private label profitability: the precipice of an explosion sunday, november 14, 1999 chicago 8912 e....
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Private Label Profitability:Private Label Profitability:The Precipice Of An ExplosionThe Precipice Of An Explosion
Sunday, November 14, 1999Sunday, November 14, 1999
ChicagoChicago
8912 E. Pinnacle Peak Rd. Ste 650 Scottsdale, Arizona 85255 8912 E. Pinnacle Peak Rd. Ste 650 Scottsdale, Arizona 85255 Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: [email protected] Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: [email protected]
TodayToday
The gathering storm of Private Label energy in The gathering storm of Private Label energy in the United Statesthe United States
What is required to survive and thrive as a What is required to survive and thrive as a private label manufacturer or supplierprivate label manufacturer or supplier
Hoyt & Company:Hoyt & Company: Marketing and sales strategistsMarketing and sales strategists
Involved with Category Management from the start:Involved with Category Management from the start: Specialists in Category Management and trade promotion spendingSpecialists in Category Management and trade promotion spending
Over 100 projects with 30 of top 100 advertisers since 1985:Over 100 projects with 30 of top 100 advertisers since 1985: Annual category business plansAnnual category business plans Re-engineering organizations to function effectively in Category Re-engineering organizations to function effectively in Category
ManagementManagement All systems and processes relating to Category ManagementAll systems and processes relating to Category Management Restructuring trade promotion spending and tracking to support Restructuring trade promotion spending and tracking to support
Category Management strategies and implementation requirements Category Management strategies and implementation requirements and to maximize efficiencies of trade promotion spendingand to maximize efficiencies of trade promotion spending
Made every mistake humans can make.Made every mistake humans can make.
You are about to benefit from 12 years of trial and error.You are about to benefit from 12 years of trial and error.
Hoyt & Company Believes That the Private Label Business in Hoyt & Company Believes That the Private Label Business in the United States Is on the Precipice of an Explosion:the United States Is on the Precipice of an Explosion:
Past growth cannot be used as a predictor of future Past growth cannot be used as a predictor of future potential.potential.
Consolidation and determination to increase profits Consolidation and determination to increase profits make it a whole new ball game.make it a whole new ball game.
Private Label suppliers face both huge threats and Private Label suppliers face both huge threats and huge opportunities.huge opportunities.
The U.K. provides an almost line-by-line benchmark The U.K. provides an almost line-by-line benchmark for what we believe will be the Private Label trajectory for what we believe will be the Private Label trajectory in the U.S. over the next 5-10 years.in the U.S. over the next 5-10 years.
The Most Distinguishing Factor of the U.K. Marketplace Over the The Most Distinguishing Factor of the U.K. Marketplace Over the Past 25 Years Has Been the Astounding Growth of Private Labels:Past 25 Years Has Been the Astounding Growth of Private Labels:
Between 1975 and 1998, Private Label unit share Between 1975 and 1998, Private Label unit share jumped from 25% to 43% of total U.K. packaged good jumped from 25% to 43% of total U.K. packaged good sales while dollar share jumped from 20% to 36%:sales while dollar share jumped from 20% to 36%:
Non-packaged goods private labels in the U.K. now Non-packaged goods private labels in the U.K. now account for over 80% of all goods sold in the meat, account for over 80% of all goods sold in the meat, fish, poultry, fruits, vegetables and deli fish, poultry, fruits, vegetables and deli departments.departments.
