New & Improved Private Label Brands

NEW YORK This past spring, Safeway, in a search for what it called “pure talent,” ran the O Organics Photo Contest for children. The two winners, announced in August, became the faces of the O Organics food line for babies and toddlers, an extension of a health foods initiative that began in 2006.

The line, consisting of over 200 certified organic products from beverages and baked goods to frozen foods and snacks, is part of Safeway’s effort to differentiate itself through the creation of private-label brands that are able to compete with national rivals. And in a nod to the increasingly savvy marketing strategies of such store lines, the retailer has spread out the products—many priced below traditional brand options—throughout the store, often next to their competition. Another company initiative, Lifestyle, is the makeover of the stores themselves—what company CEO Steve Burd calls “branding the shopping experience.” New features like sushi bars and olive bars are being added, and space is being carved out for mini florists and home gift accessories. There’s also a shift away from the fluorescent glare of grocery retail, thanks to new hardwood floors and soft lighting. The store’s efforts are paying off: Net income in 2006 jumped 55 percent to $870.6 million from $561.1 million in 2005.

As national manufacturers struggle to connect with consumers through increasingly fragmented media, the retail environment has become the new battelground for shoppers who once believed private labels sacrificed quality for economy. Store brands are fighting big brands in several key ways: a new sensitivity to consumers’ changing lifestyles; quick-response times (a result of their ability to collect data at point-of-purchase); stylish packaging; and higher-quality ingredients. One new development: U.S. retailers are offering an increasing number of tiered private-label options, a strategy well-entrenched in the more sophisticated U.K. private-label market.

National manufacturers, slow to respond to private-label practices, are finally waking up to the changing world order, with some fighting back and, in some instances, even joining the enemy camp.

“Before [private label] was about knock-offs or best fast-follower,” observes Jim Lucas, svp, managing director, shopping at DraftFCB. “Now it’s about product innovation.”

Across traditional retail channels, private- label development is greatest at grocery stores, with a 19 percent share, and supercenters (16 percent), according to the Nielsen Company. And while private-label share is lowest at convenience stores/gas stations (3 percent), even 7-Eleven is getting into the act with its January announcement that it plans to increase its share of private-label sales from 4 percent to 10 percent by 2010.

A long list of other stores, including Costco and Trader Joe’s, are already setting their own agendas. And for the most part, they’re succeeding: Sales of private-label items have been growing up to twice the rate of national brands over the past 10 years, according to Nielsen. (Also per Nielsen, while that growth has slowed recently, private-label sales still outpaced that for national brands, rising 4.2 percent versus 3.4 percent in the 52-weeks ended in June.) And as those retail brands seek to grab more share, management consulting firm McKinsey estimates that as much as $55 billion in sales of national brands may be at stake over the next decade.

Another measure of the growing credibility of store brands will be on view next month at the Private Label Manufacturers Association trade show in Chicago. For the first time the event will play host to a number of big-ticket store expenditures like financial services and vacations. While retailers like Wal-Mart and Costco already offer those options to customers, the PLMA says that to meet popular demand, regional retailers are also jumping on the trend, from Wakefern Food Corp. in the mid-Atlantic states (offering a ShopRite private-label credit card) to the largest supermarket chain in Texas, H-E-B, which is marketing life and auto insurance with stores inside H-E-B locations.

Changing Consumer Perception

It may have been none other than Martha Stewart who gave upscale consumers the permission to look for goods at stores they wouldn’t have visited before.

When Stewart launched her Everyday collection in Kmart a decade ago, jaws dropped at the unlikely pairing of the mediagenic style icon with the downscale mass marketer. But it wasn’t long before architect Michael Graves and a number of other high-profile designers followed at Target and a new era of “mass with class” emerged—to the point that private-label sales are now growing fastest among more affluent consumers, according to Nielsen. Such retailers sought to get ahead of the curve in matching product development to consumer lifestyles. Stewart’s designs provided an affordable aspirational lifestyle, for instance, and products like those designed by Graves reinforced Target’s larger brand focus on design, but also possessed a subtle genius. “Target realized that 90 percent of what a toaster does is sit on a counter,” says DraftFCB’s Lucas, which effectively makes it an objet d’art in the kitchen.

“In building private brands, retailers are focusing much more on lifestyle than price,” observes Mary Delk, director of Deloitte Consulting. “Attitudes drive the shopping behavior; demographics are the descriptor.”

“Look at how the whole perception of coffee has changed with Starbucks,” says Jan-Benedict Steenkamp, the C. Knox Massey professor of marketing at the University of North Carolina who is co-author of Private Label Strategy: How to Meet the Store Brand Challenge. “You’ll even pay more for Starbucks than you will Folger’s, which has been on store shelves all those years.”

A New Aesthetic

In an industry that traditionally skimped on packaging, the new emphasis on private labels has meant a switch in aesthetics. Now, appearance at point of purchase is one of the most compelling strategies being employed.

“Packaging is the most enduring marketing with consumers,” says Ted Mininni, president of consultancy firm Design Force. “It’s the moment when consumers get to interact with the product, the vehicle where they spend the most amount of time with the product. For private-label brands, that’s usually their only opportunity to look upscale.”

According to Gary Stiebel, CEO of the New England Consulting Group, “Retailers are becoming far more savvy, far better marketers [and are] hiring people with packaged-goods marketing backgrounds. In some cases, they’re creating a product and packaging which exhibits the entire brand of the retailer, not just the product.”

