they offer one or more niche brands in addition to their core store brands, similar to last year’s findings (68.1 percent).
Compared to a year ago, more than a third of respondents (35.7 percent) said they are putting a greater focus on premium/upscale store brand products, a significant increase from the 17.9 percent of respondents who said they were doing so in last year’s study. Twenty-five percent of respondents are doing more in the niche store brand area (21.1 percent in last year’s study), and 23.2 percent are putting more of an emphasis on NBE products (24.2 percent in last year’s study). Although 37.9 percent of respondents in our 2013 study said they were doing more within the value tier, that number fell to 23.2 percent this year. Moreover, 25 percent said they have not changed their focus at all.
In terms of category-specific interest for new product development going forward, the top three areas cited overall (retailers plus wholesalers) include refrigerated/frozen prepared foods, deli items and fresh/prepared foods. In contrast, the top three areas cited in our 2013 study were center-store grocery items, health and beauty products, and non-food essentials such as cleaning products and laundry care items. In some cases (e.g., deli items), interest level varied dramatically between retailers and wholesalers, however.
In addition to specific categories, 84.3 percent of retailer and wholesaler respondents indicated that they were actively pursuing a number of major trends in relation to store brand development, up from 70.5 percent last year. The top five trends being pursued by that subset include better-for-you (43.4 percent), local sourcing (41.2 percent), all-natural or natural (40.5 percent), gluten-free (38.2 percent) and premium/gourmet (32.0 percent).
When it comes to marketing store brand products, in-store signage and displays together represent the most important tools for retailers, with 56.9 percent rating them as extremely important or very important, down only slightly from 58.3 percent in last year’s study. Coming in second are weekly printed circulars, followed by merchandising a greater assortment, but both saw a decline in percentage rankings in comparison to last year.
Quality counts
When it comes to selecting store brand suppliers, retailer and wholesaler respondents ranked a strong quality assurance program as the most important attribute again this year, with 57.1 percent of respondents citing it as extremely important or very important (compared to 83.3 percent of respondents in 2013). Ranking second and third were a proven track record in terms of deliverables (38.8 percent) and the ability to partner on everything from store brand product innovation to in-store merchandising (36.7 percent) — the latter of which moved up from number four in importance last year. Rounding out the list were the ability to deliver custom formulations, products and/or packaging (30.6 percent), the lowest cost (28.6 percent) and a strong commitment to environmental improvement (16.3 percent).
Despite ranking cost low on the desired supplier attribute list, 33.3 percent of retailer and wholesaler respondents admitted that cost is more important in supplier-related decisions than it was a year ago. Only 2.1 percent said it is less important.
On the collaboration front, 66.7 percent of respondents said retailer-supplier collaboration is more important than it was a year ago on the product development front, with more than a third (39.2 percent) of those folks indicating it is much more important. Only 3.9 percent said it is less important.
To achieve their store brand-related goals, 21.6 percent of respondents said they are relying on more private label suppliers now than they did a year ago. But the majority, 64.7 percent, indicated their supplier needs are “about the same” — and 13.7 percent said they are using fewer suppliers.
More than a third (39.6 percent) of retailer and wholesaler respondents said that their companies manufacturer at least some of their own-brand products, an increase from 31.3 percent last year. Of that number, 35.4 percent said they aim to expand manufacturing capabilities in the future, while the rest plan to maintain (58.3 percent) or reduce (6.3 percent) capabilities here.
Despite continued strong growth on the store brands side, retailer and wholesaler respondents pointed to numerous challenges going forward that could stand in the way of attaining goals. A sampling of respondent challenges includes “balancing the need for variety and assortment against a reputation that looks like we are trying to shove store brands down the consumer’s throat,” “competing with national brands as they lower their prices to remain competitive,” “finding space to merchandise product,” and “getting supplier partners to move faster on innovation investments.”
Supplier sales trending upward
Like their retailer and wholesaler partners, suppliers reported an upswing in private label’s unit share of sales in 2013 compared to 2012. In fact, 77.3 percent of supplier respondents saw at least some growth here, with 25.0 percent of them reporting an increase of 10 percent or more. Gains between 6 and 10 percent were reported by 20.5 percent of respondents, while 18.2 percent of respondents realized increases between 3 and 5 percent, and 13.6 percent of respondents saw gains between 1 and 2 percent. Only 11.4 percent of respondents realized a unit share decline.
Although the majority (71.3 percent) of supplier respondents offer their own brand or brands in addition to products for private labeling, store brands are a future growth focus. In fact, 50.0 percent of respondents said store brands are “very critical” to their 2014 operations, while
38.1 percent said they are “somewhat critical.” Only 11.9 percent indicated store brands are “not very critical.”
Moreover, 85 percent of supplier respondents pointed to a goal to increase private label dollar sales for 2014.
As for the store brand industry as a whole, 67.5 percent of supplier respondents said they expect it to see “modest growth” in 2014. Meanwhile, 20.0 percent predict “strong growth,” while 12.5 percent expect neither growth nor a decline.
Hindered by commodity costs, more
Suppliers, too, are not without obstacles in the road to meeting store brand-related goals. When asked to select their greatest challenges from a list of nine, they ranked rising commodity costs (86.7 percent), high fuel costs (49.4 percent) and logistical issues outside of fuel costs (47.0 percent) as their top three. Although rising commodity costs also came out on top in our 2013 survey, logistical issues outside of fuel costs outranked high fuel costs on last year’s list. Other issues of concern include keeping up with necessary plant upgrades (34.9 percent), keeping up with regulatory changes (33.7 percent), achieving/maintaining plant certifications (9.6 percent), allergen control (7.2 percent), recall plans (6.0 percent) and “other” (21.7 percent).
When asked to select their top challenge when it comes to working with retailers to bring new store brand products to market, supplier respondents cited a cost-over-quality emphasis on the part of the retailer as the top response (39.5 percent). The retailer bid process, the top answer for 2013 (37.0 percent), moved down to third on the list this year (22.2 percent).
When asked about challenges that could specifically impact store brand growth, meanwhile, supplier respondents cited inadequate marketing efforts on the part of retailers and too little promotional/merchandising attention on the part of retailers as the top responses (21.5 percent each vs. 25.5 percent and 29.8 percent, respectively, in 2013; respondents could pick only one answer). Other challenges for 2014, in order of importance, are too-frequent national brand promotions on the part of retailers (20.3 percent vs. 12.8 percent in 2013), lack of innovation (17.7 percent; not reported in 2013), lack of acceptance on the part of consumers, at least in certain categories (8.9 percent vs. 14.9 percent in 2013), quality issues
(6.3 percent vs. 19.1 percent in 2013) and “other” (3.8 percent; not reported in 2013).
And when asked what needs to change most in the typical retailer-supplier relationship for store brands to continue to succeed and grow in North America, suppliers had a lot to say. Highlights among the comments include: “let the supplier make some margin from volume,” “more collaboration and innovation,” “increased overall strategic thinking on the part of the buyer or category manager responsible for complete results for the company,” and “regular top-to-top meetings — one on one, not in a large group — to speak openly and honestly regarding how to grow private label.”