The Most Distinguishing Factor of the U.K. Marketplace Over the The Most Distinguishing Factor of the U.K. Marketplace Over the Past 25 Years Has Been the Astounding Growth of Private Labels:Past 25 Years Has Been the Astounding Growth of Private Labels:
It is clear that there is a consistent relationship It is clear that there is a consistent relationship between Private Label growth and retailer between Private Label growth and retailer consolidation:consolidation:
Top 5 Supermarket Chains, U.K. 1975 - 1998Top 5 Supermarket Chains, U.K. 1975 - 1998
19751975 19981998 % +/-% +/-
Top 5 SOMTop 5 SOM
Private LabelsPrivate Labels
22%22%
24%24%
63%63%
43%43%
18651865
79%79%
Source: PLMA, Tony Cowling, Taylor Nelson, Mark Husson
Key Private Label Drivers – U.K., 1975 - 1998:Key Private Label Drivers – U.K., 1975 - 1998:
1.1. 1970’s & 1980’s – Sainsbury Private Label Objectives:1970’s & 1980’s – Sainsbury Private Label Objectives: Give Sainsbury name status of a major brandGive Sainsbury name status of a major brand Offer own labels competitive on quality to major national Offer own labels competitive on quality to major national
brands at consistently lower pricesbrands at consistently lower prices Use national brands to promote categories and add Use national brands to promote categories and add
excitement (i.e., build traffic)excitement (i.e., build traffic)
2.2. Late 1980’s, Early 1990’s – Enter The Mass Merchandisers:Late 1980’s, Early 1990’s – Enter The Mass Merchandisers:
QwikSave – Built business on price and cheap P.L.sQwikSave – Built business on price and cheap P.L.s Discount share of market catapulted from 9% - 15% between Discount share of market catapulted from 9% - 15% between
1989 and 19921989 and 1992 Supermarkets responded with own cheap P.L.s – e.g., Tesco Supermarkets responded with own cheap P.L.s – e.g., Tesco
with BOLwith BOL
U.K. 1975 - 1998 (cont’d):U.K. 1975 - 1998 (cont’d):
3.3. Since 1992:Since 1992:
1992 – Analysts concerned about impact of low price brands 1992 – Analysts concerned about impact of low price brands on retailer profitson retailer profits
Sainsbury introduces first successful premium private label Sainsbury introduces first successful premium private label with Novon in the highly competitive HDLD category:with Novon in the highly competitive HDLD category: Between 1992 and 1996, private label share of HDLD Between 1992 and 1996, private label share of HDLD
catapulted from 8-16%catapulted from 8-16% Sainsbury Novon share doubled from 15-33%Sainsbury Novon share doubled from 15-33% Lever’s share of HDLD nose-dived from 40-30%Lever’s share of HDLD nose-dived from 40-30%
Sainsbury immediately followed with Classic Cola which Sainsbury immediately followed with Classic Cola which chopped Coke and Pepsi share in Sainsbury stores fromchopped Coke and Pepsi share in Sainsbury stores from 85% - 40% in 85% - 40% in less than one yearless than one year
U.K. 1975 - 1998 (cont’d):U.K. 1975 - 1998 (cont’d):
3.3. Since 1992, cont’dSince 1992, cont’d
Tesco retaliated with Virgin Cola (controlled label) which at Tesco retaliated with Virgin Cola (controlled label) which at one time captured 25% of Tesco’s CSD salesone time captured 25% of Tesco’s CSD sales
Virgin is now being phased out by Tesco in favor of Virgin is now being phased out by Tesco in favor of Tesco’s own labelTesco’s own label
Net On U.K.:Net On U.K.:
Over 43¢ of every dollar spent in U.K. supermarkets is now Over 43¢ of every dollar spent in U.K. supermarkets is now spent on private labels.spent on private labels.
U.K. private label brand marketing has all of the U.K. private label brand marketing has all of the sophistication as national brand marketing in the United sophistication as national brand marketing in the United States:States:
““Store Brands” – Premium P.L.s priced to compete with Store Brands” – Premium P.L.s priced to compete with nationals and deliver sufficient profits to fund nationals and deliver sufficient profits to fund advertising and promotion campaigns.advertising and promotion campaigns.
““Traditional P.L.s” – NBE’s to capture conventional Traditional P.L.s” – NBE’s to capture conventional private label consumers and offer high value for price.private label consumers and offer high value for price.
““Cheap Budget Own Labels” – Minimum acceptable Cheap Budget Own Labels” – Minimum acceptable performance, packaging and priced accordingly.performance, packaging and priced accordingly.
Net On U.K. (cont’d):Net On U.K. (cont’d):
U.K. private labels now growing at a steady 1% per year U.K. private labels now growing at a steady 1% per year while national brands continue to decline, in some while national brands continue to decline, in some categories as much as 2-3% per year.categories as much as 2-3% per year.
Supermarkets are now the second largest advertisers in Supermarkets are now the second largest advertisers in the country, behind only automobiles:the country, behind only automobiles:
Tesco, Sainsbury and Asda are each individually Tesco, Sainsbury and Asda are each individually among the top 10 advertisers in the realm.among the top 10 advertisers in the realm.
The amount of exposure the U.K. consumer has to retail The amount of exposure the U.K. consumer has to retail organizations in the U.K. is overwhelming compared to that organizations in the U.K. is overwhelming compared to that of major branded suppliers.of major branded suppliers.
Net On U.K. (cont’d):Net On U.K. (cont’d):
In many categories, the demarcation between national In many categories, the demarcation between national brands and store brands has been so diluted that the brands and store brands has been so diluted that the consumer no longer distinguishes between the two, much consumer no longer distinguishes between the two, much less cares.less cares.
The “balance of power” struggle in the U.K. is over. U.K. The “balance of power” struggle in the U.K. is over. U.K. retailers:retailers:
Control the shelvesControl the shelves Control the windowsControl the windows Control the “telly”Control the “telly” Control the distributionControl the distribution
Counter Arguments – “It Will Never Happen Counter Arguments – “It Will Never Happen Here – The U.S. Is Different!”Here – The U.S. Is Different!”
The U.K. is small geographically vs. the U.S. which is very The U.K. is small geographically vs. the U.S. which is very heterogeneous and regionalized in nature.heterogeneous and regionalized in nature.
