private label

Getting the narrative right in a compelling selling story for private label foodsLike any good book, a good retailer selling story is one with a captivating narrative.

Sometimes it is easy to forget the overarching story that you are trying to tell in your private label foods selling story. You are bogged down in PowerPoint and bullet points and it is easy to lose sight of the story that you are trying to weave. It is helpful to remember the following hints:

Tell the consumer insight Give consumer reactions to the product Share impact that it has on category Tell the buyer what you need him to do

The most compelling selling stories are ones born out of keen consumer insight. After all the consumer is king and if there is not a need or a benefit to them, then the product or program is doomed for failure or at best mediocrity. Consumer insights can be gained through primary research, secondary research, relevant articles, or even just casual observation. The point is to look, listen, and think.

If you have a new product to sell then you should have consumer feedback on the product to share with the buyer. Again, the buyer does not want to take a big risk on anything new. So the more you can do to ease this risk, the better chance you have for a successful sell-in. You should have consumer responses such as a quantitative new product concept test, qualitative focus group feedback on product, a limited market test, or even just some taste tests to validate the product idea.

The buyer is also going to want to know how the product or program will grow the category. It is nice if the product does well but not just at the expense of other items. The new product ideas that have the best chance of success are those that can be shown will be incremental to the category. This may mean that they will be bringing new consumers to the category or that they introduce a new usage occasion for the category.

Finally, remember to help the buyer know what you now need them to do after accepting your new product or program. They will be considering where will they put the item. What needs to be moved or come off the shelf? They will also want to know how they should promote it, how often should they promote it, and at how much of a price discount?

A good narrative ensures that you cover all of your main talking points and that you do it in an interesting and convincing way.

May 21, 2010 by Ric Brockmeier under the Sell-in Stories category with 0 comments.

Private Label Foods: The power of Wal-Mart vs. the power of brandsDespite their massive size, small brands can still have the advantage.

It is always humbling when you get that e-mail every so many years reminding you how big big companies really are. I recently received one about Wal-Mart showing just how big the company is.

Americans spend $36,000,000 at Wal-Mart every hour of every day. This works out to $20,928 profit every minute!

Wal-Mart will sell more from January 1 to St. Patrick’s Day (March 17th) than Target sells all year. Wal-Mart is bigger than Home Depot + Kroger + Target + Sears + Costco + K-Mart combined. Wal-Mart employs 1.6 million people, is the largest private employer, and most of its employees

speak English. Wal-Mart is the largest company in the history of the world.

Wal-Mart now sells more food than Kroger and Safeway combined, and keep in mind they did this in only 15 years. During this same period, 31 supermarket chains sought bankruptcy.

Wal-Mart now sells more food than any other store in the world. Wal-Mart has approx 3,900 stores in the USA, of which 1,906 are Super Centers; this is 1,000

more than it had five years ago. This year, 7.2 billion different purchasing experiences will occur at Wal-Mart stores. (Earth’s

population is approximately 6.5 billion.) 90% of all Americans live within 15 miles of a Wal-Mart.

Size is why Walmart has the power with its vendors today. So unless you are an equally powerful brand, what hope do you have; especially with the growth of Wal-Mart private label? If you asked this question three months ago the answer would have been “not much.” Wal-Mart was reducing brands and SKUs to make way for more private label on the shelf. One Wall Street estimate is that private label could grow to 40% at Wal-Mart. That does not leave much hope for smaller challenger brands.

That is, not much hope from Wal-Mart’s perspective. But let’s remember Sam Walton’s famous quote, “There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”

And it looks like Wal-Mart is listening. Wal-Mart is bringing back 300 SKUs to its stores. Since removing the SKUs, Wal-Mart has experienced sales declines in some categories and store traffic has also declined.

I know many challenger brands are certainly concerned about the expansion of private label. Credit Wal-Mart for making the right decision in terms of customer satisfaction and give even more credit to the challenger brands who have created such a loyal following that consumers would shop someplace else in order to buy the brand.

May 19, 2010 by Brad Hanna under the Buyer Insights Private Label Strategy category with 0 comments.

Data analysis is the foundation to writing a compelling selling story for private label foodsHard data (numbers) always beats soft data (opinions) when private label food buyers are trying to make business decisions.

There are certain methods or processes that tend to work well in performing data analysis for your selling stories:

Cascade down from broad to specific Create success stories Show scenarios for action

You generally begin your analysis by looking broadly. It helps to find a national story as to what is happening in the marketplace. From here you see if this story holds true at the regional level in which your account does business. Finally, you take the analysis down to the account level of the retailer for whom you are writing the selling story. You may want to also perform the analysis for the retailer’s competitive market. This will help to see if the retailer is performing in step with his competitors.

When you are looking into the data at the varying levels of granularity, you are seeking to find success stories. You are looking for areas or customers that are doing well and confirming why and how they are doing it. This behavior is what you are trying to convince your retailer to mimic. Many times they do not want to be the first to try something, so if you can show someone who is already doing it and being successful then you give them confidence to “buy” what you are “selling.”

Finally, it is impactful to show your retailer some scenario outcomes. You can assume that they may take two to three different responses to your request or three different levels of support for your

program. With scenario planning you can show them what their returns might be given market data so that they can feel better about the decision that they make.

In all compelling selling story development, you are always trying to help the customer feel good and smart about the decisions you are trying to help them make.

May 17, 2010 by Ric Brockmeier under the Sell-in Stories category with 0 comments.

Best ideas from 80 years of following advertisingLearn the lessons from Advertising Age: 80 Years of Ideas.The past offers key lessons. First, there is never a bad time to launch a great product or company. (The biggest opportunities on the Internet were born of or after the dot-com crash. Just ask Google and Facebook). The recession is a great time to launch a company, product or brand. As consumers come out of the recession there is pent-up demand for enjoying the good things in life again. While maybe not as luxurious, there will still be the desire for new.

Second, failure is a cost of doing business. When Apple’s first wireless device (1993′s Newton) flopped, Ad Age noted, “The category may give a new twist to Newton’s law: Products may be falling now, but the category is still poised to soar — eventually. … Smart money still is betting on long-term prospects for wireless portable communications devices.”Apple came back with iPod (2001), iPhone (2007) and iPad (2010). Great lesson about how many companies failed before success. Many times consumers are just not ready for “what’s new” when first introduced.

Third, the best marketers, media firms and agencies boast an outstanding ability to reinvent themselves and lead their changing markets decade after decade. Or another way to say it, “Grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.”

May 14, 2010 by Brad Hanna under the Advertising & Social Media Private Label Foods category with 0 comments.

Getting the most out of the quantitative validation of new product development for private label food categoriesIn the final stage of validating your new product ideas you can compare your concepts with tens of thousands of others that have been tested in the past.

The quantitative concept test is the final stage of validating your private label food new product ideas. In this test, you will get feedback from hundreds of consumers on your concepts. Importantly, the data is normative so you can compare your results with that of other new product ideas that have been tested in your category. In this way you can see just how strong of an idea you have.

To get the most out of your quantitative validation test you will want to write compelling concept boards. This is why you did the qualitative first: because you can ensure that your wording and description connect well with consumers. You want to keep your concepts simple and brief. You want the information to be as clear as possible. You want to give your ideas the best chance possible, so if you have too much wording or if the idea is confusing then the respondents will not be reacting to a fully understood concept.

The concepts that you write should have one main idea or benefit. You do not want the respondent to have to work at figuring out why they may like this new product idea. You want to be upfront and bold with the key benefit. They may not like your new product idea but at least they will understand why you are thinking of putting it into the market.

It is also helpful to have an illustration of your new product. It is not necessary to have photos or color illustrations; simple black-and-white drawings are fine. Many times you will not have the product produced or mocked up, so a photo is not possible anyway. But respondents are used to seeing simple illustrations and they generally bolster a new product idea, not detract from it.

When you get your results, they are normative data across the general population. This is an important data point to consider since the general population will be shopping in grocery stores. However it is also helpful to further cross-tabulate the data to look at subsets of the population. For example, if you are testing a better-for-you product, you will want to see how it scores with health-conscious consumers and consumers currently on a diet. Even though the size of the target may be smaller, it is more critical to meet their approval if you want to ensure a better chance for success.

The new product development process is an exciting journey from learning more about your consumer and brainstorming new solutions. Thorough work in this process can help greatly increase the odds that you will have a winning new product entry to the marketplace.

May 10, 2010 by Ric Brockmeier under the New Product Development category with 0 comments.

Private Label Foods: Are you seeing the trends?We are well into 2010 so let’s see if we are seeing the trend predictions coming to life in the marketplace. I’ll share the trends if you’ll share the opinion.

1. Keeping It Real – Back to the basics economy is a return to basic ingredients that are pure, simple, clean and sustainable. A shift from convenience foods to scratch cooking.

2. Conscious Consumption – The recession has forced consumers to become conscious about what and how they spend. Consumers now evaluate shopping behavior and purchases with new scrutiny. As consumers emerge from the current recession, they will return to shopping and buying with a new mental filter. They have had a chance to re-evaluate and re-value, and time to consider what is important to them.

3. Re-Luxing – After the forced practicality of the recession, consumers will look for ways to indulge the tastes acquired before difficult economic times forced them to cut back. This includes looking for ways to put luxury back into their lives and searching for ways to satisfy their broader, enlightened palette of pleasures and tastes. Consumers will be on the hunt for new ways of putting luxury, indulgences and pleasures on every level back into their lives.

4. Grocery Stores Becoming The New Mall – Grocery stores will add in services to reap more share of spending and convenience. From catering, in-store dining, phone-in takeout like pizzas, and even more conveniences for an aging population.

5. Food Origins – Not big diet fads but just more awareness for eating the right things. A need for assurances our food is safe, local, protects animals and sustainable. It is knowing where your food comes from.

6. Sustainable – As Americans learn how to be sustainable, so goes our food. It’s more authentic and wanting to make a difference. Even if it is buying a packaging change or bringing your own reusable bag, consumers are more aware and trying.

7. Frankenfoods – More openness for foods with added health benefits such as nutrients added or “free” of additives. Call it “fortified” or “functional foods” – will consumers still see it as “Frankenfoods” as brands continue to evolve?

