Why bother?

The classic argument for developing and maintaining a strong store brand program is well understood: a retailer usually can earn higher margins on own-brand items than it can on consumer-packaged-goods (CPG) products.

“No matter what, a retailer — perhaps with the exclusion of a giant like Walmart or Target — will get a lower cost structure on private label than [it] will on a national brand,” says Paula Rosenblum, managing partner, Retail Systems Research, Miami. “Even though the retailer gets co-op ad dollars back from a national brand, I don’t believe it covers the margin loss associated with paying for the name.”

But in a world with blurring channels, emerging online competition, and powerful data analytics tools, retailers are finding reasons beyond higher margins to own and operate a prime private brand program.

The differentiation game

Years ago, national brand equivalency wasn’t easy to achieve, and a number of retailers were known for selling sub-par and inconsistent “national-brand-equivalent” (NBE) products. So a retailer could achieve differentiation via NBE products that were truly equal to or better than their national brand counterparts in terms of quality.

But today, most retailers have a prime NBE program, says Jim Wisner, president of Libertyville, Ill.-headquartered Wisner Marketing Group. This makes differentiation through NBE products rather difficult; according to research from Wisner’s firm, 57 percent of consumers believe NBE products are the same from one store to the next, with the only difference being the brand name.

“The individual retailers’ labels really weren’t of consequence to the customer,” he states. “If I buy the private label here versus there, it’s the same thing.”

Therefore, premium and destination-style items are necessary for retailers to differentiate from the competition, Wisner states.

“Think of … somebody like Trader Joe’s, who essentially has converted the whole store into a store of destination items,” he states.

Wegmans Food Markets, Rochester, N.Y., is another example, Wisner states, boasting plenty of chef-inspired, can-buy-it-only-here items and loads of merchandising and marketing support to back them up. Target, too, has plenty of products that “just look better and taste better” under the Archer Farms brand.

“And [Costco’s] Kirkland Signature does it by consistently overperforming on quality and the value equation behind it,” he says. “So you’ve got some [companies that] really get it from a strategic standpoint. … Once you get somebody who really does like your item — and it’s better or ... different than everybody else’s — you’ve got that customer locked. They’re not going anywhere else.”

Speaking of the customer, today’s retailers have the ability to mine and interpret point-of-sale (POS) data better than ever before to get to know their shoppers, says Michael Daher, principal with Deloitte Consulting, New York. If they have a good store brand program in place, retailers can use insights gathered from the data to better develop shopper-centric private label products.

“They have the POS data; they have much more sophisticated ways to track foot traffic in stores through cameras; they’re on the pulse of what’s hot in the store,” 
he explains.

To have POS data but not a private label program would be a lost opportunity, Daher explains.

Beyond brick and mortar

It perhaps would be an even greater lost opportunity if retailers were to enter the digital arena without a private label program. Carol Spieckerman, president of retail consultancy newmarketbuilders, points to the rich amount of data that can be mined via e-commerce.

“The digital space provides a much more robust data-gathering opportunity … offering a real opportunity for retailers to leverage digital data to refine in-store assortments,” she states.

And both in-store and online, a robust selection of customer-tailored products that cannot be found elsewhere is more necessary than ever for a retailer to shield itself against the growing threat of e-commerce.

“The grocery business has the last bastion of store-centric categories, but that is set to change as Amazon, in particular, gets more aggressive in the space, and as it and Walmart double-down on expanding site-to-store and site-to-home delivery capabilities. Groceries will expand exponentially in digital spaces, and that includes private brands,” she states, adding that Amazon.com is showing signs of getting “more aggressive” with private brand development.

Private brands offer a valuable hedge against Internet-enabled price transparency and comparison, Spieckerman explains. National brands, which can be found across brick-and-mortar and online retailers, are much more vulnerable to these comparisons.

But which categories are worth entering online via private label products? Daher says retailers need to answer this question by taking a close look at their categories and sales — as well as those of their online competitors — and identifying the areas where shopping clearly is migrating from brick-and-mortar stores to online.

“If they are shopping more online for that certain product category, then that’s one area that I would certainly start to look at and [consider] whether I would need to develop a private label offering,” he says.

Other advantages

A good private label program also allows for what Wisner calls the “residual sales effect” — something that happens in the NBE tier. For example, if a shopper purchases a product for $4 instead of its $5 national brand counterpart, what happens to the leftover dollar?

“Do I get some of that back?” he asks. “Does my customer walk out with actually more product, and they’ve actually saved enough to create another sale that generates even more margin? I don’t think people think about that enough or fully comprehend what the value of that is, but that’s a key thing.”

Wisner adds that leftover money with which retailers end up could be reinvested into the program or elsewhere. For instance, five store brand products that cost $2.80 each will cost a total of $6 less than five national brand counterparts that cost $4 each.

“So I have $6 more to the extent that it’s replacing sales and it’s replacing inventory requirements of national brand products,” he says. “Just in that little foot there, I’ve got an extra $6 that can be reinvested in whole bunches of other things. So it does free up some capital.”

Additionally, a prime private brand program that boasts a good assortment of NBE products helps on the negotiating end with CPG manufacturers, Rosenblum says.

“If a retailer has a viable alternative to the national brand,” she states,” he can demand a lower cost of what he buys from those brands.”

