Looking to build loyalty
Each January, Store Brands surveys representatives from the retail, wholesale and private label supplier community to get a pulse on the current state of the store brand industry. These private brand decision-makers share with us their greatest challenges, as well as their goals and most significant opportunities for the near future.
We are pleased to share some key highlights from both the retailer/wholesaler and supplier portions of the study within these pages.
(Note: To see the full article with charts, please click here: http://magazine.storebrands.com/i/652941-mar-2016/30)
Not slowing down
On the retailer and wholesaler side, companies are still in private brand growth mode. More than half of retailer and wholesaler respondents (57.3 percent) said their companies had stepped up the pace of product development in 2015 in comparison to 2014. That number is slightly down from the 63.6 percent who said the same thing in last year’s study.
The primary reason for increasing the pace of product development varied from respondent to respondent. A few of the motivations cited most often, however, include to create a point of difference among competitors, to enhance margins, to build brand (banner) awareness and to offer customers a value proposition.
Only 5.8 percent of respondents said they had decreased the pace of store brand product development in 2015. This number is similar to the 4.5 percent who said the same thing in last year’s study. Slightly more than a third of respondents (36.9 percent), meanwhile, indicated that their companies maintained the same pace of product development in 2015 as they did in 2014.
Unit sales reflect all of that brand-building activity. Two-thirds of retailer and wholesaler respondents (66.1 percent) reported that unit sales were up at least slightly in 2015 in comparison to 2014. Moreover, 12.5 percent of respondents indicated that unit sales increased by 6 to 10 percent, while a handful of respondents (5.4 percent) reported an increase of more than 10 percent.
Some retailer and wholesaler respondents — 12.5 percent — reported a decrease in unit sales, however. But only 1.8 percent reported unit sales declines of 6 percent or more.
Notably, store brands increasingly are serving as a strategic means for retailers to compete against other retailers. When respondents were asked to rank the importance of four different roles store brands play within their companies, “to serve as a differentiator that drives traffic to our stores and builds customer loyalty” came out on top, just as it did in last year’s study. Coming in next in the rankings was “to provide our loyal shoppers with a lower-cost alternative to the national brands,” followed by “to allow us to earn higher margins” and “to compete against the national brands.”
Two-tier programs rule
In terms of private brand program structure, two-tier programs currently are more common than one-tier or three-tier programs. In fact, almost half of retailer and wholesaler respondents (46.4 percent) reported that their companies have a two-tier store brand program. Of those having a two-tier program, the combination of national brand equivalent (NBE) and value brands is most common, followed by NBE and premium. The combination of value and premium brands is less common, applying to only 6.2 percent of survey respondents.
Almost a third of respondents (29.9 percent), however, boast a one-tier program. Of respondents reporting such a structure, NBE is the most common tier, followed by premium and then value. And almost a quarter of respondents (23.7 percent) report a three-tier structure — consisting of value, premium and NBE brands.
Interestingly, in comparison to last year’s study, fewer respondents stated that their companies compete in the NBE tier (47.4 percent versus 60.3 percent in the 2015 study). Participation in the value tier, meanwhile, rose very slightly (60.8 percent versus 58.6 percent in the 2015 study), while the premium tier saw a steeper drop (43.3 percent versus 55.2 percent a year ago).
But much activity also is taking place outside of the three traditional store brand tiers. The majority of respondents (65.4 percent) indicated that their companies also offer niche brands such as natural, organic, eco-minded and gluten-free brands, on par with last year’s findings (66.1 percent). The most common niche area is organic, with 89.6 percent of this subset of respondents noting that their companies invest in store brand product development here. Coming in second is the natural arena (85.1 percent). See the chart, p.30.
When asked if their companies have stepped up product development in any tier or niche area in comparison to a year ago, the majority of respondents (83.7 percent) said yes, compared to 78 percent in the 2015 study. The premium area represents the most active area, with 24.4 percent of respondents stating their companies have increased their focus here. Coming in second and third were NBE and niche brands, respectively.
As for the trends retailer and wholesaler respondents said their companies are pursuing in current store brand product development, organic tops the list. Rounding out the top five are all-natural or natural, gluten-free, better-for-you and premium/gourmet. The top five areas cited in this year’s study mirror those cited in the 2015 study, albeit in a slightly different order. See the chart on this page.
And to attract shopper attention to new and existing store brand products, the respondents’ companies still tend to rely on traditional in-store efforts. In-store signage and displays topped the list when respondents were asked to rate 12 marketing strategies in terms of importance, as it did in last year’s study. However, respondents deemed strategic cross-merchandising significantly more critical to efforts than they did in the 2015 study, and sampling much less important. See the chart, p. 34.
Dealing with supplier consolidation and more
Private label suppliers are critical to retailers’ and wholesalers’ continued success on the private brand side. More than half of respondents (57.9 percent) said their companies rely on 25 or more suppliers to bring their store brand products to market, while a quarter of respondents (25 percent) said their companies use more than 100 suppliers. More than a quarter of respondents (27.3 percent) indicated that they now rely on more store brand suppliers than they did in 2014 to manufacture their products, while only 7.8 percent said they now use fewer suppliers.
