Source smarter
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When it comes to sourcing store brand products, retailers cannot afford to compromise quality in the quest to get rock-bottom pricing. But they could take a number of steps to make private label product procurement more cost-effective.
Private Label => Store Brands turned to three industry experts for some recommendations here: Mike Daher, principal, Retail Sourcing Practice leader for Deloitte Consulting LLP, headquartered in New York; Thom Blischok, chief retail strategist for Booz & Company Inc., which has its North American headquarters in New York; and Brian Umbenhauer, principal and U.S. sourcing and procurement leader, Deloitte Consulting LLP.
Private Label => Store Brands: In general, what do you see as retailers greatest dollar-wasting missteps in private label sourcing?
Thom Blischok: In 2009 and 2010, it became very clear that there was a private label "euphoria" across the industry. ... During that period of time, we believed that private label was the answer to value-seeking shoppers – which [number] about 102 million households.
In some cases, this euphoria brought too much too quick to the market without [retailers] developing a coherency around private label strategy. Private label is not just a product; its also an image; its also a value proposition; its also a banner promise. And I think that some of the private label products brought to market were not consistent with a strategy around ... the banner promise.
Going forward, the smart retailers are going to assess their private brands as they are currently structured; theyre probably going to think about a common look and feel; and they are probably going to think about a common market position.
Without question, America is bifurcating into two shopper groups. Sixty-five percent of Americans today are what I consider to be survivalists. They live from paycheck to paycheck; they really are trying to figure out how to survive in their daily activities, deferring maintenance. And these folks are swapping out national brands with private brands. About 30 percent of Americans are selectionists, who selectively pick and choose not only what categories they want to buy, but also what products they buy in those categories.
So one of the things that is required going forward is for the retailers to understand these two polarizing shopper groups and create a multi-tier architecture for private brands where they have a combination of core products, aspirational products for the low end and core products and premium products for the high end. And so the biggest challenge facing any retailer in private brands going forward will be their ability to understand, articulate and apply an effective private label brand strategy across the store, across the banner, in support of the banner promise.
Mike Daher: 1) Fragmenting their buys across too many suppliers to a point where youre a suppliers nice-to-have customer, but no suppliers must-have customer; 2) being married to their current sourcing footprint – both in terms of source countries and suppliers – with no backup plan or strategy in an environment of unprecedented change in the supply markets; 3) relying on value chain (all activities and players from raw material sourcing to distribution) strategies of the past decade when fundamental shifts are currently occurring in American retailing due to multi-channel forces.
PLSB: What are some steps they could take to improve the financial picture when it comes to private label product sourcing?
Blischok: The aspirational for the low end [shopper] and the artisanal and high value for the high end [shopper] are great opportunities for private label to be developed, so I think that sourcing with manufacturers that can give you a clear ability to make a good profit margin, being priced somewhat between 20 and 30 percent below the national brands, is critical.
And [retailers should look for] a manufacturer that has continued process innovation and continued product innovation. For example, if they wanted to buy canned peas presoaked in sea salt versus normal salt or pull off another slight twist in terms of differentiation, [process and product innovation] is very critical. And they should seek out manufacturers with modern factories which have high traceability, high sustainability and high food safety and really are viewed as vertically integrated. So in other words, if theyre making soda pop, theyre not having to buy bottles; theyre not having to buy syrup.
Brian Umbenhauer: Consolidating your spend to a smaller number of suppliers and building trusted partnerships. If youre 40 percent of a suppliers business, you can offer much more predictability in their operations in exchange for more favorable pricing, more consistent quality and order reliability.
Everyone knows that a single-country strategy is risky in the face of rising labor costs and other factors, but many retailers are slow to move beyond leading established markets such as China, for example. Whether its costs, regulations, infrastructure, weather patterns or geo-political risks, its critical to have a multi-country sourcing footprint with proper global oversight to optimize against in-country changes.
Many retailers were quick to build up their private label programs with the help of third parties like buying agents – as consumer spending slowed, a number of retailers are reconsidering every element of their value chain to extract more profit. Whether thats sourcing raw materials, cutting out buying agents, tapping suppliers for new designs or taking on new strategies to manage quality assurance (QA), revisiting the value chain strategy is on many retail executives agenda for 2013.
PLSB: What advice do you have for retailers in balancing concerns over sourcing costs with concerns over product quality?
Blischok: Shoppers define value as quality received per dollar spent. ... Shoppers are willing to compromise quality a little bit for price, but your private brand must stand for a very clear and well-articulated quality level. So if you want to compromise your quality level, then youve got to do it in your banner promise. I would never suggest that.
So I would approach the problem a little differently. To get the quality and get the margins, I would source [from] manufacturers that will allow me to achieve that on a consistent basis versus going to a manufacturer and saying, "I want this quality and this price." I would establish my strategy first with the quality level to where I want it positioned; I would establish my pricing next; and then I would essentially negotiate with my manufacturers about how to achieve that objective and what compromises Im able to do – and then reassess that with regard to my quality-value strategy.
In many cases, Ive seen retailers say, "OK, lets go [develop] a private brand strategy." And I would rather they start by saying, "Lets have a value strategy and determine how the national brands can play in that value strategy and how we can essentially have private brands play in that strategy." Where I think things have been missed big-time is that people say, "Lets go buy" versus "Lets understand what value we create."
Daher: Consolidating the supply base and forming strategic partnerships with fewer suppliers [are] critical to balancing sourcing costs and product quality. Beyond receiving more favorable pricing, the increased scale allows your suppliers to better understand your business and invest accordingly in reducing quality issues. A more consolidated supply base also allows the retailer to invest in performing QA reviews at a smaller number of factories in order to coach suppliers on how to avoid quality issues in the line before the product ships – a win/win for both the retailer and supplier. Retailers that choose not to invest in QA at the plant often end up charging higher claims when spotting defects at the distribution center.
PLSB: Any other comments?
Umbenhauer: With increased smartphone penetration and more aggressive online competition, the American retail landscape is changing. Private label merchandise is not only important to managing a retailers margins, but is now becoming critical to their ultimate survival.
Unlike national brands, private label merchandise – with its inherent exclusivity to the retailer – cant be offered by an online competitor. Some retailers are able to charge more than their national brand competitor, as the brand, quality and price value proposition is stronger. Ultimately, to use private label to differentiate and defend requires investments in branding and product innovation, as well as the supply chain. As a result, smart retailers are elevating the strategic importance of a private label sourcing program.