Share the Risks — and Rewards

Product innovation is becoming critical as more retailers position store brands as differentiators that encourage repeat visits to their stores. But traditionally, store brand suppliers have been burdened with most of innovation-related costs on the store brand side.

Store Brands asked three experts representing the retailer and supplier side of store brands — Clay Dockery, division vice president, corporate brands for Portsmouth, Va.-based Massimo Zanetti Beverage USA; Nate Shotwell, director, brand and business development/grocery and fresh for Grand Rapids, Mich.-based Meijer Inc.; and Sean Thompson, senior director of merchandising, private brands for Dallas-based 7-Eleven Inc. — to discuss how the costs, risks and rewards related to store brand product innovation could be shared more equally.

Store Brands: Product innovation always involves some degree of risk. How could retailers and suppliers work together to share in the risks — and rewards — tied to innovative new product development?

Clay Dockery: Innovation is critically important to the success of private brands. In consideration of risk, I would certainly agree that it should be shared, but the parameters must be established upfront. There are two cost factors to consider with innovation: the development work on the front end and the cost of exiting if the innovation does not succeed.

The discussion of cost sharing from a retailer’s perspective should tie to the manufacturer’s ability to provide exclusivity, at least at initial launch. The upfront cost sharing should be dictated by the originator of the request — i.e., if a retailer has a product concept that they are asking a manufacturer to develop, it would certainly make sense to identify initial costs and likely build that into the cost of goods sold.

Regarding the risk of failure, there simply has to be an approach where both parties agree on who is responsible for each cost component. That includes, but is certainly not limited to, unamortized package design costs, packaging, art plates, finished goods, retail markdowns, etc.

Nate Shotwell: It comes down to the strategic model in place. For so long, the focus has been on national brand equivalency — and the bulk of the volume opportunity still lies here. However, as an example, if terms could be established to commit to a hybrid production plan of NBE versus new/different items, [then] the mutual significance of the upfront commitment potentially offsets the risk of premiums associated with smaller production runs and packaging orders.

Sean Thompson: It is important for retailers and manufacturers to stay focused on the consumer, especially in the development of differentiated private brand products. Market data, trend information and consumer research should be part of the initial discussions leading to the creation of a concept.

Testing products with consumers is an important part of the process. Establishing clear benchmarks and quantifying the preference of new products relative to the benchmark help gain an understanding of product potential. Taking the concept to stores to understand the dynamic at retail also is an important part of the equation. We try to do this with concepts that are unproven to gauge the potential of a new item or platform.

Store Brands: What are some of the obstacles/challenges retailers and suppliers currently face that hinder true collaborative successes here?

Dockery: Clearly, the disadvantage that the private brand industry has versus national brands is far less consumer insight. Innovation should always start with the consumer and a discovery of an unmet need. The vast majority of private brand manufacturers don’t have the resources for a robust consumer insight program. However, retailers have extensive consumer insights that can be used to quickly glean those unmet consumer needs. If manufacturers can have access to relevant consumer insights, they can take a participative role in working toward finding those innovative ideas that will meet those unmet consumer needs.

A national brand innovation can quickly achieve scale by launching an item nationally, while a retailer-exclusive launch will by design be significantly less efficient. It is also critical to understand who “owns” the innovation and to what degree that ownership extends. In other words, can you develop a product and then make slight modifications then offer to other customers? Launching a truly innovative product is also a challenge in that the manufacturer owns the production, but the retailer owns the communication to the consumer. It is critical to develop a thoughtful marketing launch plan prior to start of production.

Another challenge for manufacturers is whether you can manufacture the product with existing capital equipment or if capital expenditures are required. If capital investment is required, can you build that into your financial model?

Clearly, one of the greatest risks to private brand innovation is the need for transparency from both parties to have the critical discussions about these issues.

Shotwell: Suppliers are often reluctant to partner with retailers on new/niche “breakthrough” innovation due to lack of significant volume commitments upfront. Minimum order quantities on both finished goods and packaging are key factors here. Small suppliers can have an advantage in this space due to dedicated capacity without the need to change over production lines, etc., to supply several customers. Many of the suppliers are copacking for national brands beyond their retailer partnerships. In addition, the pool of available suppliers is shrinking as several of the mid-size players are being acquired by larger manufacturing players.

Thompson: Cost, time and lack of information are obstacles to true collaborative successes. However; taking extra steps to do the appropriate upfront work can better ensure larger-scale success. Often, conversations center on the short-term costs of testing and research versus the sales potential of that item when introduced in the correct manner. The results for both the manufacturer and the retailer are far superior when steps to understand product potential are not skipped.

Store Brands: How could they be overcome?

Dockery: The biggest opportunity to accelerate the pace of innovation is clearly to move from a transactional business relationship to a strategic relationship between manufacturers and retailers. As we all know, many innovations take years to pay back, and many manufacturers would be hesitant to commit to a multiyear payback if there is a possibility that the business will be bid within the time parameters of the planned payback.

Also, the greater the transparency, the greater the odds that an innovation can be appropriately developed and launched. If a mutual confidentiality agreement is not in place, it is a good start to allow both parties to have open and meaningful conversations about innovation.

Lastly, we should thought-fully consider a greater collaborative relationship between retailers and possibly multiple manufacturers. Collectively the retailer’s own brand is the single biggest brand in the store, yet many manufacturers have category blinders. For example, if a retailer is looking at innovation within the breakfast category, they many want to engage their top 10 to 20 suppliers in a brainstorming session as a group.

Shotwell: Another potential solution is increased focus on self-manufacturing. This, of course, isn’t without risk — the biggest being the capital commitment, but again, it’s about aligning strategy with merchandising so everyone has a clear vision of where you’re headed and how you plan to get there.

Thompson: It is important to identify partners that share the same values as your organization. For 7-Eleven Inc., creating differentiated products driven by consumer needs is a critical part of our DNA. Our top suppliers understand our path to bring a product to market and have invested with us in the process. They know that any extra time and expense in bringing a product to market will be offset by the financial success of following the process.

Store Brands: Any other comments?

Dockery: I would also suggest that while the above commentary has been around product development, there are many other opportunities for innovation. Packaging, merchandising ideas and supply chain improvements are all areas where meaningful innovation can occur.

Shotwell: The strategic model used to set the groundwork for all of the above should be as brand-driven as possible, with a focus on scalable platforms versus one-off opportunities (the trap of a category- or item-driven approach approach).

“The discussion of cost sharing from a retailer’s perspective should tie to the manufacturer’s ability to provide exclusivity, at least at initial launch.”
— Clay Dockery, Massimo Zanetti Beverage USA

“The pool of available suppliers is shrinking as several of the mid-size players are being acquired by larger manufacturing players.”
— Nate Shotwell, Meijer Inc.

“Often, conversations center on the short-term costs of testing and research versus the sales potential of that item when introduced in the correct manner.”
— Sean Thompson, 7-Eleven Inc.