8. Me Sized – Consumers are wanting more individual sized portions. What started in desserts with bite-sized is expanding into individual customization of products in a “just for me” size.

Please share the trends you were watching and tell me what you think of the trends progress thus far in the year.

Sources: The New York Times, The Wall Street Journal, Washington Post, Aug. 30, 2008, Trendwatching.com, Iconoculture, Harvard Business Review, Marketing To Women Conference, Retail Forward, AdAge, MintelMay 5, 2010 by Brad Hanna under the Consumer Trends category with 0 comments.

How to qualitatively validate your new product concepts for private label food categoriesBe sure to include the consumer in the first step of validating the ideas that you generated in the brainstorming process by starting with qualitative.

After the brainstorming session you will have a large quantity of concept ideas. Sometimes you will generate as many as 80-100 ideas. You will want to group the ideas into like concepts or platforms. In the qualitative stage you will not be able to cover more than 7-8 platforms. The qualitative stage helps you to:

Weed out the weaker platforms Gain proper language and terms to best describe the idea Improve the platform concepts tactically Get a reading on potential brand if you are considering licensing

As you review platform concepts with consumers in qualitative, one thing you are looking for is if there are any clear weak ideas. Even with just three groups in one city, you will know if you have a weak idea.

Another crucial piece to qualitative validation is getting the proper language down. Many times we write concepts with marketing-speak and fail to remember to put it into the words of your consumer. The respondents in the groups will help to make sure that you are using words they understand and that the idea is being explained in the simplest terms.

During the groups you will also be able to learn ways to improve the concept. Many times the consumers can help build on an idea and make it even stronger. Or they can offer clarity in potential packaging options or forms or flavors offered. Again, getting the consumers’ input at this stage helps to make the concepts solid for the quantitative stage.

Finally, you may be thinking of ideas that will be branded instead of private label. And if you are considering licensing a name to give strength to your new product idea, consumers can help you out here as well. You can find out which brand names might make the most sense to them for your product concept. You will also learn what qualities different brand names can highlight for your new product concept.

Good qualitative validation will make the most out of your investment in quantitative testing by bringing your ideas into the best possible light.

May 3, 2010 by Ric Brockmeier under the New Product Development category with 0 comments.

Private Label Food: It’s time to find your soul mate – Once you have, then what?Once you have identified your consumer segments within the category, now it is time to find out whom you own and if there are any opportunities for branching out.

To do this, use a quantitative study to find out which consumer segment uses your product most and which do not. To bring this step to life we are going to share a usage study we did for fresh pork. Our agency paid for the information to use in conference presentations and potential new business, so we can share the learnings without breaking any client confidentiality.

Here is the situation: pork usage has been flat for decades. Meanwhile, chicken has taken over beef and pork as the number one protein consumed in this country. Who would have ever thought chicken could outperform beef and pork in our country? So we set out to find how pork could grow its share in the marketplace.

Here are the steps:

1. Any time you do a consumer segmentation study and identify your consumer segments, you will have a series of questions that can identify the segments in future studies. The goal is to have 10-12 questions that polarize consumers and put them into each segment naturally. This allows you to quickly segment consumers in any future studies.

2. Once we have our consumers within each segment, we asked about the usage of fresh pork. We used average usage frequency defined by the industry for center-of-plate items. The question was, “How often do you prepare fresh pork? Never Less than once a month Once a month Once every two weeks Once a week or more

3. We then take the percentages of pork usage for each segment and create a usage index. The index compares the total sum of all segments using fresh pork for each frequency and compare that to each consumer segment reported frequency. (Click to enlarge)

4. See which consumer segments are driving the largest volume. The data tell the story. In the case of fresh pork, Everyday Gourmets and Epicureans are the highest users of the product, indexing at 113 and 130 respectively. There are also much lower indexes for all other frequencies which mean that these two segments are very loyal fresh pork users – and that makes sense when you consider their segmentation attitudes.

5. Look at which consumer segments may offer opportunities for growth. Let’s look again at fresh pork. Scavengers and Crowd Pleasers under-index on using fresh pork every two weeks or more. These two segments only show promise at using fresh pork less than 1x/month. So let’s first look at Scavengers. Anything stick out? Yeah! The Scavenger indexes at a 271 for never using fresh pork. Consider their segment attitude and that really isn’t a surprise. Remember, this segment hates to cook. With the negative perceptions of fresh pork as being hard to cook there is not much opportunity to convince a Scavenger to use fresh pork. Maybe in a microwavable nugget form, but not fresh from the butcher counter. Now look at Crowd Pleasers. This IS surprising. Crowd Pleasers are looking for balanced, home prepared meals. They like to cook. They have 40-50 recipes they use in rotation. When we have done similar center-of-plate studies for basic products like fresh pork, Crowd Pleasers have actually scored pretty similar to Everyday Gourmets.

6. Quantify the opportunity. Since the study provides the usage of fresh pork for each segment, we can calculate what happens if a segment uses more of the product. In this case, if we can get Crowd Pleasers to act more like Everyday Gourmets, that would be +25% increase in consumption.

7. Talk to the opportunity segment to confirm the opportunity and positioning to change behavior. Simple focus groups at this stage can help you determine if and how to overcome barriers and turn the opportunity segment into loyal users of your product.

So now you know how to take the consumer segments, see who you own and validate new growth opportunities.

May 1, 2010 by Brad Hanna under the Consumer Segmentation & Need States category with 0 comments.

http://private-label-foods.dev.barkleylabs.com/wp-content/uploads/2010/04/pork-index-photo.jpg

How can private label capitalize on changing American population?America is changing! More than ever, private label brands have a chance at competing with big name players.

In a recent statement from The Nielsen Company, major shifts in the marketplace are projected to have a significant impact on the consumer landscape over the next ten years. These changes are directly affected by the changing American population and include an increase in aged Americans, a shift to lower-income consumers and an abrupt increase in multicultural families. These audience changes have new and exciting implications for the CPG world—especially private label products.

Aging Baby BoomersThe first trend Nielsen examines is an aging America. Baby Boomers currently make up 78 million of the current U.S. population. As Boomers move into retirement and senior years, their evolving needs should be addressed. Not only will marketing efforts need to adjust messaging to appeal to an older audience, but an increase in products for the Boomer Generation will make the fight for shelf space even more competitive.

Low-Income Households Dominant Nielsen data points out that affluent and wealthy segments are declining (9.2 percent and 5.5 percent) while the lowest income population segments are quickly growing – up 17.8 percent. The long term effects of the lowering income trends could not only influence consumption levels of products, but also change the way consumers approach buying. With a smaller disposable income, consumers may shift from being brand loyal to bargain oriented. This lack of loyalty will encourage promotional offerings and competitive pricing within any given category in order to gain consumer attention and offer incentives for brand hopping.

Multicultural Families on the RiseHouseholds with ethnic families are expected to grow more quickly than the rest of the U.S. population. By 2025, multicultural families are projected to make up more than 50 percent of the population and by 2050 more than 60 percent. These changes to the overall audience not only will affect the demand for new product offerings but also the need for multicultural marketing.

Implications for Private LabelWith the U.S. population changing rapidly, private label is faced with endless opportunities for growth. Based on the anticipated trends outlined by Nielsen, the following opportunities will be the most pertinent. Competitive product offerings in medical and prescription categories to target Boomers Move some marketing dollars from youth-focused campaigns to Boomer-centered messaging Lower price point options for popular family staples to meet needs of growing lower income

households Improve quality of current private label products in order to compete with name brands as the

battle for shelf space becomes more cutthroat Expansion of current food lines to include ethnic flavors New product development for ethnic meals/seasonings/sides Expand marketing campaigns to include ethnic focus in order to meet multicultural needs and

capitalize on growing audience

The private label versus manufacturer

brands in supermarket chains

A shift in balance of power

Pre-master thesis

June 2008

Terry de Boer

Business Administration

1664522

[email protected]

Supervisor: Dr. M.J. Flikkema

Abstract

This paper examines how and why private labels compete with manufacturer brands in supermarket

chains. The thesis primarily focuses on the positive effects that successful private label(s) have on the

business performance of supermarket chains. Also the key drivers of a successful private label are

explored. Besides the benefits for retailers, the defensive counterstrategies of manufacturer brands on the

private label invasion are revealed. Finally, the dynamic view on the phenomenon private label shows that

it can be an opportunity for both retailers and manufacturers.

Keywords: private label; store brand; house brand; business performance; strategy; supermarket; retailThe private label versus manufacturer brands in supermarket chains:


Pre-master thesis – Business Administration - Terry de Boer - 2008

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1. Introduction

One of the main reasons that I am interested in private labels is that during the past couple of years I have

seen an alteration of the assortment available in the shelves of my local Albert Heijn supermarket. I find

that very interesting, especially when I caught myself on buying more and more of Albert Heijn‟ private

label. I‟ve seen the invasion of private labels and it is becoming - according to my own experience - more

and more accepted among consumers. I would like to find out what the motives for a retailer are to own a

private label, what the essential requirements are to be successful with a private label, and what the

original brand manufacturers do to adapt to the private label invasion.

When I started doing desk research on private labels in retail chains, I found that the private label is a very

dynamic item that can be looked at from multiple perspectives, for instance the retailer or manufacturer

view. Sometimes these perspectives are opposites. The aim of this thesis is to compare existing scientific

research and literature about the influence of private labels in retail chains from multiple perspectives

(retailer and manufacturer), to interpret and discuss this information, and finally form a conclusion.

Main question:

How and why does the private label compete with manufacturer brands in supermarket chains, and

what are the future prospects of the private label for both supermarket chains and manufacturers?

The main question of this thesis comprehends how private labels can be successful and why the private

label is so successful in supermarket chains, seen from both retailer and manufacturer perspective. In order

to answer the main question it is subdivided in more specific sub questions:

Sub question 1: Which types of private labels exist and what distinguishes them from manufacturer

brands?

The definition of „private label‟ is explained, so that there are no misconceptions about the definition used

in this thesis. In this chapter the private label is compared with the manufacturer brand to gain more

insights about the differences. After answering this sub question, and knowing how private labels differ

from manufacturer brands, the following question will be answered:

Sub question 2: How did the private label market share developed and what are the future prospects?

