Support your brands — or theirs?

Many retailers today understand that investing to develop a strong private brand portfolio is critical to succeed in business. But when a consumer packaged goods (CPG) manufacturer offers good money to stock and promote its products, retailers can be tempted to take the money and forget about building and promoting their own brands.

Or is there a way to do both?

Build your brands?

According to Jim Wisner, president of Wisner Marketing Group, Libertyville, Ill., it’s almost always more advantageous for a retailer to support its own brands.

“They’re going to return higher margin dollars per unit,” he notes. “[Supporting them is] actually less investment in terms of inventory and the shelf; it frees up capital; it provides some leverage actually against some of the national brands in terms of their need to maintain active trade promotion support; the list goes on and on.”

A number of U.S. retailers have opted to develop and promote private brands rather than relying on money from the national brands. One notable example is Batavia, Ill.-based ALDI Inc., where store brands make up more than 90 percent of the overall assortment. Jim Hertel, managing partner with Barrington, Ill.-based Willard Bishop, notes that ALDI is an extreme example, but has established “a healthy business” on building brands rather than on accepting tons of slotting and promotional fees from CPGs.

Trader Joe’s, Monrovia, Calif., is another retailer that has done “very, very well” here, offering mostly store brand products and few national brand items in its stores. And this high penetration of unique own-brand products has helped create a unique shopping experience that creates strong loyalty, says Steve Rosenstock, who leads the consumer products practice of Clarkston Consulting, Raleigh, N.C.

Building such a high penetration isn’t an easy feat, though, and large-box retailers might not be able to make the business case or the economic case for declining most — or even all — fees from CPGs, says Paula Rosenblum, partner with Retail Systems Research, Miami.

“Look what happened when Walmart tried to dramatically increase its own private label at the expense of national brands,” she states. “Customers rebelled.”

But retailers don’t have to aim for as high of a store brand penetration as ALDI and Trader Joe’s.

“Wegmans and Kroger have dedicated a lot of resources to their respective own-brand programs … and are among the best-run food retailers there are,” Hertel says.

But no matter whether a retailer’s penetration is high or average, it really has to give especially strong support to its own brands in the early stages — right after a line hits shelves, says Carol Spieckerman, president of retail consultancy newmarketbuilders. For example, when Target initially launched its national-brand-equivalent up&up brand, it gave the brand “top billing,” creating a visual impact across the store to drive awareness. And although it still shelved national brand counterparts next to up&up products, it did so to support the value message of up&up.

“The brand serves as a great example of why retail¬ers need national brands to drive the value proposition for their owned brands,” Spieckerman states.

Take their money?

But a business case also can be made for taking slotting and promotional dollars. Clay Parnell, president and managing partner with the Atlanta-based Parker Avery Group, notes that consumers expect to see certain high-demand national brand products on shelves. And they’re willing to pay a premium for them.

So if a CPG company offers good money to carry an in-demand national brand product, a retailer could be making a mistake by not accepting those dollars — especially if it stands to make more from stocking and promoting that product than it would from building its own-brand counterpart, Rosenstock says.

But there’s one problem: Although slotting fees are alluring, they can be “turned off” at any time, Rosenblum explains. And if the retailer has been neglecting its own brands while giving prime shelf space and promotional support to the national brands, then it could, conceivably, find itself in a bad situation when those fees go away.

“When the slotting fees stop, the store brand has lost its perceived value to the end customer,” she states.

A good balance

Given that a good number of retailers will find them¬selves taking a dangerous risk when focusing solely on either building their own brands or supporting the national brands for financial incentives, it’s safe to say that an “either/or” solution is not acceptable for many.

“It’s all about balance,” Parnell points out. “The national brand wants and pays for premium shelf space, but the retailer has loyal consumers that expect not only a variety of brands, but a variety of price points as well.”

Therefore, it’s possible to build own brands while also supporting certain national brands.

“The key is to advertise both,” Rosenblum states. “Consumers like choice. They like curated assortments, [and] they like to choose which brand to buy within that assortment.”

With secondary and tertiary brands seeing less demand — and store brands seeing more — some retailers’ categories require only the primary brand and the store brand(s). As an example, Rosenstock points to the dry oatmeal category. Ten to 15 years ago, a retailer might have carried only three national brands — Quaker Oats and two others — in the category.

But the reality has changed.

Target, for instance, is “still carrying and providing the consumer with three choices, but now what you see is that two of those … are Target brands — one being Archer Farms, and the other being the lower-price-point [Market Pantry] brand,” he explains. “And then Quaker Oats was stuck right in the middle.”

A healthy balance also helps in the case of CPG companies that are particularly innovative. According to Hertel, many retailers have let the national brands take the lead on innovation and education. And by watching which products succeed and which ones fail, they can — with more confidence — know what is worth fast-following and what isn’t.

“That’s a strategy that can work well to lower retailers’ risk and their costs of product development, and also cedes the first-mover advantage to the national brand,” he says. “That’s a win-win for many operators.”

Down the road

But in enough time, the scales might tip more in favor of store brand development over the acceptance of slotting fees, making the balancing act a bit of a different game for retailers.

“A lot of the national brands are … getting clobbered by a reduction in shelf space; they’re getting clobbered by their own brand fragmentation, which is making their individual items less effective on shelf; they’re getting clobbered because their ability to mobilize and utilize mass media to drive demand in the store is significantly less than what it used to be,” Wisner explains.

To remedy the situation, CPG companies will increase their trade promotion spending, which generally takes away from marketing funds, making national brands weaker and weaker over time. And as a new generation of shoppers — with less brand loyalty than previous generations — comes along, the national brand becomes “just another item on the shelf,” he states.

“It loses its meaning as a brand,” Wisner says. “And we’ve seen that happen to a lot of products over the years.”