Not an easy decision
Today, many retailers understand the importance of investing in the development and promotion of their private brand portfolio. But when offered good money to stock and promote national brand goods, they can be tempted to hand over prime shelf space and promotional support – and leave their own brands in the dust.
Private Label => Store Brands asked three retail experts for their thoughts on the matter. Sharing their opinions are Ben Ball, senior vice president, Dechert Hampe, Northbrook, Ill.; Nick Hodson, partner, Booz & Co., San Francisco; and Neil Stern, senior partner, McMillanDoolittle LLP, Chicago.
Private Label => Store Brands: With financial incentives such as slotting fees enticing retailers to give prime shelf and display space to some national brands, store brands can get lost in the shuffle. Whats the worst case scenario here, in your view, for the store brand side?
Ben Ball: Retailers have always had to analyze (and hopefully optimize) the tradeoffs between \"cash in hand\" such as fees and the profit potential of selling product. When fees come hand-in-hand with a top-selling product with strong margins, the world is easy. But generally speaking, that is not the case. Top sellers naturally get prime shelf space and merchandising. It is the second- and third-tier brands that often offer up hefty incentives to achieve focus they otherwise dont deserve.
But what will the tradeoff in margin generated be if the bargain is struck? This question becomes doubly difficult for store brands. The obvious first issue is that store brands typically carry longer margins relative to the national and regional brands, so the potential profit margin loss is greater. The second issue may not be so obvious, and that is the need to grow the store brand as a competitive differentiator.
Neil Stern: Store brands are competing in a battle for shelf space against national brands. National brands employ a variety of tools to gain shelf space, from traditional advertising and marketing to drive trial to internal funding (slotting fees, advertising fees, etc.). Store brands have fewer tools available, but they can win in other areas – display, packaging, placement, etc. The worst case is that store brands begin to lose space because they have [fewer] tools to compete.
PLSB: Is it possible for a retailer to do both – take the national (or regional) brands money and still build its own brand or brands in the process? If so, how does a retailer go about creating such a win-win scenario?
Ball: What retailers do with brand funds used to be a lot less transparent when promotion funding consisted of off-invoice allowances and lump sum payments for ads, space, displays, etc. Much as motorists believe that local municipalities give their police force a \"revenue quota\" for traffic fines, brand marketers suspected that retailers gave their buyers quotas as well. And sometimes, that was true. Much was written about how retailers made their profit \"on the buy\" rather than on the sale of goods.
Those days arent entirely gone, but new accounting rules and promotion payment vehicles like scan-based trading discourage those practices. The argument can be made that national brands are always contributing at least some funding to growing store brands. It is rare for a brand program to achieve 100 percent pass-through of funding, even in consumer-oriented promotions, and other \"fees\" (like slotting) are, of course, just that: fees. So, some of the brands money winds up in the profit bucket, which, in turn, funds efforts such as store brand development.
\"The argument can be made that national brands are always contributing at least some funding to growing store brands.\" –Ben Ball |
That said, the answer still depends on \"balance.\" Retailers have to build store brands for both marketing and profitability reasons. But retailers who dont provide a reasonable ROI on manufacturers trade spending will soon find themselves working with less funding overall.
Nick Hodson: Yes, it is, but it takes time. If over a period of years, you build a strong store brand business with brands that consumers recognize ... and you build up your sales and the quality and the price point, etc., as your store brand offering, then I think you can kind of get to a point where you can have your cake and eat it too, as the manufacturers now have to compete on the shelf against your store brand. ... The strength of your store brand program gives you leverage over the manufacturers one way or another – whether it comes in lowering absolute cost or [getting] more promotional money or being able to charge a higher price for slotting fees on a sort of per-foot basis.
Stern: Retailers need to be doing both. Primarily, retailers need to put the customer first and create winning strategies by category that provide a blend of national brands and private label. Retailers need to maximize the category insights and drawing power of brands, along with the price points and differentiation of private label. Its all [about] achieving a proper balance between the two.
\"Retailers need to maximize the category insights and drawing power of brands, along with the price points and differentiation of private label.\" –Neil Stern |
PLSB: What about the other extreme – if a retailer opts not to take the brands money and instead opts to dedicate all of its prime shelf and display space to its own brand or brands? Can a business case be made for doing so?
Ball: You would have to say \"yes,\" a business case can be made for this approach – either that or deny the success of Trader Joes, for one. Whole Foods is another case in point with the ubiquity of its 365 Everyday Value brand in center store. In both cases, the products offered are either unique or carry a differentiating benefit.
What doesnt work [are] attempts to \"force\" shoppers into store brands based on availability. Some would argue that Safeway did significant damage to the Dominicks chain here in Chicago by overreaching with the Safeway family of store brands immediately after acquiring the chain. Complaints of \"cant find my brand there anymore\" were common in our social circles.
Hodson: I think its very hard to do – youre kind of going cold turkey. ... The slotting fees are a rather nice stimulant drug. Going cold turkey is never any fun, and in a public company that has to report comps every quarter, I think it would be a very hard thing to do.
Arguably, in a private environment, you would, and sales would go down, initially. Over time, they would probably recover and you would probably get back. But I dont think anyone would ever literally do it as a sort of big bang. I think the way you do it is little by little, you build up the brand strength in your store brand program, and little by little, you move towards that.
Stern: Customers are looking for choice; we can guide them towards private label through shelf space, price comparisons and display, but we want to be sensitive to their current demands and needs (which include brands). This applies to traditional retailers. Of course, a new retailer (limited assortment, hard discounters, etc.) can change the rules, and places like ALDI and Trader Joes have.