The second sub question gives a global insight in the history, development, and future perspectives of the

private label. It emphasizes the important role of the private label at the present and for the future. After

explaining the development of the private label, it is very interesting to know what motivates retailers to

develop their own label:The private label versus manufacturer brands in supermarket chains:



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Sub question 3: What are the motives of supermarket chains to develop a private label?

Now that the definition and development of private labels are known, this chapter zooms in on the motives

or benefits for a retailer to develop a private label instead of selling manufacturer brands only. The

increase of private labels is also noticed by the manufacturer brands, which means that they have to adapt

themselves by developing counterstrategies that are clarified in the next chapter:

Sub question 4: What are the possible counterstrategies of manufacturers that interact with the success of

private labels in retail markets? Private labels can also be an opportunity for the manufacturer brands; this

chapter explains how and what the manufacturer strategies can be to compete with the private label in

order to survive. At the same time it shows how manufacturer brands can affect the private label success.

As the private label is not invincible, the next chapter explores the preconditions for a successful private

label:

Sub question 5: What are the key drivers that determine the success of a (new) private label in

supermarket chains?

As mentioned in the above sub questions, private labels can be a big opportunity for both retailers as

manufacturers, but what are the necessary conditions? What are the most important determinants of

private label success? This chapter describes the preconditions that are necessary for private label growth.The private label versus manufacturer brands in supermarket chains:



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2. Methodology

This chapter describes the research methods undertaken and reported in this thesis. The aim of this thesis

is to isolate the variables that are responsible for private label success, to find the positive effects for

retailers‟ business performance, and explore the counterstrategies of the manufacturer brands. To answer

these questions, empirical evidence is needed and therefore the information used in this thesis consists of

scientific research from journals. The thesis starts with an explanation of the definition private label and a

summary of the history of private label growth. After answering the sub questions the main question of

this thesis will be answered. The information found on private labels is more or less ambiguous; therefore

there will be a discussion for further research in the chapter „Further research‟.

Definition of „private label‟

There are many names for the private label, including own brand, store brand, retailer brand, and house

brand etcetera. The term used in this study is private label, and is according to Davies (1990) defined

broadly as: “Any product with a retailer-owned name on it”.

Definition of „manufacturer‟

The producer or originator of the product or service that is sold (Stern, El-Ansary, Anderson & Coughlan,

2001). In this thesis; the manufacturer of products that are sold thru supermarket chains.

Definition of „retailer‟

A company that purchases a product or service from a distributor and resells them to any user or

consumers (Rolnicki,1998). This thesis zooms in on one type of retailer: the supermarket. In this thesis the

term „retailer‟ can be interpreted both as „supermarket‟ or „supermarket chain‟.

Definition of „supermarket‟

A supermarket is a large self-service grocery store selling groceries and household goods (Nickel, S.,

2004).

Definition of „supermarket chain‟

A large retailer (supermarket) with multiple stores, such as: Albert Heijn and Tesco supermarkets.

Definition of „category management‟

Category management is a method whereby vendor and retailer team up to manage their mutual product

categories on a store-by-store basis (Joseph 1996). The private label versus manufacturer brands in supermarket chains:



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3. Thesis structure

Intro - Question 1

Types of private labels and what

distinguishes them from

manufacturer brands.

Intro - Question 2

Private label history and future

perspectives.

Question 3

Motives of supermarket chains to

develop a private label

Question 4

Manufacturer counterstrategies that

may affect private label success.

Question 5

The key drivers of successful

private labels

Conclusion

Future research

Thesis

How and why does the private label compete with manufacturer brands in

supermarket chains, and what are the future prospects of the private label for both

supermarket chains and manufacturers?The private label versus manufacturer brands in supermarket chains:



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4. Which types of private labels exist and what distinguishes them from manufacturer brands?

What are private label products?

Private label products encompass all merchandise sold under a retailer's brand. That brand can be the

retailer's own name or a name created exclusively by that retailer. In some cases, a retailer may belong to a

wholesale group that owns the brands that are available to only the members of the group. Major

supermarkets, hypermarkets, drug stores and discounters today offer almost any product under the

retailer's brand. Private labels cover full lines of fresh, canned, frozen, and dry foods; snacks, ethnic

specialties, pet foods, health and beauty, over-the-counter drugs, cosmetics, household and laundry

products, DIY, lawn and garden, paints, hardware and auto aftercare. The private label phenomenon is not

restricted to CPG products and grocery retailers. Best-in-class retailers and distributors such as IKEA,

Home depot, Toys „R‟ Us, Victoria‟s Secret, and Zara carry a large percentage, or in some cases

exclusively, private labels (Kumar and Steenkamp, 2007).

They are often positioned as lower cost alternatives to regional, national or international brands, although

recently some private label brands have been positioned as "premium" brands to compete with existing

"name" brands.

Who makes private labels?

Manufacturers of private label products fall into three general classifications:

Large manufacturers who produce both their own brands and private label products.

Small and medium size manufacturers that specialize in particular product lines and concentrate

on producing private label almost exclusively.

Major retailers and wholesalers that operate their own manufacturing plants and provide private

label products for their own stores.

Which different types of private labels are there?

Generic private labels

Private labels, especially in the U.S., started as cheap, inferior products. They did not even carry the name

of the store and were therefore called generics. Usually, the package with black letters on a white

background identified the product, like paper towels or dog food. Most important for generics is the low

pricing. Over time, generics have lost shelf space and importance to copycat store brands, premium store

brands, and value innovator own labels. However, there has been a recent resurgence in the generics

consumer proposition. As a response to the intense price pressure of hard discounters like Aldi and Lidl,

mainstream retailers are forced to develop a private label that can compete on price levels against the hard The private label versus manufacturer brands in supermarket chains:



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discounters. By having such a low priced private label, traditional retailers such as Albert Heijn can

demonstrate that they have a basket that is priced competitive against the hard discounters.

Copycat brands

Copycat brands imitate the leading manufacturer brands in the category. The copycat brand is sold under

the store brand, claiming at least the same quality as manufacturer brands, but against a lower price. To

ensure quality, retailers analyze the contents of a leading manufacturer brand and then re-create the

product step by step, a process called reversed engineering.

Premium store brands

The emergence of the premium private label is one of the hottest trends in retailing. The important

distinction between premium store brands and traditional copycat brands is the clear vision of the retailer

to differentiate on quality against manufacturer brands combined with the absence of any attempt to copy

packaging of the leading manufacturer brands. Retailers wish to differentiate their premium private labels

explicitly from other manufacturer and retailer brands, and thereby generate store loyalty.

Value innovators

Successful value innovator own labels aim for objective product quality on a par with manufacturer brands

at unbeatable prices, with a constant search to lower the prices continually. They achieve these lower

prices trough rigorous system processing cost savings rather than by compromising on product quality.

Retailer brand portfolios

Most retailers manage a brand portfolio, which incorporates multiple types of the above store brand types.

By having a portfolio of own labels, a retailer can penetrate several different segments simultaneously.

The three most effective strategies used by retailers are price-based, category-based, and benefit-based

segmentation. The price-based segmentation is used to create at least two private labels (standard and

value), but increasingly a third tier (premium) to attack the competition in multiple price segments.

Retailers employ category-based segmentation to give shoppers a sense of choice. The big advantage of

retailers against manufacturers is that they are closer to the customer. Thus, the retailer can exploit

benefit-based segmentation to cater the changes in consumer needs by building individual store brands

around these specific needs. The four types of store brands combined with three types of segmentation can

ultimately lead to very complex portfolios.The private label versus manufacturer brands in supermarket chains:



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The following graphic illustrates the differences between the different private label types. It shows two

important dimensions, pricing and quality, both in relation to the brand leader. The circles give a more

precise image of where the different label types are positioned against each other.

What are the main distinctions between national brands and private brands?

1. The private label is the only trademark that appears throughout the store. No other brand name

appears in as many product categories. Even the biggest packaged goods companies do not come

close in storewide coverage and penetration.

2. Private labels are the only products (other than fresh meat, produce, and deli items) for which the

retailer absorbs all marketing and inventory investments. The private label versus manufacturer brands in supermarket chains:



9

3. With a national brand, the retailer has little influence over product quality, advertising, brand

image, and packaging. With a private label the retailer can exert more influence over the

performance of their store brands. For example, retailers can more easily use the implied threat of

over merchandizing private labels as a lever to gain better trade terms from a manufacturer.

4. Private labels are guaranteed full distribution and good shelf placement. Private labels do not have

to pay slotting allowances to obtain distribution (Sullivan, 1994).The private label versus manufacturer brands in supermarket chains:



10

5. How did the private label market share developed and what are the future perspectives?

The invasion of private labels started in the early 90‟s, when high quality private label products were

introduced. Traditionally, consumers regarded private label products as “a cheap and nasty generic

substitute for the real thing, rolled out by retailers during recessions and discarded once the economy

picked up again” (The Economist). Technological advances allowed competitors to „come close to‟

replicating successful national brands (Kennedy, 1992). Consumers were becoming increasingly aware of

private label improvements as well. Supermarkets started prominently displaying house brands while

dropping second-tier national brands in many categories (Janofsky, 1993) and learned that private labels

provided higher profits than national brands (Beckett, 1992).

Throughout Europe, private labels are winning the loyalty of more and more consumers every day. The

impressive market share gains, see table 1.1 below, reflect a fundamental shift in shopper attitudes,

according to new research conducted for PLMA by Ipsos MORI, the well-known public opinion

consultancy. The research, based on polling more than 3,000 shoppers in France, Germany and Great

Britain, found that the consumer‟s connection to retailer brands extends far beyond the issues of price,

economic conditions and retail format. While each of the three countries has a very different retailing

model, private label is growing in all of them.

Private label‟s long-term future appears especially strong. The Ipsos MORI research found strong support

for private label among younger shoppers. These shoppers, aged 16-34, are more frequent purchasers of

retailer brand products and have a greater awareness of them than middle age and older shoppers. Both the

Ipsos MORI research and the AC Nielsen sales data report how popular the private label is today in

Europe and indicate that future growth is going to be greater than anyone expected. The future

perspectives will be discussed more extensive in the conclusion.

