Innovation: Who pays?

Many of todays retailers want to create unique store brand products that resonate with their shoppers. But their store brand suppliers often are forced to bear more than their share of costs – and risks – associated with such innovation.

Private Label => Store Brands asked three industry experts – Evan Hyman, business development manager, private label, Ingredion Inc., Westchester, Ill.; Jim Hertel, managing partner, Willard Bishop, Barrington, Ill.; and Steven Fay, executive vice president of sales for Roscoe, Ill.-based Berner Food & Beverage Inc. – to discuss how retailers and suppliers could best share both the costs and rewards related to store brand product innovation.

Private Label => Store Brands: In your opinion, what must retailers be expected to bring to the table – or pay for – specifically when it comes to store brand product innovation?

Evan Hyman: Innovation and collaboration are the current buzzwords of the store brand industry. Every retailer and supplier is talking about this, but those retailers that have a clear vision, specific expectations and guidelines laid out in the beginning, and agreed to by all involved, are the ones that are executing it best. Retailers need to be fair in their expectations, but as long as the expectations are set upfront and retailers are willing to consider a variety of options, the project will drive forward. The retailers \"payment\" is really about commitment to working with the supplier partners that are ultimately going to drive the innovation that ends up on their shelf.

\"Retailers need to be fair in their expectations, but as long as the expectations are set upfront and retailers are willing to consider a variety of options, the project will drive forward.\" –Evan Hyman

Jim Hertel:The historic process by which innovation is driven has been dominated by the retailer: Product specs are generated, put out to bid, and then a bid is accepted. It has been very transactional from the suppliers perspective. Without any guarantee of future business, its tough for them to invest in development efforts. So retailers who wish to differentiate themselves with private brands have been the ones driving the process.

Steven Fay:Unless it is a low-cost adaptation to existing production assets, almost all risk involved in packaging innovation is borne by the manufacturer. ... There are certainly areas of innovation that can be shared at a reasonable risk level for both parties. Formula enhancements often can be done on a cost-neutral basis. Health and wellness attributes can be formulated in. Points of significant differentiation that have regional appeal can be incorporated. There are a host of things that can be done in this realm. In many of these scenarios, a handshake and an agreement to share the cost to dispose of leftover labels if it is a failure could be acceptable for both parties.

PLSB: How about suppliers? What specific parts of the bill must they be expected to \"foot\" for the purposes of driving store brand innovation?

Hyman: Suppliers must be willing to think differently about store brand innovation. ... For a long time, many finished goods suppliers in store brands have looked to drive efficiency only and have not worked to drive new innovation with retailers. Today, innovation for differentiation at the store level is a given for retailers, so suppliers must respond to this. Only those suppliers that are willing to work with retailers on innovation efforts for new products will be successful. Specifically, suppliers must be willing to pay for product development efforts, which could have multiple iterations based on retailers feedback.

Hertel: Collaboration carries the implication that business relationships extend beyond bid-to-bid deals. And innovation that is \"disruptive,\" more than simply knocking off what the national brand is doing, is pretty risky and demands commitment that perseveres through the inevitable new product failures. Between retailer and supplier, its not only a question of \"Who pays?\" Its also a question about who has the skill sets to minimize new products risks.

Fay: We feel that we can offer the research and product development portion of the bill. From a marketing development perspective, there is a reality that is not frequently discussed. Since the advent of electronic auctions, the manufacturers margin in most store brand products has been reduced to a margin nearly as thin as the retailers, but without the same huge dollar turnover to generate revenue. Our task is to create a national-brand-equivalent or better product that retails for 15 to 20 percent less than the national brand while producing equal penny profits and an increment or two of additional net profit.

We need to manage packaging inventories of multiple customers. In many instances, to enhance the retailers turns and efficiencies, we have to forward-produce floor stock inventories so just-in-time inventories are available for shipment. We have to do all of this with changeovers and much shorter runs, thus less-efficient runs than our branded competitor who runs the same thing 24/7. It is a tall order.

\"I believe retailers need to be very understanding of their supplier partners real circumstances.\" –Steven Fay

On marketing development, there is, however, a small well from which to draw precious funding. I believe retailers need to be very understanding of their supplier partners real circumstances. Most private brand manufacturers are realizing a very modest low single-digit profit. Most private brand suppliers have very modest single-digit costs for general services and administration.

It would not be irrational for a supplier and a retailer to collaborate for some short period of time to ... invest into future gains in the category by sacrificing their top line margins. ... What the retailer has to realize is that this is not a sustainable model for their store brand supplier. It has to be for a short duration. While I have had successes doing this, I have also had retailers respond by saying that whatever discount is offered will now be their new lower price.

PLSB: What are the common pitfalls here – are there any typical expectations that go unmet? If so, what must either side do to avoid these pitfalls?

Hertel:Disruptive innovation is all about meeting unmet needs, including needs that consumers cant yet articulate. In branded CPG companies, those skills typically reside in marketing departments. In my opinion, few retailers have those marketing skills, and even fewer private brand suppliers do.

Fay:At least at the buyer, category manager level, I dont believe there is much understanding of suppliers and their actual circumstances. I believe a lot of gaming takes place where pricing gets driven to unsustainable levels, and before long you see the supplier base reduced because that supplier ends up out of the picture.

Many of the buyers in our industry know very little about their suppliers, their margin structures and what is or is not a reasonable expectation. I would suggest that if you are going to be successful as a buyer in the long-term that you need to have some awareness of both your needs and your suppliers true circumstances.

PLSB: Any other thoughts?

Hyman:Typically, ingredient companies have not been part of the innovation equation in the store brand industry. As a global ingredients solutions provider, Ingredion has made a concerted effort to make it known to the industry that a company like ours can help to \"pick up the tab\" for innovation, in terms of resources applied for collaborative product development efforts. This is something that both retailers and finished goods suppliers need to consider – that there are other partners out there that can help to spread the cost of innovation and potentially enhance the efforts.

Hertel: The path forward, as it relates to true innovation, will be characterized by more committed retailer/supplier relationships and a significant investment in marketing skills.

\"The path forward, as it relates to true innovation, will be characterized by more committed retailer/supplier relationships and a significant investment in marketing skills.\" –Jim Hertel