The U.S. consumer is habituated to national brands and has The U.S. consumer is habituated to national brands and has more disposable income than the U.K. consumer.more disposable income than the U.K. consumer.
Advertising costs too much in the U.S. and retailers would never Advertising costs too much in the U.S. and retailers would never be able to afford the sustained advertising necessary to be able to afford the sustained advertising necessary to establish a store brand as a national. establish a store brand as a national.
Meanwhile, U.S. national brand manufacturers are much more Meanwhile, U.S. national brand manufacturers are much more powerful than in the U.K. and are not just going to sit idly by powerful than in the U.K. and are not just going to sit idly by while supermarkets and other retailers chip away at their while supermarkets and other retailers chip away at their franchises or shares.franchises or shares.
All This May Have Been True In The Past All This May Have Been True In The Past BUT...BUT...
While Hoyt & Company does not wish to degrade or While Hoyt & Company does not wish to degrade or minimize these arguments, we believe that there is minimize these arguments, we believe that there is presently a combination of factors at work in this presently a combination of factors at work in this
country which will shortly and inevitably bring fierce country which will shortly and inevitably bring fierce and renewed retailer energy behind the private label and renewed retailer energy behind the private label sector – energy, power and commitment unlike any sector – energy, power and commitment unlike any
other country has experienced before.other country has experienced before.
While Hoyt & Company does not wish to degrade or While Hoyt & Company does not wish to degrade or minimize these arguments, we believe that there is minimize these arguments, we believe that there is presently a combination of factors at work in this presently a combination of factors at work in this
country which will shortly and inevitably bring fierce country which will shortly and inevitably bring fierce and renewed retailer energy behind the private label and renewed retailer energy behind the private label sector – energy, power and commitment unlike any sector – energy, power and commitment unlike any
other country has experienced before.other country has experienced before.
Factor #1 – Consolidation:Factor #1 – Consolidation:
Top 5 Industry Players – FoodTop 5 Industry Players – Food
YearYear % ACV% ACV
19921992
19981998
19991999
2002E2002E
2007E2007E
19%19%
24%24%
33%33%
50%50%
60%60%
Private Label Share Data In Other Countries Show That With Few Private Label Share Data In Other Countries Show That With Few Exceptions, It Is The Large, Powerful Retailers Who Invest Most In Their Exceptions, It Is The Large, Powerful Retailers Who Invest Most In Their P.L. Programs And Who Almost Uniformly Have The Highest P.L. Shares:P.L. Programs And Who Almost Uniformly Have The Highest P.L. Shares:
CountryCountry Top RetailerTop RetailerTop RetailerTop Retailer P.L. Share ($)P.L. Share ($)
Avg. Avg. P.L. ShareP.L. Share % Difference% Difference
U.K.U.K.
CanadaCanada
NetherlandsNetherlands
U.S.U.S.
FranceFrance
BelgiumBelgium
SpainSpain
TescoTesco
LoblawLoblaw
AholdAhold
KrogerKroger
CarrefourCarrefour
DelhaizeDelhaize
ContinentéContinenté
45.045.0
37.037.0
33.033.0
24.524.5
20.020.0
20.020.0
20.020.0
37.137.1
20.020.0
16.316.3
16.316.3
20.520.5
16.316.3
12.012.0
+21%+21%
+85%+85%
+127%+127%
+50%+50%
-3%-3%
+23%+23%
+66%+66%
Source: Mark Husson, Merrill Lynch, 1999
Factor #2 – Private Label Profitability:Factor #2 – Private Label Profitability:
Private Label gross margins are estimated at 34% vs. Private Label gross margins are estimated at 34% vs. national brands at 24%.national brands at 24%.
The narcotic appeal of P.L. margins is shown in the The narcotic appeal of P.L. margins is shown in the following table which illustrates P.L. profit contribution in following table which illustrates P.L. profit contribution in the CLCP category for one major national retailer.the CLCP category for one major national retailer.
Factor #2 – Private Label Profitability:Factor #2 – Private Label Profitability:
Contact Lens Cleaning Products, 52 Weeks, 9/99Contact Lens Cleaning Products, 52 Weeks, 9/99
SegmentSegment Total ProfitTotal Profit P.L. ProfitP.L. Profit P.L. % TotalP.L. % Total Total Vol.Total Vol. P.L. VolP.L. Vol
Re-wettingRe-wetting
WeeklyWeekly
DailyDaily
MPSMPS
PeroxidePeroxide
HardHard
RGPRGP
Aerosol SalinesAerosol Salines
Liquid SalinesLiquid Salines
TOTALSTOTALS
$1,335.7$1,335.7
1,644.31,644.3
743.7743.7
2,501.52,501.5
38.938.9
1.91.9
1,103.91,103.9
61.461.4
193.6193.6
$7,625.0$7,625.0
$189.4$189.4
352.6352.6
10.910.9
1,778.31,778.3
––
––
––
––
––
$2,331.3$2,331.3
14%14%
21%21%
1%1%
71%71%
––
––
––
––
––
30.6%30.6% 5,156.95,156.9 6.1%6.1%
Factor #3 – Need For Differentiation On Factor #3 – Need For Differentiation On Basis Other Than Price:Basis Other Than Price:
60% ACV among five supermarkets will escalate competition to 60% ACV among five supermarkets will escalate competition to unprecedented heights:unprecedented heights:
Not two years ago, one often-quoted survey noted that over Not two years ago, one often-quoted survey noted that over 83% of consumers thought all supermarkets were alike.83% of consumers thought all supermarkets were alike.