Table 1.1 – Consumer packaged goods private label share

Private label share (% of sales)

2000 Expected 2010

Worldwide 14 22

Western Europe 20 30

Central and eastern Europe 1 7

North America 20 27

Latin America 3 9

Australasia 15 22

Japan 2 10

China 0.1 3

South Africa 6 14The private label versus manufacturer brands in supermarket chains:



11

6. What are the motives of supermarket chains to develop a private label?

Supermarket chains learned that private labels provided higher profits than national brands. According to

Jonathan Ziegler, a retail-industry analyst at Sutro & Co., the gross margins on store brands may be 35%

or more, versus an average of 25% on other products (Beckett). Supermarket profits also rise from

carrying private label brands because they create loyalty to a particular supermarket chain rather than to a

national brand: Customers return to Albert Heijn if they prefer the chain‟s brands. But is selling private

labels truly more profitable for retailers, and is this always true?

1. Better profit margins

The retailer earns a higher margin on its own private label products. In a Discount Merchandiser survey,

retailers rated „better profit margins‟ as the most important reason for selling private labels (Ailawadi and

Harlam, 2004).

Private labels generate higher margins, because store brand suppliers have virtually no market power. The

private label supplier market has all the characteristics of what economists describe as „perfect

competition‟. The market share of any individual private label is usually low. Product differentiation by

definition is virtually absent, and they sell to professional retail buyers who are well informed about

product quality and availability (Ailawadi, 2001). Retailers often set the technical specifications and ask

private label manufacturers to bid on contracts. In such perfectly competitive markets, standard economic

theory dictates that the retailer will be able to drive the acquisition price of its private label down to the

point where marginal costs of production equal average costs. Therefore, the retailer will capture most of

the total system profits, resulting in high retailer gross margins on private labels. On average, the retailer‟s

gross margin on private labels is 25%-30% higher than its gross margin from manufacturer brands. To

illustrate this difference, if the gross margin of a manufacturer brand is 20%, the average gross margin of a

private label is 25%-26%.

Simply concentrating on gross margins is misleading. Dollar profit per square foot shelf space is the

appropriate measure that retailers should focus on. Four factors intervene between gross margin and dollar

profit per square foot of shelf space:

1. Retailers often receive additional discounts, advertising allowances, and credit for unsold

merchandise from brand manufacturers. These are not available in the case of private labels.

2. Brand manufacturers provide various free services, such as transportation, warehouse storage, and

merchandising help for retailers. These services are not available in private label and the retailer

usually has to bear the costs of these services.The private label versus manufacturer brands in supermarket chains:



12

3. Manufacturer brands are often sold against a higher price. Thus even when the net margin as a

percentage on manufacturer brands is lower, the absolute dollar profit per unit sold may still be

higher than of store brands (for example, 20% of $2.00 is higher than 25% of $1.50).

The Boston Consultancy Group studied the economics of fifty SKUs at two major U.S. retailers and found

„on average, that branded and private label were near parity on penny profits but differed widely by

category and item.‟

Table 4.1 – Profitability analysis of private labels versus manufacturer

brands (U.S. grocery retail chain)

Private labels Manufacturer brands

Gross margin 30.1% 21.7%

Net margin 23.2% 15.9%

Price* $1.00 $1.45

Dollar contribution $0.23 $0.23

Velocity per square foot (index) 90 100

Direct product profitability 21 23

*Assumed price of private labels is $1.00

Source: Ailawadi and Harlam, „An empirical analysis of retail margins‟, Journal of

Marketing, January 2004, p. 159.

2. Greater leverage over brands

For most of the twentieth century, retailers were relatively small, compared with their largest suppliers.

This allowed branded manufacturers to ride a wave of quality products, innovation, and mass advertising

to establish their power over distribution channels. Manufacturers were thereby forcing retailers to accept

their products with the associated price and promotion policies; take it or leave it.

Sometime in the 1970‟s things began to change, albeit slowly, as retailers started to develop national

chains. Some retailers, like Ahold, Carrefour, and Metro, even began to expand internationally, and

consolidation of the retail industry from mom-and-pop stores to global players was well under way. The

bulking up of retailers that started then has changed the balance of power between brand manufacturers

and retailers. Twenty-five years ago, the large CPG manufacturers would dwarf their retail customers in

size. This is no longer the case. Retailers have now seized the size advantage and the negotiating power

that flows from it. The structure is characterized by greater store size; increase in retailer concentration;

growth and importance of own brand and the retailer as a brand; strong demand for one stop shopping; The private label versus manufacturer brands in supermarket chains:



13

greater retailer access to information of loyalty cards; and the adoption by retailers of a range of formats to

reach as large a customer base as possible. All of these factors have combined to weaken the power and

influence of the manufacturer and potentially of their brand. Retailers are now in firm control of large

parts of the marketing mix functions, which were once primarily exercised by the manufacturer.

The presence of private labels in a category allows the retailer to negotiate a better margin on

manufacturer brands. Apart from higher margins on private labels, retailers listed „bargaining tools with

branded manufacturers‟ as one of the prime benefits of introducing a private label in the category

(Narasimhan and Wilcox, 1996). The presence of own labels helps the retailer to negotiate better terms

with branded manufacturers (Mills, 1995).

According to industrial economics theory, the margin secured by a party is directly related to its market

power. The greater the power of its store brand in a category, the more margin the retailer should be able

to extract from manufacturer brands. Empirical research reveals that this theory is remarkably accurate.

(Chintagunta, Bonfrer, and Song, 2002).

In the above graphic it is clear that the introduction of a private label in a category can significantly affect

the supply terms between the retailer and branded goods manufacturers, even when the store brand market

share is very small (Morton and Zettelmeyer). However, the threat of private labels is only credible (and

Introduction of

private label

Private label %

Credible threat

Increased market power

Most non-brand products;

consumer dissatisfaction with

lack of variety

Retailer bargaining powerThe private label versus manufacturer brands in supermarket chains:



14

beneficial for negotiating with manufacturers) if a store brand is actually introduced. When the private

label share increases the market power of the retailer also increases, until there is an overemphasis in

private labels. Overemphasis of private levels can have a contrary effect, because it may cause

dissatisfaction among the retailer‟s customers when they are unable to find their favorite manufacturer

brands.

3. Building store loyalty

Private labels were often introduced as „best-value‟ products, but increasingly retail chains have improved

their quality in order to raise the image of the chain. Because private labels help differentiate the retailer,

and consumers who purchase these store brands can only do so at the retailer in question, consumers

become more loyal to their store (brands) in stead of manufacturer brands. Empirical evidence indeed

supports the strong relationship between purchasing of private labels and store loyalty. Private label

products contribute to retail brand differentiation, and their positioning reflects the value of the brand.

They are not perceived as being interchangeable with similar private label products in other retailers

(unlike manufacturer branded products, which are the same regardless of the retailer). 100% manufacturer

branded products means that retail differentiation can only be achieved by service related factors, such as

location and atmosphere (KPMG, 2004).

4. Higher customer profitability

The shopper who favors private labels is considered to be more profitable for the retailer (higher margins

on private labels and greater store loyalty) than a shopper who largely purchases manufacturer brands

from the retailer. But is this always true? The table below shows a profitability analysis for a large U.S.

drugstore.

Table 4.2 – Are private label buyers more profitable?

Mean value over six-month period for consumers whose private label share is:

0-10%

Light

10%-20%

Medium

20%-35%

Heavy

>35%

Very heavy

Total sales $251 $263 $216 $ 129

Gross margin 30.3% 32.1% 34.7% 36.8%

Total gross margin dollars $77 $85 $70 $48

Source: Ailawadi and Harlam, 2004The private label versus manufacturer brands in supermarket chains:



15

The table above shows that the very heavy private label buyers have the lowest total gross margin. For the

retailer the medium private label buyer is the most profitable, according to the research of Ailawadi and

Harlam (2004).

5. Increase of consumer choice

One of the key differences between the way brands and retailers view private label and perhaps why

private label is proving so successful is that retailers understand what their shoppers actually want and

how they behave. Tesco has built its business from the bottom up on ClubCard data (Saatchi&Saatchi,

2007). Many retailers offer a range of price and quality alternatives within a category by creating

differently positioned private label products. For example, Tesco has its budget Value range, Healthy

Eating, normal Tesco-brand and “restaurant-quality” Finest-range to cover many different price-quality

options. However, if the private label product is very similar to an existing one, it can be argued that

private label may decrease consumer choice. As private label products generally take market share from

secondary and tertiary brands, rather than from brand leaders, the result can be to drive smaller

manufacturer brands out of the market. This also decreases customer choice (KPMG, 2004).

6. Match products to customers’ needs

Private label products also increase choice by providing alternatives to manufacturer brands. Retailers can

use the increasing amount of information they have on customers and their shopping habits, through

scanning and loyalty cards, to develop new, customer-driven products. This customer knowledge can give

retailers a competitive edge. The balance of information ownership has swung toward the retailer (Kumar,

1996).The private label versus manufacturer brands in supermarket chains:



16

7. What are the possible counterstrategies of manufacturers that interact with the success of

private labels in retail markets?

Traditionally, leading national brands have followed a differentiation strategy, whereas private labels

aimed to deliver value-for-money or employed a straight low price strategy. Private labels thus belonged

to different strategic groups (Porter, 1976). Due to a narrowing of the quality gap, the distance between

both groups has decreased significantly. As a result a new strategic reality has emerged, and new strategic

reactions of leading manufacturers are required (Morris and Nightingale, 1980). The invasion of the

private label forces traditional brand manufacturers to involve private labels in their brand strategy. The

manufacturers of leading national brands now face two important strategic dilemmas (Glémet and Mira,

1993a; Hoch, 1996):

1. How should they react towards private labels?

2. Should they produce private labels?

The manufacturers have critical mass and specialization, superior brand quality, variety, image, and choice

in many markets. They gain power from advertising and product innovation investments in brand equity.

The manufacturers‟ dilemma is that they sell to as well compete with their retailers. In addition to

lowering prices and engaging in promotional activities, the executives of manufacturer brands said that

they engaged in brand building (Nijssen and Van Trijp) by increasingly differentiating their products. For

example, when consumers started switching from Kellogg‟s to private label cereals similar to popular

Kellogg‟s brands (that sell at roughly half the price), Kellogg announced that it was issuing more coupons

to make its prices more competitive with generic brands, improving its advertising, and further

diversifying its products (MacDonald, 1998).