Mininni adds that some of the most successful store brands are those that certainly don’t look generic, but also don’t try to mimic national brands. He cites packaging at Trader Joe’s, Wegmans and Target as examples of packaging that does double duty at selling the product as well as the larger retail brand. For example, he says Wegman’s private label ranges from toilet tissue to frozen foods, but no matter the product, it’s packaged in a consistent manner. Its toilet tissue, for instance, doesn’t use the harsh, heavy colors found in some other labels’ packaging, but the design is such that it’s readily recognizable as Wegman’s.

Shelf Life

While national marketers are still grappling with traditional mass-marketing models, retailers, empowered by growing industry consolidation, are the beneficiaries of technological advances in data collection.

DraftFCB’s Lucas notes that retail stores are the ultimate research tools. A product is put on the shelf and it sells—or it doesn’t. Retailers are also close, literally, to shoppers, which creates a relationship not available to national manufacturers.

“Retailers are trying to focus on what consumers want—that was always the core competency of big national brands,” notes Deloitte Consulting’s Delk. “Now [store brands have] cut time in the supply chain. Instead of taking 18 months, they’re taking 9-10 months to create new products. At this point, most national marketers are not doing that or are [not] able to do that.”

The shift in the balance of power between store operators and manufacturers also gives retailers greater leeway in merchandising their brands.

“Retailers have the advantage in product placement, getting better shelf visibility,” says Jack Trout, president of marketing consultants Trout & Partners. “It makes the job of the traditional brand marketers much more difficult” because now retailers are also brand managers of their own products and thus have ultimate control over the retail real estate.

“As the media landscape becomes more fragmented, it’s more difficult to cut through the clutter,” adds Steenkamp. “As national reach and ability to communicate is diminishing, the store environment is alive and kicking, and is owned by the retailer with their own store brands.”

Wal-Mart’s private label brands, which reached $126 billion in sales in 2005, are already generating global sales nearly twice that of all of Procter & Gamble’s brands, according to Keith Lincoln and Lars Thomassen, authors of the forthcoming book, Private Label: Turning the Retail Brand Threat Into Your Biggest Opportunity. Wal-Mart’s private label is 50 percent bigger than any single manufacturer’s entire brand portfolio, they argue.

The book is based on exclusive worldwide research conducted by Saatchi & Saatchi X, the agency’s retail unit. Simon Hathaway, Saatchi X’s managing director, says national manufacturers may have underestimated the potential encroachment of retail brands.

“With national brand marketers, their attitude is, ‘It’s just private label.’ They’ve let retail own private brands while they focus only on their national rivals,” he says. “Now they’re starting to wake up and say they have to do something about it.”

National brands “have to be very proactive in defense of shelf space,” says Todd Hale, svp, consumer and shopper insights at the Nielsen Company. “They need to know their weak points and their strong points. There are 80,000 new items on store shelves every year. Something’s got to give.”

One under-the-radar response from national manufacturers such as Kimberly-Clark is to quietly produce select products for private label manufacturers.

Big national manufacturers are also making the kind of R&D investments that retailers, with their margins, can’t afford when it comes to developing new product technologies.

While “a lot of national manufacturers haven’t realized how private label has become such an important issue, P&G is one who has reacted well and is in continuous innovation as a way of putting private label at a distance,” notes the University of North Carolina’s Steenkamp. In the diaper category, for instance, which it virtually invented and still dominates, P&G has kept private label at bay through new product features. P&G has also created new categories with products like Swiffer and Crest Whitestrips.

And some brands are using loyalty programs to collect info about their customers in an attempt to cultivate the type of close relationship private labels have in stores. The Coca-Cola Co., for instance, uses its My Coke Rewards loyalty program to bypass retailers’ grass-roots hold over consumers and go directly to shoppers, gathering information and then promoting the brand to them.

Seth Sarelson, COO of OnCardMarketing.com, a promotions and loyalty program agency, predicts that an increasing number of manufacturers will use such incentives to stay close to their customers. “It’s connecting with consumers and rewarding them, asking them things like, ‘How do you shop, what are you buying,'” says Sarelson. “It reduces the risks of disintermediation by store brands.”

He adds that retailers’ own loyalty card efforts can be, in a twist, a turnoff to consumers. “People are sensitive to ‘big brother,'” he explains. The store cards “almost offer a negative incentive in that, if I forget my supermarket card, it’s almost like I’m being penalized, because I’m paying the higher price.'”

Certain product categories with high emotional links, or status-appeal products like beer, candy and cosmetics, have so far held their own against private labels. (One can argue they may not be immune, given the success of Trader Joe’s “Two Buck Chuck,” the cheap, best-selling Charles Shaw wines that have a loyal following, or the success of stores like The Body Shop.)

Last spring, McKinsey, working for the Grocery Manufacturers Association/Food Products Association, offered two possible scenarios for private-label growth in America: Current share could continue, or, if U.S. retailers develop best-practices as seen in private-label leaders like Tesco in the U.K. and Loblaw in Canada—whose premium lines, Tesco Finest and President’s Choice, respectively, rival or exceed national brands—more American stores will increase their commitment to retail brand development as a way to differentiate their stores and build customer loyalty. By 2016, private-label growth dollar share in the U.S. should increase by 16-24 percent, depending on how aggressive retailers are in driving dollar growth generated by private-label sales, per Mckinsey.

Category brand leaders, with strong share and marketing support, have little to worry about in holding on to that retail real estate. It’s the category laggards that might find themselves with a shorter shelf life.

“In the next 10 years, in every category you’ll have a No. 1 and No. 2 national brand and then you’ll have retailer brands,” predicts Saatchi X’s Hathaway. “We will see a lot of brands fall out.”