Supermarkets cannot compete on price and raise profits at the Supermarkets cannot compete on price and raise profits at the same time.same time.
One of supermarkets’ key weapons will be premium Store One of supermarkets’ key weapons will be premium Store Brands:Brands:
Wal-Mart is already on this trackWal-Mart is already on this track Consolidation –> Increased Store Penetration –> makes Consolidation –> Increased Store Penetration –> makes
advertising cost-effectiveadvertising cost-effective 60% national penetration is magic number – reason why Wal-60% national penetration is magic number – reason why Wal-
Mart wants so desperately to get into the EastMart wants so desperately to get into the East
Consumer Migration Across Channels Only Intensifies Consumer Migration Across Channels Only Intensifies Competition And Exacerbates The Need To Differentiate:Competition And Exacerbates The Need To Differentiate:
1999:1999:
100% of consumers shop supermarkets 1.8 times per 100% of consumers shop supermarkets 1.8 times per week.week.
94% of consumers shop mass merchandisers 2.3 times per 94% of consumers shop mass merchandisers 2.3 times per month.month.
86% of consumers shop drug chains 1.3 times per month.86% of consumers shop drug chains 1.3 times per month.
52% of consumers shop convenience/gas 1.1 times per 52% of consumers shop convenience/gas 1.1 times per month.month.
49% of consumers shop clubs 9 times per year.49% of consumers shop clubs 9 times per year.
Source: A.C. Nielsen, Channel Blurring Study, 1999
Factor #4 – Rapidly Growing Population Factor #4 – Rapidly Growing Population Segments To Whom Private Labels Appeal:Segments To Whom Private Labels Appeal:
ElderlyElderly
Lower IncomesLower Incomes
Lower Housing ValuesLower Housing Values
Large FamiliesLarge Families
Higher % Working WomenHigher % Working Women
High Levels of EducationHigh Levels of Education
Source: Stephen J. Hoch & Sanjay K. Dhar, Wharton, Feb, 1996: “Why Store Brand Penetration Varies By Retailer”
Average HH Income – Despite What The Government Average HH Income – Despite What The Government Might Claim, Here Are The Startling And Abysmal Facts:Might Claim, Here Are The Startling And Abysmal Facts:
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
1967 1970 1975 1980 1985 1990 1995 1998
Lowest Quintile Second Quintile Third Quintile
Fourth Quintile Highest Quintile Median Income
Source: U.S. Census Bureau: 1967 - 1999
If The Average HH Bought P.L.s Exclusively On Every Shopping Trip To A If The Average HH Bought P.L.s Exclusively On Every Shopping Trip To A Supermarket, It Could Save Up To $3,000 Per Year, Depending On Where It Supermarket, It Could Save Up To $3,000 Per Year, Depending On Where It Lived:Lived:
P.L. Savings Vs. National Brands, 54 Item Shopping ListP.L. Savings Vs. National Brands, 54 Item Shopping List
Supermarket ChainSupermarket ChainBrand-NameBrand-Name
PricePriceStore-BrandStore-Brand
PricePrice Overall SavingsOverall Savings
A&PA&P
JewelJewel
SafewaySafeway
ShopRiteShopRite
$135.70$135.70
138.81138.81
139.33139.33
135.91135.91
$91.13$91.13
114.36114.36
114.71114.71
98.5698.56
$44.57$44.57
24.2524.25
24.6224.62
37.3537.35
Avg. of Above 4 Retailers:Avg. of Above 4 Retailers: $32.69$32.69
X 91 Trips/Year:X 91 Trips/Year: $2,975$2,975
Source: Phil Lempert, 1998: “Store Brands: Their Stock Is Soaring”
The Following Reiterates Why The Prospect Of Buying Private Labels To The Following Reiterates Why The Prospect Of Buying Private Labels To Save Up To $3K Per Year Is So Powerful For The Average American, Save Up To $3K Per Year Is So Powerful For The Average American, Particularly If He/She Felt They Could Get NBE (Or Better) In The Process:Particularly If He/She Felt They Could Get NBE (Or Better) In The Process:
Share of Aggregate HH Income By Quintile: 1996, 1993 and 1998 (%)Share of Aggregate HH Income By Quintile: 1996, 1993 and 1998 (%)
4.0
10.8
17.3
24.2
43.8
3.6
9.0
15.1
23.5
48.9
3.6
9.0
15.0
23.2
49.2
0
10
20
30
40
50
60
Lowest Quintile Second Quintile Third Quintile Fourth Quintile Highest Quintile
199619931998
Middle 60 Percent
17.521.0 24.4
Top 5Percent
Source: U.S. Census Bureau, Current Population Survey, March 1968, 1994, 1999