This emphasizes the three most important counterstrategies of manufacturer brands to compete with the

upcoming private labels. But are the above strategies always true? The private label versus manufacturer brands in supermarket chains:



17

1. Wait and do nothing

Reactions to private label require large, long-term commitment and investments that cannot be reversed

easily. As long as private label‟s development in the brand‟s category remains uncertain and the market is

characterized by high volatility or cyclically a manufacturer may, therefore, want to wait and see what

happens (Waarts and Wierenga, 2000). The waiting strategy does not always lead to a bad performance.

For example, sometimes waiting to react on a new product introduction until the company feels able to

react with an innovative new product can be rather successful (Shankar et al, 1998).

2. Provide more for the money

In this strategy the manufacturer maintains prices, while providing the consumer with additional value.

Quelch and Harding (1996) call this the „invest in brand equity‟ approach. It can be accomplished by

simple improvements, for example when brands improve packaging; by making no-mess containers

(dripless spouts), or stressing brand image. Ashley (1998) reports that effective advertising can lead to

lower private label shares.

3. Innovate with the „new and improved‟

„Leading brands possess great long-term value only if they can evolve over time to respond to the tastes

and needs of new generations‟ (Martin and Kubomura, 1999). In this strategy national brands make

fundamental (new) improvements in quality, whether in existing categories (for example microwave

French fries) or in products that create entirely new and improved categories. The strategy is concerned

with beating the competition through innovation. Hoch and Banerji (1993) report that a large quality-gap

between the national brand and private label is negatively related to private label market share. The private label versus manufacturer brands in supermarket chains:



18

4. Reduce the price gap

The food industry‟s conventional wisdom about the entry of private label products is that manufacturer

brands will lower their prices to compete with the lower priced private labels. Many national brand

executives reported that the private label invasion was killing brand loyalty, so that they had to cut prices

to compete. This reasoning was given by Philip Morris when it cut its price for Marlboro cigarettes

(Beckett, de Jonquieres and Tait). Many other firms reported that they lowered their prices indirectly by

means of sales and discount coupons. Manufacturers of name brand products may also raise the quality of

their goods when faced with private-label entry. This response leads to higher name-brand product prices

especially if it is more costly to produce higher quality goods. Hoch and Banerji (1993) show that the

price gap between national and private label brands in different categories is not related to private label

market share in the category. They conclude that quality, which is significantly related to the private label

market share, is more important than price. Also, significant reduction in the price could harm the firms‟

and market profitability. Reducing the price gap could also harm the firms‟ relationship with the retailer,

as one directly attacks one of the private labels core benefits.

5. Introduce value flanker

The most ambitious „me too‟ strategy requires that the national brand introduces a value flanker. The

reason for this introduction is to move closer to the private labels. The intent of a value flanker is to

introduce a lower priced, possibly lower-quality, item to crowd out the private label or preemptively limit

the private label‟s viability to move up-scale (Hoch, 1996). The resulting extra variety also acts as a

barrier to entry, simply because market share is carved up into smaller pieces (Hoch and Banerji, 1993).

There are some clear advantages to the value-flanker strategy. First, it allows the national brand to

preserve both a premium image and, at the same time, avoid excessive price competition that may erode

both manufacturer and retailer profit margins. Second, it can provide an outlet for utilizing excess

manufacturing capacity. Capacity utilization is critical when manufacturing is based on continuous

process technology, where huge capital equipment costs require that machines never stop. However, as

Hoch (1996) argues, the introduction of a value-flanker is very expensive and it is very hard to get shelf

space from the retailer. It might also steal market share from its own national brand. Finally as it is

intended to frontally attack the private label, it may hurt the manufacturer‟s relationship with the retailer.

(Verhoef, Nijssen, Sloot, 2002).The private label versus manufacturer brands in supermarket chains:



19

6. Make private label for the retailer

In this counterstrategy the manufacturer chooses to manufacture private labels directly for the retailer. A

dual strategy is also called „sleeping with the enemy‟, because in this dual strategy the manufacturer

supplies the retailer with private labels. There a two motives for private label production for the retailer:

1. Economic motives

The most important reason for manufacturers to produce for retailers is overcapacity. By producing extra

products for retailers they create an opportunity to optimize their production capacity.

2. Relationship motives

The production of private labels can improve relationships with the retailer. Kalwani and Narayandas

(1995) show that long-term relationships with retailers can be more profitable and lead to sustainable

competitive advantage by creating a win-win situation (Kalwani and Narayandas, 1995).

7. Promotional activities

Name-brand manufacturers reported increasing point-of purchase promotional activities in response to the

new competition. The share of promotional budgets allocated to point-of-purchase expenditures and

advertising were 73% and 27% in 1992, compared to 62% and 38% respectively in 1960 (Lenius). From

1980 to 1992, U.S. food manufacturers‟ spending on promotional schemes, such as money-off offers and

coupons, rose from half to threequarters of total marketing budgets, while advertising‟s share fell from

44% to 25% (de Jonquieres and Tait).The private label versus manufacturer brands in supermarket chains:



20

8. What are the key drivers that determine the success of a (new) private label?

This chapter takes a closer look on how retailers around the world are enhancing their store brands to

make them strong competitors of manufacturer brands. Creating successful private labels is about more

than just price. But is this always true and what are the external drivers for private label success?

In the past few years several studies have investigated the drivers that lead to successful private labels. For

example, Hoch and Banerji (1993) analyzed across category differences in private label market share.

They localized the drivers of store brand performance with the three parties that make up the retail

channel: consumers, retailers and manufacturers. In a cross-sectional analysis of 185 grocery categories,

they found that six variables could explain 70% of the variance in market shares. Store brands obtained

higher market share when:

1. Quality relative to the national brands was high.

2. Quality variability of store brands was low.

3. The product category was large in absolute terms ($ sales).

4. Percent gross margins were high.

5. There were fewer national manufacturers operating in the category.

6. National advertising expenditures were low.

The first two variables show that, all else equal, consumers are more likely to buy private labels that

provide parity quality. The middle two factors reflect the retailer‟s scarce resource allocation problem.

Because retailers must draw on internal funds for the branding, packaging, production, and advertising of

their store brands, they invest more heavily in large categories offering high profit margins so as to

maximize their return. The last two variables demonstrate the influence of manufacturers and show that

private labels can be crowded out of the market when national brand competition is high and when those

brands invest advertising resources into the consumer franchise.

Raju, Sethuramen, and Dhar (1995) studied the factors that influence the retailer‟s decision to introduce a

store brand into a category. They showed that:

1. Store brands are more likely to be introduced into categories where price competition between

the national brands is low (because margins will tend to be higher).

2. The number of national brands is high (which implies that introducing a store brand will have

less impact on margins).The private label versus manufacturer brands in supermarket chains:



21

To illustrate the drivers mentioned by Hoch and Banerji (1993) and Raju, Sethuramen, and Dhar

(1995):

To re-ensure the statements made by Hoch and Banerji (1993) and Raju, Sethuramen, and Dhar (1995) in

the model above, the following subjects are also compared to other literature:

Product Quality

Quality Consistency

Category Retail

Sales

Category Gross

Margin

Number of National

Manufacturers

National Advertising

per Manufacturer

Private Label

Market Share

+

+

+

+

-

-

Consumer Driven

Retailer Driven

National

Manufacturer

DrivenThe private label versus manufacturer brands in supermarket chains:



22

1. Category characteristics

Private label performance varies widely across product categories and items (Hoch and Banerji, 1993).

Refrigerated food had the highest overall share of Private Label in the AC Nielsen 2005 study, with an

aggregated value share of 32%. The table below shows that there are obvious differences between the

success of private label in different categories.

Private Label shares and growth rates by Product Area

Product Area PL

Share

PL

Growth

Product Area PL

Share

PL

Growth

1

Refrigerated Food

32% 9% 8

Non-Alcoholic

Beverages

12% 3%

2

Paper, Plastic &

Wraps

31% 2% 9

Home Care

10% 2%

3 Frozen Food 25% 3% 10 Snacks & Confectionery 9% 8%

4 Pet Food 21% 11% 11 Alcoholic Beverages 6% 3%

5 Shelf-Stable Food 19% 5% 12 Personal Care 5% 3%

6

Diapers & Feminine

Hygiene

14% -1% 13

Cosmetics

2% 23%

7 Health Care 14% 3% 14 Baby Food 2% 13%

Source: AC Nielsen 2005

1. Quality

Economic theory holds that the price consumers are willing to pay for a product depends on the utility

they derive from consuming the product. A major source of utility is the perceived quality of the

product. Perceived quality is defined as the degree of perceived performance excellence of the product

(Zeithaml, 1988). How well does the brand perform in the eyes of the customer? The perceived

quality drives the private label success, not the price. The private label versus manufacturer brands in supermarket chains:



23

Four types of buyers (Kumar and Steenkamp, 2006)

Consumer price sensitivity

Low

Random buyers Brand buyers

High

Private label buyers Toss-ups

Random buyers are not particularly price sensitive and see little difference in quality;

Brand buyers are consumers who are low on price sensitivity and perceive a large quality

difference between leading manufacturer brands and the store brand. They will buy a

manufacturer brand;

Private label buyers are price-sensitive consumers who perceive a small quality gap between

leading manufacturer brands and the store brand. They will purchase the store brand;

Toss-ups are consumers who are high on price sensitivity and perceive large quality differences

between leading manufacturer brands and the store brand.

The challenge for retailers is to induce the toss-ups and random buyers to buy private labels. Toss-ups will

usually purchase a manufacturer brand since for most consumers quality is more important than price

(Steenkamp, 1989). Private labels can convert toss-ups into private label buyers only if they convince

consumers that the quality of the private labels is comparable, or better than, the quality of the

manufacturer brands. The random buyers are more difficult to convince, but can be triggered, for example

by placing the private labels in better shelves (Kumar and Steenkamp, 2006).

