The Innovation Disconnect

Our retailer and supplier roundtable participants ponder the barriers to store brand innovation.

Store brand innovation is a hot topic right now, as retailers increasingly look to store brand products as a critical means to differentiate them from the competition. But a disconnect exists between what many retailers and suppliers say they want and what they actually end up doing. For example, many retailers say they want innovative products, but ultimately select a supplier based on the lowest cost. Likewise, many suppliers promise to deliver innovation, but cannot provide the uniqueness retailers desire in absence of significant scale. Moreover, neither side wants to bear the full cost necessary for true innovation.

In an industry roundtable held during the Private Label Manufacturers Association's (PLMA) 2011 Private Label Trade Show in November, Progressive Grocer's Store Brands asked retailers and suppliers to discuss the unique innovation challenges they face today — and to outline potential solutions to those challenges. Our roundtable participants included Jose Alvarez, vice president of merchandising, Navarro Discount Pharmacy, Medley, Fla.; Melissa Billman, director of private label development, Kum & Go, West Des Moines, Iowa; Mark Coleman, vice president of retail sales, CatagniaSpagna, Ayer, Mass.; Joe Ennen, senior vice president, consumer brands, Safeway, Pleasanton, Calif.; Lou Helfrich, vice president of purchasing, Chain Drug Consortium, Boca Raton, Fla.; Sage Horner, vice president, merchandising and supply chain, Sunflower Farmers Market, Boulder, Colo.; George Jackson, CEO, Associated Hygienic Products (AHP), Duluth, Ga.; Marc Lessard, manager, merchandising sales and analytics, Delhaize America, Salisbury, N.C.; Robert Masche, senior vice president, supply chain, Piggly Wiggly Carolina Co., Charleston, S.C.; Bobby D. Ray, vice president, retail and private brands, Haliburton International Foods, Ontario, Calif.; Daniel Sinclair, director of private label, Sunflower Farmers Market; and Regina Tator, director of private brands, Weis Markets, Sunbury, Pa. It's worth noting that the participants had a great deal more to say than we have room to print. What follows, therefore, are a few highlights from the roundtable.

The retailers speak

Innovation might be necessary, but it certainly is not easy to work with many suppliers to get there, many of the retailer participants agreed. Minimum order sizes are one major issue.

"To get something on the shelf without the economies of scale, there's a hurdle there [that prevents] that from happening," Lessard offered.

Speaking of scale, Mache said the challenge becomes even greater to find suppliers when a retailer is a small- to mid-sized player such as Piggly Wiggly Carolina Co.

"That's why we decided to go with the high-end private label for our Newton Farms brand — local and regional companies, small companies that specialize in small batches," he said, "and make sure the quality is there."

Another challenge is an aversion to risk-taking Lessard noted.

"I think everybody needs to understand that failure of a couple of items is OK," he said, "because without failure, that means that you're not pushing the envelope in the direction that needs to be pushed."

A supplier needs to be willing to engage in some risk-taking, Horner agreed, particularly if it wants to work with a smaller retailer such as Sunflower Farmers Market.

"We need manufacturers willing to have that risk tolerance around natural and organic product development, and, quite frankly, not just knocking off what's already working," he said. "It's such an innovative channel to begin with."

As for the innovative ideas themselves, they don't necessarily have to come from the manufacturer. For private label innovation inspiration, Billman said she relies heavily on Kum & Go's category managers.

"Our category managers also have strong relationships with national brands, so I take their guidance and opinions to heart," she said. "In addition, I believe they are the experts in their categories. There's no way that I'm going to be an expert in automotive oil, in carbonated soft drinks and in artesian water."

But the concept of innovation itself also is problematic, Ennen maintained.

"I think everything gets labeled as innovation," he said. "Well, it's not innovative if you're the ninth to market 17 years after it was first launched. I think it's one of the most abused words in business today, and I don't think anybody has a consistent definition of innovation."