Factor #5 – Dilution and Erosion Of Supplier Factor #5 – Dilution and Erosion Of Supplier Clout And Control:Clout And Control:
With few exceptions, the national brand supplier community is in With few exceptions, the national brand supplier community is in disarray:disarray: Has not been able to formulate a successful response to retailer Has not been able to formulate a successful response to retailer
consolidation or ascendancyconsolidation or ascendancy Spending more and getting less (TP spending now at 60%)Spending more and getting less (TP spending now at 60%) Focused on the wrong things – e.g., growing the category Focused on the wrong things – e.g., growing the category
instead of own brands (!)instead of own brands (!) Characterized by unthinking and uncritical acceptance of Characterized by unthinking and uncritical acceptance of
industry epidemics such as DPP, ECR, “Partnering”, “Meal industry epidemics such as DPP, ECR, “Partnering”, “Meal Solutions”, “Solutions Selling” and Category Management.Solutions”, “Solutions Selling” and Category Management.
Meanwhile, brand loyalty continues to erode while P.L. sales Meanwhile, brand loyalty continues to erode while P.L. sales grow at national brands’ expense.grow at national brands’ expense.
This Is True Of P.L. vs. National Brands In This Is True Of P.L. vs. National Brands In All Trade Classes:All Trade Classes:
Food Sales: Private Label Versus National Brand Growth By FormatFood Sales: Private Label Versus National Brand Growth By Format
2.3%
1.0%
18.1%
3.2%
3.0%
7.1%
20.9%
3.5%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
Private LabelNational Brands
Total
Mass Merchants
Drug Stores
Supermarkets
Source: Private Label Manufacturing Association
It Is Also True of Manufacturers Of All Sizes Except Small It Is Also True of Manufacturers Of All Sizes Except Small Manufacturers Who Either Did Not Know Enough Or Have The Manufacturers Who Either Did Not Know Enough Or Have The Resources To Get Distracted By The Latest Industry Craze:Resources To Get Distracted By The Latest Industry Craze:
Manufacturer Sales Growth By Channel Comparison (1998 over 1997)Manufacturer Sales Growth By Channel Comparison (1998 over 1997)
SupermarketsSupermarketsDrugDrug
StoresStoresMassMass
MerchandiserMerchandiserCombinedCombined
OutletsOutlets
Top 10 ManufacturersTop 10 Manufacturers
Next 15 ManufacturersNext 15 Manufacturers
All Other ManufacturersAll Other Manufacturers
Private LabelPrivate Label
1.2%1.2%
0.9%0.9%
3.5%3.5%
3.2%3.2%
4.7%4.7%
1.5%1.5%
2.1%2.1%
7.3%7.3%
14.5%14.5%
13.0%13.0%
13.7%13.7%
17.6%17.6%
3.1%3.1%
3.3%3.3%
5.1%5.1%
5.0%5.0%
Source: IRI
Net Result – A Tsunami In The Making:Net Result – A Tsunami In The Making:
Kroger – #1 At $44B (1999E):Kroger – #1 At $44B (1999E):
P.L. Brands now account for 25% of salesP.L. Brands now account for 25% of sales
Own P.L. manufacturing facilitiesOwn P.L. manufacturing facilities
Centralized P.L. purchasingCentralized P.L. purchasing
Three tier P.L. program – premium, traditional and valueThree tier P.L. program – premium, traditional and value
Just bought Fred Meyer where P.L. sales are 18% and Just bought Fred Meyer where P.L. sales are 18% and mainly in G.M. versus Foodmainly in G.M. versus Food
Kroger (cont’d)Kroger (cont’d)
If Kroger can get Fred Meyer P.L. food sales to 25% in If Kroger can get Fred Meyer P.L. food sales to 25% in three years, Kroger’s P.L. sales would be $10B and three years, Kroger’s P.L. sales would be $10B and incremental gross profits would be almost $100MM. This incremental gross profits would be almost $100MM. This means that Kroger’s:means that Kroger’s:
P.L. segment only would be larger than Heinz, Pillsbury P.L. segment only would be larger than Heinz, Pillsbury or Best Foodsor Best Foods
Profits would grow from 2.8 to 4.0 or 43%Profits would grow from 2.8 to 4.0 or 43%
Reality is that Kroger’s P.L. sales will grow to more like Reality is that Kroger’s P.L. sales will grow to more like 30% when Kroger shifts focus from reducing operating 30% when Kroger shifts focus from reducing operating expenses and assumes role of marketer.expenses and assumes role of marketer.