2. The optimal price gap

It is undeniably true that buying private labels helps consumers save money. This has led managers in

both retail and manufacturer organizations to believe that the larger the price gap is between private labels

and manufacturer brands, the more successful private labels will be. Yet it is far from obvious that

successful private labels are all about lower prices compared with manufacturer brands.The private label versus manufacturer brands in supermarket chains:



24

Hoch and Lodish (1998) suggest that retailers who maintain excessively large price gaps between national

and store brands are leaving significant category profit on the table and getting little if anything in return.

Consumers expect the price gap to be in the 20-30% range when in fact the actual gap is about 45%

nationally. Moreover, they observed that larger gaps produce diminishing returns in terms of consumers‟

assessment of the value offered by the store brand. If gaps are too big, consumers may infer that the

quality is not there, which is disastrous for any retailer who is intent on building and maintaining a strong

store brand program. In order for category management to work, manufacturers and retailers need to find a

win-win situation. Category management is a method whereby vendor and retailer team up to manage

their mutual product categories on a store by store basis (Joseph 1996). The research of Hoch and Lodish

(1998) suggests that smaller rather than larger gaps between national and store brand prices are an

example where a win-win situation actually exists.

Economical influences on private label success

Recession

Private labels are not a recessionary phenomenon. Although private label shares have increased in all

developed economies in the last twenty to thirty years, the growth trajectory has not been linear. The pastreceived wisdom was that private label buying is for recessionary times only. A recent examination of data

from four countries (Unites States, Germany, United Kingdom, and Belgium) spanning multiple decades

indeed reveals that private label share increases during recessions and decreases during periods of

economic expansion. (Kumar and Steenkamp, 2006). However, these changes are asymmetric. Private

label share increases faster and more extensively during a recession than it falls in the subsequent

expansionary phase. Thus, part of the private label growth in a recession is permanent, caused by

consumer learning. As consumers learn about the improved quality of private labels in recessions, a

significant proportion of them remain loyal to private labels, even after the necessity to economize on

expenditures is over. The onward march of private labels continues across business cycles.The private label versus manufacturer brands in supermarket chains:



25

Geographical influences on private label success

1. Retailer concentration

In the European countries of Sweden and Finland the top five retailers account for nearly 100% of total

country sales, whereas in the Asian countries of South Korea and Japan, the leading retailers hold only

12% of total sales. The level of retailer concentration is significantly correlated with the level of Private

Label development. Generally, across the countries, when retailer concentration was low, the share of

Private Label was also low. (AC Nielsen, 2005).

RETAILER CONCENTRATION OF THE MOST DEVELOPED PRIVATE LABEL MARKETS

Country Region

Private label

share

Retailer

concentration

1 Switzerland Europe 45% 86%

2 Germany Europe 30% 65%

3 Great Britain Europe 28% 65%

4 Spain Europe 26% 60%

5 Belgium Europe 25% 80%

6 France Europe 24% 81%

7 Netherlands Europe 22% 64%

8 Canada North America 19% 62%

9 Denmark Europe 17% 89%

10 United States North America 16% 36%

Source: AC Nielsen, 2005

2. Role of hard discounters

A contributing factor to private label growth, particularly in Europe, was the growing presence of hard

discounters. Hard discounters sell a very limited selection of products (primarily shelf stable food) at a

very low price. More important is that hard discounters mostly sell private label products. For example,

within Aldi, private label products account for approximately 95% of sales. Hard discounters such as Aldi

and Lidl are present in every European country and are expanding this presence. As hard discounters

continue to grow and gain share, with more stores and wider consumer acceptance, so does private label.The private label versus manufacturer brands in supermarket chains:



26

9. Conclusion

In this chapter the main question of this thesis will be answered, based on the answers found in the

literature. The main question of this thesis is:

‘How and why does the private label compete with manufacturer brands in retail chains, and what are

the future prospects of the private label for both supermarket chains and manufacturers?’

In recent years, the quality of private label products and their market shares have grown to such an extent

that most consumer goods manufacturers, including brand leaders, cannot afford to ignore them. However

private label is not just another generic competitor. The retailer that sells private labels is also an

important client of the national brand manufacturer. For that reason it is important for the manufacturers to

develop counterstrategies that create win-win situations. There is a shift in balance of power; the retailers

gain more bargaining power over the manufacturers through their store brands. Manufacturers are forced

to make an important strategic decision: fight private label or make it part of their manufacturing portfolio.

There are a three major key drivers for the private label success: quality, price, and category. The

challenge for private label is to create an optimal price and quality gap compared to manufacturer brands,

and also select the category with most potential.

So the actual reason for retailers to develop private labels, and therefore the reason of private label

success, is all about power and profit. Retailers are recognizing that they cannot simply rely on national

branded products to draw consumers into their stores and sustain their loyalty. This is due to the fact that

manufacturers‟ product brands often are available at a wide array of stores. Private labels are now part of

the strategy of horizontal differentiation between retailers. The advantage for the retailer is that they are

very close to the customer and have the knowledge of what works and what doesn‟t, for example by

looking at product introductions from the national brands.

Future prospects

The limits of private label are currently not yet determined, but it seems almost certain that they have not

been reached. The private labels will continue to challenge the position of branded products in the minds

of consumers. Retailer concentration continues to be a driving factor in the development of private label.

The more concentrated the market, the greater the share of private label is. As the hard discounters and

supermarkets expand their stores and enter new (emerging) markets, the share of private label will grow.

In order to be truly successful in the future, collaborative category management is vital. Effective category The private label versus manufacturer brands in supermarket chains:



27

management ensures that the category‟s overall potential will not be undermined, and enables retailers to

solidify and optimize supply-chain relationships, which means win-win situations for both retailer and

manufacturer.

Future challenges for the retailers:

1. Category management.

2. Gain more manufacturing know-how.

3. Improve private label marketing and change the mindset of consumers: premium private labels.

„retailers need to think like a brand and act like a retailer‟

Richard J. George, Professor of Food Marketing, Saint Joseph‟s University

Future challenges for the manufacturers:

1. Choose a strategy: fight the private label or make it part of the manufacturing portfolio.

2. Become more innovative, improve the ability to generate traffic for the retailer.

10. Limitations and further research

This study is based on existing scientific research. The findings and conclusions can be considered as

widely applicable in supermarket chains, which is also a limitation of this research. The findings in this

thesis might serve as a base for the construction of hypotheses, which in a later study could be tested

quantitatively in a specific setting.

Because the private label is a relatively new phenomenon there are many directions for further research,

both qualitative and quantitative. Some of the topics in this thesis can be used for more specific research.

For example research about the upcoming private label in category management or the power of each

individual key driver and interaction between key drivers for private label success. The private label versus manufacturer brands in supermarket chains:



28

11. References

AC Nielsen (2005), “The power of private label 2005”.

Ailawadi (2001), “The retail power-performance conundrum”, Journal of Retailing, 2001, p. 299-318.

Ailawadi and Harlam (2004), “An empirical analysis of retail margins”, Journal of Marketing, January

2004, p. 147-165.

Ashley (1998), “How to effectively compete against private-label brands”, Journal of Advertising

Research, 1998, vol. 38, no. 1, p.75-82.

Beckett (1992), San Fransisco Chronicle, 2 March 1992, p. B1.

Chintagunta, Bonfrer, and Song (2002), “Investigating the effects of store brand introduction on

retailing demand and pricing behavior”, Management Science, (October 2002).

Davies (1990), “The two ways in which retailers can be brands”, working paper. C2, Oxford Institute of

Retail Management).

Dhar, Sanjay K., and Stephen J. Hoch (1997), "How Store Brand Penetration Varies by Retailer",

Marketing Science, in press.

Hoch, Stephen J. (1996), “Sloan Management Review”, Winter 1996, p. 99.

Hoch, Stephen J., and Shumeet Banerji (1993), "When Do Private Labels Succee?", Sloan

Management Review. 34 (Summer), p. 57-68.

Hoch, Stephen J. and Lodish, Leonard M. (1998), “Store Brands and Category Management”, March

1998.

Janofsky (1993), New York Times, 24 April 1993, section 1, p. 37.

Joseph (1996), “The Category Management Guidebook”, 1996.The private label versus manufacturer brands in supermarket chains:



29

Kalwani and Narayandas, “Long-term manufacturer-supplier relationships: do they pay off for supplier

firms?”, Journal of Marketing, vol. 59 no. 1, p. 1-16.

Kennedy (1992), Star tribune, 26 March 1992, p. 7D.

KPMG (2004), “Customer Loyalty & Private Label Products”, 2004.

Kumar and Steenkamp (2006), “Private Label Strategy”, 2006, p. 7.

Martin and Kubomura (1999), Food engineering, December 1999, p.26.

Mills, „Why retailers sell private labels, Journal of Economics and Management Strategy (Fall 1995),

p.509-528.

Morton and Zettelmeyer, “The strategic positioning of store brands in retailer-manufacturer

bargaining”.

Narasimhan and Wilcox (1996), “Private labels and the channel relationship”, Journal of Business 4,

1996, p. 573-600.

Nickel, S., (2004), “Category management”. Retrieved from http://de.wikipedia.org/wiki/Category

_Management.

Raju, Jagmohan S., Raj K. Sethuraman, and Sanjay K. Dhar (1995), "The Introduction and

Performance of Store Brands," Management Science, 41 (June), p. 957-78.

Rolnicki, K. (1998). “Managing Channels of Distribution” (1st edition), AMACOM, a division of

American Management Association.

Saatchi&Saatchi (2007), “Private Label”, June 2007, par. 4.2 Retailers.

Shankar et al (1998), “Late mover advantage: how innovative late entrants outsell pioneers”, Journal of

Marketing Research, 1998, vol. 35 no. 1, p. 54-70).The private label versus manufacturer brands in supermarket chains:



30

Steenkamp, Jan-Benedict E.M (1989), “Product Quality”, 1989.

Stern W.L., El-Ansary A., Andersso E. & Couglan A. (2006), “Marketing Channels” (7th edition),

Upper Saddle Creek, NJ: Prentice-Hall.

Sullivan (1994), “Slotting allowances”, 1994.

Verhoef, Nijssen, Sloot (2002), “Strategic reactions of national brand manufacturers towards private

labels”, European Journal of Marketing, 2002, Vol. 36, no. 11/12.