And whenever a retailer has assortment gaps that cannot be filled by the national brands, Rosenblum adds, a good private label program can help them fill those spaces — and better tailor the assortment to shoppers. SB

Consider the alternatives

Retailers without the scale or capacity to operate a private brand program have other ways to offer value to shoppers and/or differentiate themselves. Buying cooperatives such as Topco and Federated Group offer brands that can function as a retailer’s own.

Jim Wisner, president of Libertyville, Ill.-based Wisner Marketing Group, also points to packer labels as a way to create an opening-price-point product assortment. A number of manufacturers offer packer label products in most traditional categories. One category that comes to his mind is trash bags.

But the fact is, even with continued explosive growth of store brands in the U.S. market, not every retailer has to feel pressured to jump on the private label bandwagon.

“If business is going well and there’s no perceived need, then don’t!” states Paula Rosenblum, managing partner, Retail Systems Research, Miami.

Retailers also can find alternatives to store brands that still function to draw shoppers into the store. One hinges on curating an excellent and unique assortment of hard-to-find products, states Paula Rosenblum, managing partner, Retail Systems Research, Miami.

“If I remember correctly, FMI did a study a couple of years ago and found that consumers valued curated assortments as much as they do price,” she says.

It might require more work to seek out and source unusual and special products, but the work could be worthwhile. Rosenblum states that consumers have demonstrated an appreciation of independent retailers that create a unique environment for them.

According to Wisner, one retailer that has a weak private label program but creates a unique environment via specialty food offerings is Highland Park, Ill.-based Sunset Foods, a small chain operating in the Northwest suburbs of Chicago. He also points to Mundelein, Ill.-headquartered Garden Fresh Market — another small chain in the same market — which, in addition to offering hard-to-match prices on quality produce, differentiates itself via hard-to-find ethnic foods.

Rosenblum singles out another ethnic-minded retailer that differentiates via specialty offerings.

“I’m thinking of a place near where I live that makes me feel like I’ve gone to France,” she states. “The store — The Village Stand — carries artisan breads, unique pastas and sauces from other countries, and other eclectic products that create a really fun experience.”

On the non-foods side, mostly, Target, Minneapolis, pulled off a similar “curating” move several years ago by launching its The Shops at Target program, which brought in a rotating seasonal selection of products under brands from various U.S. boutiques. Initial brands brought in included Cos Bar (bath, body and beauty care products), Polka Dog Bakery (dog treats and accessories), Privet House (international collection of vintage-style furniture, artwork and mirrors) and more.

“Alternatives to private brand programs could include boutique brands that have cache in specific categories,” adds Carol Spieckerman, president of retail consultancy newmarketbuilders.

She also points to opportunity for retailers to partner with — or even acquire — brands that have developed a following in the digital space but have not been overexposed in physical retail.

“Doing so will allow retailers to tap into these brands’ digital content, user bases and data assets in relevant categories and, as more retailers build out site-to-store capabilities, the brands will also complement in-store offerings,” she says. “Walgreens’ investment in Alliance Boots and Target’s recent triple-play acquisition of DermStore.com, CHEF’s Catalog and Cooking.com are great examples of this trend.”

Ponder these points

Creating and maintaining a store brand program is not an easy feat. So if a retailer is truly serious about getting into the private label game, it needs to consider several critical points and ask important questions, says Jim Wisner, president of Libertyville, Ill.-based Wisner Marketing Group.

First, what are you trying to accomplish with the program? Retailers need to make sure they have a strategy in place.

“There are so many [retailers] out there that really don’t have a strategy,” he states.

Second, are you genuinely willing to invest in the necessary resources? According to Wisner, retailers need a procurement group and a branding group. They also have to understand cost and how it affects total profitability.

“And if you genuinely want to differentiate yourself, you’ve got to invest more heavily in those things,” he says. “You’ll have some products you can command higher prices for, but you really have to understand it and can’t be just giving it lip service. … For it to work well, you have to really be committed.”

Third, are you genuinely concerned about product quality? Or are you just giving lip service? According to Wisner, retailers need to make sure they have standards and practices in place so, for example, national-brand-equivalent (NBE) products are, in fact, NBE.

“You don’t cut corners; you don’t make exceptions — you simply don’t carry those items, or you position them in a different quality tier if you can’t match NBE,” he states.

Fourth, do you understand all of the costs and requirements of operating a successful private label program? Wisner notes that retailers have to have a good comprehension of category dynamics, price shielding, price spreads and more.

“Do you understand how you can lower your prices and increase your margins?” he asks. “Do you understand how you can redirect private brand gross margin dollars to actually lower your branded products, which, if you will, drive traffic and then drive the customers? How do you convert the customer in your store, then, to your private brands?”

And fifth, are you making sure that your buyers and people responsible for the program have incentives and disincentives?

One incentive practice many retailers engage in that Wisner recommends against is paying buyers and category managers based on their sales instead of profits tied to those sales.

What retailers need to be doing is incentivizing category managers and buyers based on total category profit dollars, Wisner explains. That way, you also force operating decisions and ask yourself important questions.

“Am I running programs that are too labor-intensive?” he advises retailers to ask themselves. “It really forces you to think through … what you’re doing. And nobody does that — I don’t know why. At least incentivize people on private brand growth.”