The Other Players:The Other Players:
Albertson’s-American – #2 at $36B:Albertson’s-American – #2 at $36B:
American got 30% of its profits and 20% of sales American got 30% of its profits and 20% of sales from just 8% of its P.L. SKUsfrom just 8% of its P.L. SKUs
This gives Albertson’s huge opportunity to grow This gives Albertson’s huge opportunity to grow its own P.L. sales from current levels (16.5%) to its own P.L. sales from current levels (16.5%) to American Store’s levels (20.2%)American Store’s levels (20.2%)
The Other Players:The Other Players:
Safeway – #3 at $27B:Safeway – #3 at $27B:
Wins Titanium Award for developing and Wins Titanium Award for developing and establishing a beautifully-packaged, quality “store establishing a beautifully-packaged, quality “store brand” with Safeway Select.brand” with Safeway Select.
Has the P.L. formula down pat: Is country leader Has the P.L. formula down pat: Is country leader with P.L. share at 25.5% of unit sales.with P.L. share at 25.5% of unit sales.
Can leverage Select brand name plus P.L. Can leverage Select brand name plus P.L. experience in Von’s, Dominick’s and Carr experience in Von’s, Dominick’s and Carr Gottstein.Gottstein.
The Other Players:The Other Players:
Ahold – #4 at $22B:Ahold – #4 at $22B:
Can leverage European P.L. expertise against Can leverage European P.L. expertise against Bi-Lo, Stop & Shop, Tops, Finast, Cleveland and Bi-Lo, Stop & Shop, Tops, Finast, Cleveland and Giant, Landover.Giant, Landover.
Procure on an international level.Procure on an international level.
37% P.L. penetration in Netherlands.37% P.L. penetration in Netherlands.
37% becomes the floor (not the objective) in the 37% becomes the floor (not the objective) in the U.S.U.S.
In Total, The Handwriting Would Appear To In Total, The Handwriting Would Appear To Be On The Wall:Be On The Wall:
All need to differentiate on basis other than price.All need to differentiate on basis other than price.
No evidence that consolidation ambitions have peaked.No evidence that consolidation ambitions have peaked.
All have size, resources and economies of scale to become own All have size, resources and economies of scale to become own marketers and take over role of “Category Captains” themselves.marketers and take over role of “Category Captains” themselves.
Key PlayersKey Players $ Sales (B)$ Sales (B) 19931993 19981998
Share of MarketShare of Market
KrogerKrogerWal-MartWal-MartAlbertson’sAlbertson’s
SafewaySafewayAholdAhold TotalsTotals
$44$4439393636
2727 2222
$168$168
6%6%0%0%3%3%
4%4% 2%2%15%15%
10%10%9%9%9%9%
7%7% 5%5%40%40%
% P.L. Share of Total (Units)% P.L. Share of Total (Units)
19931993 19981998
22.0%22.0%
14.0%14.0%17.4%*17.4%*20.5%20.5% 16.0%16.0%17.8%17.8%
24.5%24.5%
16.5%16.5%20.2%*20.2%*25.5%25.5%20.5%20.5%21.2%21.2%
* American
Surviving And Thriving As A P.L. Surviving And Thriving As A P.L. Manufacturer or SupplierManufacturer or Supplier
Threats To The Independent P.L. Threats To The Independent P.L. Manufacturing Community:Manufacturing Community:
1)1) Retailers developing own manufacturing capabilities as their P.L. Retailers developing own manufacturing capabilities as their P.L. grows and becomes cost effective to take in-house.grows and becomes cost effective to take in-house. KrogerKroger SafewaySafeway
2)2) National Brand manufacturers who have adopted P.L. supply as a National Brand manufacturers who have adopted P.L. supply as a contingency (or even survival) strategy:contingency (or even survival) strategy: Protect National Brand franchiseProtect National Brand franchise Cover operating costsCover operating costs Already producing to NBE standardsAlready producing to NBE standards Can leverage current I.T. and R&D to capture and maintain Can leverage current I.T. and R&D to capture and maintain
Private Label edgePrivate Label edge
3)3) “I Saw The Enemy And It Was Us!” – Lack of size, clout, “I Saw The Enemy And It Was Us!” – Lack of size, clout, resources and information technology to deal with mega giant’s resources and information technology to deal with mega giant’s demands in what, by definition, is a low margin business.demands in what, by definition, is a low margin business.