Zeithaml (1988), “Consumer perceptions of price, quality, and value”, Journal of Marketing 52, July

1988, p. 2-22).

12. AppendicesThe private label versus manufacturer brands in supermarket chains:



31

Generic private labels

Strategy Lowest price, undifferentiated

Objectives Provide customer with a low price option

Expand customer base

Branding No brand name

Pricing Large discount, 20%-50% below brand leader

Category coverage Basic functional product categories

Quality to brand leader Poor quality

Product development None, product put up for contracts to manufacturers with lagging technology

Packaging Cheap and minimal

Shelf placement Poor, less visible shelves

Advertising/promotion None

Customer proposition Sold as cheapest-priced product

Examples Simple packages with no name marked only with soap, butter etc.

Copycat brands

Strategy Same product at a lower price

Objectives Increase negotiating power against manufacturer

Increase retailer share of category profits

Branding Umbrella store brand or category-specific own labels

Pricing Moderate discount, 5%-25% below brand leader

Category coverage Originates in large categories with strong brand leader

Quality to brand leader Quality close to branded manufacturers

Product development Reverse engineered using manufacturers with similar technology

Packaging As close to brand leader as possible

Shelf placement Adjacent to brand leader

Advertising/promotion Frequent price promotions

Customer proposition Sold as same quality but lower price

Examples

Premium store brands

Strategy Value added

Objectives Provide added-value products

Differentiate store

Increase category sales

Enhance margins

Branding Store brand with sub brand or own label

Pricing Close to or higher than brand leader

Category coverage Image-forming categories, often fresh products

Quality to brand leader Quality on par or better, advertised as better

Product development Considerable effort to develop best products with similar or better

technology

Packaging Unique and source of differentiation

Shelf placement Prominent eye-catching positions

Advertising/promotion Featured in advertisements but limited price promotions

Customer proposition Sold as best products on the market

Examples Body Shop, Tesco Finest

Value innovatorsThe private label versus manufacturer brands in supermarket chains:



32

Strategy Best performance-price ratio

Objectives Provide the best value

Build customer loyalty to store

Branding Meaningless own labels to demonstrate variety

Pricing Large discount, 20%-50% below brand leader

Category coverage All categories

Quality to brand leader Functional quality on par with brand leader but with removal of „non-valueadding‟ product features and imagery

Product development Considerable effort and innovation in terms of cost-benefit analysis

Packaging Unique but cost efficient

Shelf placement Normal as all over store

Advertising/promotion Store not own label advertising, normal promotion schedule

Customer proposition Sold as best value-price of generics but objective quality on par with brand

leaders

Examples Aldi, H&M, IKEA

This category includes supermarkets, food stores, and grocery stores, primarily engaged in the retail sale of all sorts of canned goods and dry goods (such as tea, coffee, spices, sugar, and flour), fresh fruits and vegetables, and fresh and prepared meats, fish, and poultry.

NAICS Code(s)

447110 (Gasoline Stations with Convenience Stores)

445110 (Supermarkets and Other Grocery (except Convenience) Stores)

452910 (Warehouse Clubs and Superstores)

445120 (Convenience)

Industry Snapshot

Some 243,800 establishments comprised the U.S. retail food industry in 2000, according to the U.S. Census Bureau's Statistical Abstract of the United States. The entire retail food industry combined for total sales of $483.7 billion in 2000, up from $368.3 billion in 1990. Grocery stores totaled 163,000, including 24,600 super-markets (defined as having at least $2.5 million in annual sales). These supermarkets reported total annual sales in 2000 of $453.8 billion. Although supermarkets accounted for only 67 percent of the industry stores, they took in 95 percent of the industry's revenues. Supermarkets are further categorized as conventional (9,900 stores), superstores (7,900 stores), warehouse (2,400 stores), combination food and drug (3,700 stores), superwarehouse (500 stores), and hypermart (200 stores), a small subcategory that sells the broadest range of consumer goods along with food items.

Also included in the food industry are convenience stores, superettes (grocery stores that produce under $2.5 million in annual sales), and

specialty food stores (stores that specialize in a single category such as meat, seafood, or baked goods). Convenience stores totaled 81,900 and generated $48.5 billion in sales in 2000; superettes numbered 56,700 and had sales of $72.5 billion; and specialty food stores totaled 80,600 with annual sales of $25.4 billion.

After undergoing extensive consolidation during the 1990s in response to flat sales and increased competition, in the early the 2000s mergers and acquisitions abated. The primary focus of the grocery industry is to shift market share away from the conventional supermarkets to favor superstore discounters, namely, Wal-Mart Superstores. Clearly the discounter grocers are here to stay. During the remainder of the 2000s, the industry will continue to adjust to Wal-Mart's ever-increasing domination of the market. The question will be how traditional grocers will adjust to the new competitive environment to continue to survive and prosper.

Organization and Structure

Like all retail industries, the grocery industry at its most basic, functioned by obtaining goods from distributors and manufacturers, marking up the price to cover costs and to allow for profit, and reselling the merchandise to the general public. Larger grocery chains typically manufactured or prepared a limited line of goods for exclusive sale in their stores. These goods included those prepackaged under a private label or store brand and those offered ready-to-eat through in-house bakeries and delicatessens.

The choice of which goods appeared on grocery shelves and how many of each was often carefully calculated by both manufacturer and grocer alike. Shelf space, considered a commodity, was purchased by manufacturers and distributors based on the amount of shelf space they wished to reserve for their products. According to Sales & Marketing Management of March 1996, the cost of shelf space, called a "slotting fee," might range from $5,000 to $25,000 per product. On the retail side, grocery stores tracked their inventories—frequently using a computer system integrated with their

cash registers—to determine the frequency and volume of sales for each product and ordered from their suppliers based on this data. In this arrangement, both manufacturers and retailers sought to maximize the volume of sales by giving ample shelf space to high-volume items while leaving room for lower volume and niche products. Also competing for space were the thousands of new products introduced every year. According to the Food Marketing Industry Speaks 1999, median number of supermarket items was 40,333.

The grocery industry was dominated by supermarkets, that is, grocery stores with more than $2.5 million in annual sales. In 2000, there were 24,600 such units, with a total of $337.3 billion in sales and a 70 percent share of the market, down from 77 percent in 1998. This group was subdivided into affiliated independents and corporate chain supermarkets. Their differences lay in their respective financial and organizational structures.

Affiliated independents were characterized by a wholesaler-retailer interdependence. Under the terms of an agreement between the wholesaler and retailer, the retailer took advantage of the wholesaler's purchasing power and had the right to use the wholesaler's name. In return, the wholesaler maintained the retailer's business for products purchased and also for services provided by the wholesaler. The independent retailers in the United States controlled a 15.9 percent share of the total market volume in 1998, a decrease of 5.9 percent from 1988. These stores reported $71.6 billion in combined sales in 1998.

Affiliated independents were further divided into voluntary wholesaler groups and retailer-owned cooperatives. The former were companies who bought the franchises of independently owned wholesalers. These, in turn, sponsored voluntary groups of independent retailers in their respective communities. Included in this category were supermarkets such as Supervalu and Scot Lad Foods. The retailer-owned cooperative was an association of retailers who organized for the purposes of achieving greater

purchasing power and other services. Among these were the Associated Group and United Grocers.

The chain supermarkets continued to control a strong segment of the market. Their combined sales in 1998 amounted to $274.5 billion, or 61.1 percent of total industry sales. Corporate chain retail stores were company operated and included such well-known outlets as Safe-way, Kroger, A&P, Winn-Dixie, Jewel, Publix, and Acme Markets. Because of their size, these firms typically bypassed third-party wholesalers and purchased in bulk directly from manufacturers. No single chain, however, dominated the national market, and none had operations in all 50 states.

Convenience stores made up the majority of units in the industry. They were defined by Food Retailing Review in 1993 as "small, high margin, easy-access stores with a limited line of high convenience items, including staple groceries, nonfoods, and ready-to-heat and ready-to-eat foods." There were, in turn, two kinds of convenience stores: stand-alone units and gasoline station units. In the early and mid-1990s, the gas station stores, known as "G stores," held significant advantage over their stand-alone counterparts. Many of the grocery stores were newer and equipped to sell a wider array of foods—including such nontraditional convenience offerings as fresh fruit in some cases—than conventional convenience marts, and all of them shared the advantage of having gasoline customers they could lure into convenience sales. In general, the G stores outperformed stand-alones, leading some stand-alones to pursue niche markets to maintain their customer base. The National Association of Convenience Stores reported that convenience outlets in the United States totaled 95,700 in 1997, up 1.6 percent from 1996. According to the association, "the strong shift towards urban store development continued in 1997. More than three out of every four new stores built is located in an area with a population of 50,000 or greater. While urban store development costs dropped 6.2 percent in 1997 to $1.2 million, rural store development broke the million-dollar mark. New rural stores averaged $1,027,300 with land costs averaging $272,400,

building costs averaging $341,000, equipment costs averaging $347,800, and inventory costs averaging $66,100."

The industry held relatively few foreign interests outside North America in the late 1990s; however, several corporate chains were held by foreign parents. One major player was Delhaize Fréres & Cie., "Le Lion" of Belgium, and its new holding company—Delhaize America—which held a controlling interest in the Food Lion chain in 1999. Dutch retailer Ahold NV had a sizable U.S. presence through its acquisitions of First National, Bi-Lo, Giant Foods, Pathmark, and Tops stores. Also as of 1999, a 55 percent majority of The Great Atlantic and Pacific Tea Co. (A&P) was held by Tengel-mann Warenhandelgesellschaft of Germany. U.S. holdings in other countries included Safeway's Canadian operations, as well as its interest in the Mexican chain Casa Ley S.A. de C.V, which operated 80 stores in 1999. A&P also had operations in Canada. In a September 1999 press release, A&P CEO Christian Haub reported that company "market share is also increasing in Ontario, both through internal and acquired growth. Comparable store sales in our operated Canadian stores continue to be among the strongest in the Company. The mostly franchised Food Basics format continues to do very well, including the 10 additional stores converted so far this year. Finally, we have concluded two agreements to acquire a total of 11 stores in Ontario, strengthening our positions in several markets, particularly the Hamilton/Niagara Falls area. While making these acquisitions, we improved our balance sheet during the quarter with a successful offering of 40 year bonds."