When it comes to supplier-related challenges, almost a third of respondents (32.2 percent) said their companies have been impacted by the recent wave of consolidation within the store brand supplier base. Although some respondents pointed to consolidation-related positives, most cited downsides. A few highlights among the negative respondent comments include “higher minimums [and] reduced input and availability from vendor suppliers,” “creating enormous companies with questionable benefits to the retailer,” “less choices and limited value,” “increase in cost to me,” and “supplier is not as available.”
In terms of private label supplier attributes, respondents ranked a strong quality assurance program as the top in importance; the same attribute came out on top in last year’s study. Rounding out the top five, in order, were a proven track record in terms of deliverables, new ideas for product concepts, the ability to deliver custom formulations/products/packaging, and the ability to deliver smaller quantities of products. The environment seems to be taking a back seat to other priorities — a strong commitment to environmental improvement came in dead last in importance in respondents’ ranking of nine private brand supplier attributes. See the chart on this page.
Although it scored rather low in importance in the ranking of supplier attributes, cost is still very important to retailers and wholesalers in store brand decision-making. In fact, almost a third of respondents (29.2 percent) indicated that cost is more important now than it was a year ago. Only 1.4 percent said it is less important.
Almost half of respondents (44.1 percent) indicated that their companies are involved in self-manufacturing. The most common areas cited for self-manufacturing include prepared foods (68.8 percent), bakery products (62.5 percent) and dairy products (28.1 percent). More than a third of respondents (39.5 percent) whose companies are involved in self-manufacturing indicated plans to expand here in the future. The top five areas cited for future expansion include fresh prepared foods/foodservice, refrigerated and frozen foods, center-store grocery items, bakery items and value-added produce.
Looking to the future
When it comes to the areas of greatest interest for future store brand product development, retailer and wholesaler respondents pointed to niche products as the No. 1 opportunity, with center-store grocery items, deli items, fresh prepared foods/foodservice items and ready-to-drink nonalcoholic beverages rounding out the top five. The top five areas vary somewhat from those cited in the 2015 study. See the chart on this page.
In general, respondents are optimistic about the prospects for growth. Even some retailers and wholesalers that lost ground in store brand unit sales in 2015 are aiming to change that reality in 2016. The majority of respondents, 80.4 percent, indicated that their companies have a goal to increase unit sales this year — on par with the 80 percent who said the same thing in last year’s study. Of those respondents, more than half (55.4 percent) aim to grow sales by 3 percent or more.
Of course, they also face a number of challenges to realizing their growth goals. A small sampling of the many challenges cited by respondents includes containing costs/increasing margins versus the national brands, creating “curb appeal” for store brands within the store, gaining customer trial of store brands, keeping up with new national brand items, investing in the right items, and getting marketing dollars to promote store brands.
Manufacturers have their say
In Store Brands’ separate but concurrent private label supplier survey, more than half of respondents (59.4 percent) indicated that 50 percent or more of their companies’ sales come from private brand products. And for 52.6 percent of respondents, the percentage of sales representing private brand items increased in 2015 in comparison to 2014.
More than three-quarters of respondents (78.9 percent) indicated that they compete in the NBE space, while 52.6 percent said they participate in the premium tier arena. About a third (34.2 percent) manufacture products that fall into niche territory, and 18.4 percent participate in the value tier space. (Respondents could select multiple areas of product positioning if those areas applied.)
Store brand suppliers remain in growth mode as well, with 76.5 percent of respondents stating that their companies realized private label-related dollar sales increases in 2015 (versus 75.6 percent in 2015’s study), and 79.3 percent of them saying they realized unit sales increases here (versus 73.2 percent in 2015’s study). More than a third (38.3 percent) reported dollar sales gains of more than 5 percent, while 47 percent reported unit sales gains of more than 5 percent. Only 11.7 percent and 5.8 percent, respectively, reported dollars sales and unit sales declines.
For 2016, 100 percent of respondents said their companies have a goal of increasing private label sales in 2016. See the chart, p. 38.
Despite the fact that many of the respondents’ companies also manufacture products under their own brands, the majority of respondents (64.7 percent) called the store brand side of their business “very critical” to operations this year. Another 26.5 percent called that side of the business “somewhat critical.”
Like the retailer and wholesaler respondents, supplier respondents also face challenges in reaching their private brand growth goals. In a rating of 13 current challenges, respondents chose increased competition as the number one challenge. Rising commodity costs came in second, while hiring and retaining employees ranked third. Also coming in on or near the top half of the list were logistical issues outside of fuel costs, keeping up with necessary plant upgrades, keeping up with regulatory changes and supply chain transparency.
When asked about the greatest challenges their companies face in working with retailers/wholesalers to bring new products to market, more than a third of supplier respondents (36.4 percent) indicated a cost-over-quality emphasis on the part of retailers/wholesalers. Coming in second (27.3 percent) was the retailer bid process, while talk of collaboration without real action on the part of the retailer came in third (24.2 percent).
Although most supplier respondents predicted at least modest growth for store brands overall in 2016, they did point to obstacles that could negatively impact growth. Too-frequent national brand promotions, a lack of innovation and inadequate marketing efforts on the part of retailers were the top obstacles cited.
And when asked what specifically needs to change within the marketplace for store brands to continue to grow in North America, suppliers were quite vocal. A sampling of the responses includes greater effort on the part of retailers to promote and merchandise private brands, more consumer education regarding quality, adoption of the European model, avoidance of reverse auctions to choose suppliers, and a bolder approach on retailers’ part — less of a focus on cost and more of a focus on innovation and managing store brands as real brands.