Given this environment, the key questions Given this environment, the key questions for private label suppliers is what are the for private label suppliers is what are the
meaningful ways one can differentiate meaningful ways one can differentiate oneself and create value for retailers over oneself and create value for retailers over
and above the obvious?and above the obvious?
Given this environment, the key questions Given this environment, the key questions for private label suppliers is what are the for private label suppliers is what are the
meaningful ways one can differentiate meaningful ways one can differentiate oneself and create value for retailers over oneself and create value for retailers over
and above the obvious?and above the obvious?
Let’s Start With The Obvious, Because This Let’s Start With The Obvious, Because This Is The Baseline:Is The Baseline:
Key Success Factors That Characterize Key Success Factors That Characterize Retailers’ “Best” Private Label SuppliersRetailers’ “Best” Private Label Suppliers
Very ImportantVery Important ImportantImportant Not ImportantNot Important
Consistent Product QualityConsistent Product Quality
Complete/Timely DeliveriesComplete/Timely Deliveries
Promotional SupportPromotional Support
Flexibility On PriceFlexibility On Price
Innovative Product IdeasInnovative Product Ideas
Below Average Product CostsBelow Average Product Costs
In-Store Sales ServiceIn-Store Sales Service
100%100% 0%0% 0%0%
98%98% 2%2% 0%0%
52%52% 36%36% 11%11%
49%49% 51%51% 0%0%
49%49% 49%49% 2%2%
44%44% 42%42% 14%14%
14%14% 44%44% 42%42%
Source: PLMA, “Blueprint For Growth” Current Salmon Associates, 1998Based On Responses From 45 Leading Retailers
How Independent Private Label Manufacturers Stack-Up Against National How Independent Private Label Manufacturers Stack-Up Against National Brand Manufacturers In Meeting These Needs Suggests That “Pricing Brand Manufacturers In Meeting These Needs Suggests That “Pricing Flexibility” Is Currently The Independents’ Strongest Selling Point:Flexibility” Is Currently The Independents’ Strongest Selling Point:
Which Type of Supplier Is Better Equipped Which Type of Supplier Is Better Equipped In Regard To The Following Factors?In Regard To The Following Factors?
Performance MeasuresPerformance MeasuresPrivate LabelPrivate Label
Suppliers SuppliersNational Brand National Brand
SuppliersSuppliers
Retail MarginsRetail Margins 96%96% 4%4%Pricing FlexibilityPricing Flexibility 84%84% 16%16%Ability To Work WithAbility To Work With 69%69% 31%31%Product QualityProduct Quality 39%39% 61%61%Consistent DeliveryConsistent Delivery 34%34% 66%66%Promotional SupportPromotional Support 22%22% 78%78%PackagingPackaging 21%21% 79%79%Equipment & Technology (Plant/Machinery)Equipment & Technology (Plant/Machinery) 20%20% 80%80%Category ManagementCategory Management 9%9% 91%91%EDIEDI 9%9% 91%91%Product InnovationProduct Innovation 2%2% 98%98%ECRECR 0%0% 100%100%
Source:
With Regard To Price:With Regard To Price:
Low price is NOT a viable or sustainable strategy for Low price is NOT a viable or sustainable strategy for P.L. manufacturers long-term:P.L. manufacturers long-term:
Anyone with deep pockets can emulate low prices Anyone with deep pockets can emulate low prices and outlast youand outlast you
Perrigo and Paragon are not the lowest cost Perrigo and Paragon are not the lowest cost suppliers in their categories and did not build their suppliers in their categories and did not build their businesses slowly on pricebusinesses slowly on price
With Regard To Price:With Regard To Price:
Price IS a major component of the P.L. sales mix but Price IS a major component of the P.L. sales mix but must be balanced with other factors to provide you must be balanced with other factors to provide you with a signature reason for being – for example:with a signature reason for being – for example:
Identifying new product opportunities and Identifying new product opportunities and developing new products to meet themdeveloping new products to meet them
Consistent qualityConsistent quality
Consistent deliveryConsistent delivery
Promotion supportPromotion support
All of the aboveAll of the above
It Is Obviously Impossible In A General Meeting Like This To Address Each It Is Obviously Impossible In A General Meeting Like This To Address Each Supplier’s Particular Issues, But Here Are Some Guidelines Which Will Help Supplier’s Particular Issues, But Here Are Some Guidelines Which Will Help You Survive and Thrive In The New Environment:You Survive and Thrive In The New Environment:
1.1. Do not try to be all things to all retailers:Do not try to be all things to all retailers:
Different retailers have different definitions of Different retailers have different definitions of “value-added” and even these may vary in degree.“value-added” and even these may vary in degree.
Know how each retailer defines value-added and Know how each retailer defines value-added and target those retailers whose definition most closely target those retailers whose definition most closely approximates your core competencies.approximates your core competencies.