And although everyone thinks immediately about "what's inside the jar" when it comes to innovation, in reality, retailers and suppliers need to consider multiple layers of innovation, Lessard added. That includes packaging. Alvarez agreed.

"For us as a Hispanic pharmacy chain in south Florida, where beauty is a major category for us, we make sure that we're partnering with a regional manufacturer [that allows us] to push the envelope some by making sure we're staying ahead with all of the latest packaging," he said. "And I think a big function of [success] has to do with the actual relevance of the product vs. the innovation of it."

Retailers also pointed to innovation obstacles outside product and packaging development. Helfrich called the amount of marketing needed to "brand" a store innovation a challenge in terms of time, effort and expense.

"The greatest product in the world can fail because you can't figure out how to market that product, and some of the worst products succeed because that person who has that product is a marketing genius," he said.

Closely related to the store brand marketing conundrum is the consumer education challenge, Tator offered.

"A lot of innovation seems to be more upscale specialty," she noted. "So it's teaching the consumer how to cook with it, how to put it in the kitchen and use it."

With several stores spread across numerous states, it also can be very challenging for convenience retailers to build consumer awareness in relation to private label products, Billman said. Here, the best education resource is the associates working in the stores, but it's still a challenge.

The suppliers respond

On the supplier side, innovation also continues to be difficult. Too often, what could be a collaborative relationship hits a roadblock of bids, auctions — and, ultimately, price, Jackson said.

"At the end of the day, I only get asked one question: That's price," he noted. "And then we have the blind bids, and some of the major retailers bid it every year. How do you have a collaboration or partnership if you bid it every year? It's impossible."

As a manufacturer, AHP employs a bid process for certain raw materials, Jackson noted.

"But we also have strategic partners, and we also typically have more than one supplier," he stressed.

And when AHP does in a bid process — and loses the business to another supplier — the company asks to have a meeting with the retailer to learn where it failed, Jackson said.

"How do we go into the future, otherwise?" he asked. "And I will say that a lot of the accounts we end up doing business with and like to collaborate with allow that to happen."

Coleman also questions the role of the bid process in what are supposed to true retailer-supplier innovation partnerships aimed at growing the business.

"I deal in a commodity business; I'm in oil," he said. "I hear, 'What's your price?' probably five times a day, whether it's through an e-mail, a phone call or what have you. So is it a partnership? That's my question — is it real in the commodities end of it?"

For his part, Ray believes retailers could borrow a page from Haliburton's foodservice customers, which tend to act and collaborate on a new concept very quicldy, instead of taking a wait-and-see stance.

"How come we can't get started earlier?" he asked. "If we all sit at the same table to do the collaboration, like a lot of foodservice people do, we can get there."

Collaboration is possible

Despite all the challenges, both retailers and suppliers seemed to agree that there's room for compromise in the name of innovation.

For his part, Jackson is a big believer in transparency. He said he's happy to show his retailer customers or distributors the cost basis for AHP's packaging, logistics and more.

"If you can help me get a lower cost, I'll do it," he said. "And I'll have some suggestions on how you can nail things together so it can be mutually beneficial for a number of customers to drive costs down."

He's also a fan of continuous improvement in the name of enhancing relationships with customers.

"So we do quite a bit in terms of having our vendors evaluate us," Jackson said.

For a true partnership, accountability — on both sides — is critical, Sinclair added.

And although a lot of the dialogue during the roundtable centered on costs, that doesn't mean the retailer's decision is based on cost, Ennen stressed.

"So give us a reason not to make the decision based on cost," he said. "If it's all basically the same, we're going to go with the lowest cost, because we're in the business of delivering value to our shopper."

Moreover, under a true partnership, retailers and suppliers should be able to innovate in more than products and packaging — for example, in using quick-response (QR)codes to deliver a more complete product story to consumers, Sinclair added.

"[A supplier] is going to tell the whole story to me about where the product is sourced, how it's sourced, how it's refined — all those are customer questions that we get on a daily basis," he said. "That [QR code] is a partnership — and it links all the way down to the consumer."