Guidelines, (cont’d)Guidelines, (cont’d)
2.2. Be able to say who you are what you stand for in one Be able to say who you are what you stand for in one (short) sentence:(short) sentence:
For example:For example:
““One-stop shopping for high quality store brand One-stop shopping for high quality store brand products”products”
Do one thing right and build your reputation on itDo one thing right and build your reputation on it
Guidelines, (cont’d)Guidelines, (cont’d)
3.3. Understand what you are good at and be honest with Understand what you are good at and be honest with yourselves about what you are not good at:yourselves about what you are not good at:
Do not expand into areas outside of your core Do not expand into areas outside of your core competencies as this will only dilute your image competencies as this will only dilute your image and drain your resourcesand drain your resources
Guidelines, (cont’d)Guidelines, (cont’d)
4.4. Know your costs:Know your costs:
If you do not yet have an activity-based costing If you do not yet have an activity-based costing (ABC) system, get one(ABC) system, get one
As chains get bigger, P.L. margins As chains get bigger, P.L. margins will go downwill go down
Success or failure may be a matter of pennies – as Success or failure may be a matter of pennies – as it has been for years in the supermarket businessit has been for years in the supermarket business
Guidelines, (cont’d)Guidelines, (cont’d)
5.5. Avoid making promises you cannot fulfill:Avoid making promises you cannot fulfill:
““If you take us on, we’ll put one person on-site to If you take us on, we’ll put one person on-site to manage the business.”manage the business.”
““We can process and deliver within 7 days.”We can process and deliver within 7 days.”
Guidelines, (cont’d)Guidelines, (cont’d)
6.6. Hire the best people you can afford but stay lean:Hire the best people you can afford but stay lean:
Particularly important with those who represent you Particularly important with those who represent you on the front lineon the front line
Leverage big company training and expertiseLeverage big company training and expertise
Guidelines, (cont’d)Guidelines, (cont’d)
7.7. Do not build in unnecessary quality:Do not build in unnecessary quality:
Once NCE is past, you are back in a price gameOnce NCE is past, you are back in a price game
Better to devote the funds to new product Better to devote the funds to new product innovation or operational improvementsinnovation or operational improvements
Guidelines, (cont’d)Guidelines, (cont’d)
8.8. Dig for the details that will make a difference and set Dig for the details that will make a difference and set you apart. For example:you apart. For example:
Most supermarkets are leaving millions on the table Most supermarkets are leaving millions on the table because the price gap between P.L.s and national because the price gap between P.L.s and national brands is too big vs. consumer expectationsbrands is too big vs. consumer expectations
All of this is carefully detailed and publicly available All of this is carefully detailed and publicly available in a nifty little report from Wharton. Using in a nifty little report from Wharton. Using information like this to help your key accounts information like this to help your key accounts increase profits is far more powerful than cutting increase profits is far more powerful than cutting your costs another 10¢.your costs another 10¢.
Death Strokes:Death Strokes:
In the future, if your answer to, “why should we buy from In the future, if your answer to, “why should we buy from you?”, is: “Because we are the lowest cost brand” – you you?”, is: “Because we are the lowest cost brand” – you are committing suicide.are committing suicide.
““We’re just as good as the supplier you are using” – We’re just as good as the supplier you are using” – provides no real point of differentiation (and pisses off the provides no real point of differentiation (and pisses off the buyer).buyer).
““I’ll match anybody’s price” – indicates that the supplier I’ll match anybody’s price” – indicates that the supplier does not understand his own costs and is potentially does not understand his own costs and is potentially unreliable as a long-term source.unreliable as a long-term source.
““Just tell me what you want and I’ll make it for you” – Just tell me what you want and I’ll make it for you” – conveys the message that you are not much more than a conveys the message that you are not much more than a street walker.street walker.
Net:Net:
Pick your ground and plan your flag – stand for something that Pick your ground and plan your flag – stand for something that leverages your core competencies and be able to communicate leverages your core competencies and be able to communicate this simply and effectively.this simply and effectively.
Develop a strategic approach to expanding sales and profits:Develop a strategic approach to expanding sales and profits:
A “strategy” is a course of action build on an understanding A “strategy” is a course of action build on an understanding of one’s inherent or indigenous strengths which results in a of one’s inherent or indigenous strengths which results in a predictable growth curve predictable growth curve andand which forces your competitors which forces your competitors to define their own strategies by what you are doing.to define their own strategies by what you are doing.
Wal-Mart’s “always low prices” strategy has forced Wal-Mart’s “always low prices” strategy has forced supermarkets to react to Wal-Mart for the past 15 years – supermarkets to react to Wal-Mart for the past 15 years – mostly without success.mostly without success.
Net:Net:
If you have not done so already, reengineer your organization to If you have not done so already, reengineer your organization to develop an answer to the following question:develop an answer to the following question:
““What are you going to do to help us sell more product, not What are you going to do to help us sell more product, not just more of your products?”just more of your products?”