Background and Development

"The food supermarket was perhaps the single most important innovation in retail distributive institutions in the entire period from 1850 to the present," according to Malcolm McNair and Eleanor May in The Evolution of Food Institutions in the United States. Supermarkets, particularly chains, were able to achieve greater economies of scale than smaller outfits and were

thus able to charge the consumer less while still earning a greater profit margin.

Characterized by carrying a large variety of different food stuffs, dry goods, and health and beauty products under one roof, supermarkets developed in the early 1930s. The expansion of their stock beyond essential food items was encouraged by rising operating costs, particularly rent and wages, influenced by government regulation and union bargaining. Prior to this, food was sold through local "mom and pop" grocery stores and chain "economy stores." Faced with competition from supermarkets that undercut them by as much as a third or a half, the old style grocery store chains either converted to supermarkets, were bought out, or went out of business.

Supermarkets provided consumers with lower-priced goods during the Great Depression. Concentrating less on personalized service and more on bare bones cash and carry, supermarkets emphasized the utilitarian aspects of the business and let the customer do the work of selecting and handling goods. With their emphasis on high stock turnover, supermarkets benefited from the new tendency toward bulk buying, supported by the growing use of refrigeration and the proliferation of cars. The growth of automobile traffic also influenced store location, with placement for traffic convenience becoming a primary concern.

From 1930 to 1950, the industry witnessed radical and far-reaching changes in methods of food distribution. Noticeable changes included increased self-service, the wide expansion of lines, and the great increase in the number and size of stores. Consequently, consumers benefited from greater choice and convenience. Through creative marketing techniques and low competitive prices, supermarket chains, both independently affiliated and corporate, had established themselves as the leading outlet for retail food distribution by World War II.

After 1950, increased competition fostered further developments in the retail food business. The large profit margins that stores had been able to

realize were undercut as supermarkets found it necessary to increase print and television advertising and initiate such promotional efforts as trading stamps, games, and contests to win business. These efforts succeeded only in pushing up super-markets' overhead faster than they could increase gross margins. These percentages narrowed consistently throughout the 1950s and 1960s. By 1954, the United States had 288,000 grocery stores, almost 100,000 fewer than in 1948.

By 1965, supermarkets had won a 71 percent share of all retail food sales, with superettes (stores having annual sales between $150,000 and $500,000 a year) accounting for 13 percent and small stores (sales less than $150,000 annually) 16 percent. It had become evident by the 1960s that an integrated chain of self-service super-markets could offer consumers a better deal due to their economies of scale. It was also clear, however, that cutthroat competition, which forced chains to keep their price margins low, was wiping out some of these economies.

Supermarkets sought ways to cut their costs even further and found inspiration in the new soft goods discount stores that were starting to appear. These businesses applied the same techniques pioneered by super-markets to create low-price department stores. Supermarket managers subsequently decided to employ the discount idea in their own businesses. Doing so necessitated abandoning their previous promotional schemes and focusing on price cutting. For consumers, the appeal was immediate, and discount pricing spread throughout the industry.

While the industry was undergoing these transformations, many supermarkets simultaneously endeavored to raise their profit margins by expanding their stock to include more general merchandise. Others bought out existing discount department stores and opened the two kinds of stores side by side or under one roof in strategically located shopping centers. Another development was the trend for supermarkets to ally themselves with discount drug stores.

The net effect of these changes was a gradual decline in the number of general food stores—although the food retailing market saw some increase in the number of specialty stores. The 1972 census recorded 194,000 supermarkets with sales per establishment more than seven times greater than in 1948. By 1996, the number of grocery stores had fallen to 130,000, but sales had grown upwards of $400 billion.

The industry enjoyed moderate sales growth during the late 1980s, although it was not shared uniformly across the industry. According to the U.S. Bureau of Census, pre-inflation growth between 1987 and 1992 for the industry as a whole was 23.5 percent, which included a 50 percent sales boost in the convenience segment. Supermarkets reported a 22 percent net gain in the same period, while other segments of the industry languished around 10 percent. Different firms in the industry also fared differently in this period: while some chains experienced growth in sales, others such as A&P suffered millions in losses.

Growth in that period was dampened by the recession in the early 1990s, which hit retail grocers especially hard. Already operating under low profit margins due to fierce competition, numerous chains took severe financial beatings because of the austere consumer-spending climate. Fiscal weakness helped set the stage for several smaller chains to be acquired by their aggressive large-chain rivals. This consolidation trend continued into the mid-1990s. In 1993, the industry began a slow recovery from its heavy recession losses—so slow that growth was at its lowest point in the past 40 years. From an annual high of 7.2 percent sales gains in 1989, growth plummeted during the recession and then leveled to between 2 and 4 percent through the mid-1990s.

By the mid-1990s the grocery industry had at least shown signs of solid recovery thanks to its ability to remain competitive. Aided by a more robust economy, the industry posted modest gains because of corporate cost savings, horizontal and vertical integration, private label expansion, and innovative marketing. Industry gains in current dollars, however, were often

neutralized by inflation, according to the Food Marketing Institute (FMI), which estimated that the industry's modest 4 percent sales growth in 1995 amounted to only 0.7 percent after inflation. Despite this, the FMI noted that some measures of industry productivity had increased in 1995 following three consecutive years of decline. Average sales per labor hour in the industry, according to the FMI, were at $111.40 for 1995 compared to $106.50 in the previous year.

To remain competitive with such formidable competitors as Wal-Mart, supermarkets pursued new avenues of growth, including the expansion of private label brands, the introduction of larger stores, and the development of specialty services like delicatessens. Private labels—brands offered exclusively by a particular chain—were seen as opportunities to boost sales growth by providing lower-cost alternatives for shoppers while retaining a greater share of the profit, since private label goods were often manufactured by the supermarkets themselves or under contract by third-party purveyors. According to the Private Label Manufacturers Association, "Store brands now account for one of every five items sold every day in U.S. supermarkets, drug chains and mass merchandisers. They represent a $43.3 billion segment of the retailing business that is achieving new levels of growth every year." The 1998 $43.3 billion figure was up from $41 billion in 1997.

The association also reported that consumer sentiment for private label items was high in 1998. "For American consumers, store brands are brands like any other brands. In a recent Gallup study, 75 percent of consumers defined store brands as "brands" and ascribed to them the same degree of positive product qualities and characteristics—such as guarantee of satisfaction, packaging, value, taste and performance—that they attribute to national brands. Moreover, according to Gallup, more than 90 percent of all consumers polled were familiar with store brands, and 83 percent said that they purchase these products on a regular basis."

A&P, for example, continued a heavy push in the late 1990s for its mid-priced America's Choice label, which was offered in addition to its low-cost Savings Plus store brand. Private Label reported that the firm intended to offer an in-house brand to reach three separate consumer buying segments through differential branding of its private labels. Owning the manufacturing plants for private labels, however, was not always key to realizing higher profits, as Safeway reported in 1995 when it closed several of its plants due to poor performance.

New store formats were another major component of the supermarkets' late-decade growth plan. With such competitors as warehouse clubs and the new Wal-Mart and Kmart superstores, having more physical retail space was seen as an advantage. Most of the new store introductions by the supermarket chains boasted greater retail square footage than was typical of existing units in the industry. In 1998, the median average store size was 40,483 square feet, up from 38,600 in 1996. Many of the new stores were much larger than the median, with some reaching upwards of 60,000 square feet. A typical new store in 1998 was just over 57,000 square feet, up from about 52,400 square feet in 1997.

In addition to broader nonfood selections, fresh produce and ready-to-eat dishes were often a focal point of the new stores. Enticing consumers with a wider selection of produce and high-quality, in-house delicatessens, these stores were designed to win back market share from both restaurants and discount superstores that were drawing away traditional grocery business. In the late 1990s, deli revenues were one of the fastest growing segments of total supermarket sales, with 5.79 percent of total store sales.

The larger format supermarkets maximized profits in both food and nonfood offerings. The impetus towards these combination stores was the large profit margins—in the region of 35 to 40 percent—to be made on many of the items they sold, including health and beauty items, deli food, pharmaceuticals, and bakery goods. In contrast, the markup on food and dry goods was only 15 to 20 percent, and stores devoted exclusively to

grocery items were purely functional and provided less in the way of "shopping as entertainment."

Marketing was also key to maintaining growth in the late 1990s. This did not mean, however, that chains were spending more on advertising. Several chains actually reported decreases in total advertising expenditures as part of broader cost saving initiatives. Several marketing innovations responded to consumer concerns and environmental issues. In 1995, for instance, Safeway launched an "animal welfare charter" on the meats it sold to reassure customers that the livestock had been treated humanely. On a similar note, more stores began to implement sections that contain foods that are natural or organically grown, an attempt to win consumers who are attracted to the growing natural food specialty store segment. Another tool to increase revenues was to dedicate more space to high-volume goods and focus on core product categories that earned the most money. Market research and advertising also supported major private label expansions, such as those of A&P and Kroger.

Large chains have also implemented savings cards to lure more customers. For example, Kroger began offering a "Kroger Plus Savings Card" that allows 'members' to receive special discounts on promotional items without having to clip coupons. Farmer Jack also offers a savings card and teamed up with Northwest Airlines in Michigan in 1999. Consumers now receive points towards airline travel every time they use their card.

The key to maintaining profits into the 2010s will be to optimize cost awareness and attract new and existing customers. This industry has had modest growth and is predicted to have only slight growth in the future. Many larger chains have sought growth through acquisition including Albertson's, who purchased American Stores in 1999, and Kroger, who had plans to purchase 74 Winn-Dixie stores in late 1999, and bought Jay C Stores of Indiana in August 1999.

Current Conditions

With overall spending slow during the early 2000s due to a sluggish economy, the retail grocery sector worked hard to keep costs down and revenues up. Although the industry was slightly more immune to changes in the economy because food is a basic, necessary expenditure, changes in shopping and spending habits were reflected in grocers' bottom lines. According to a survey of consumer attitudes conducted by the Food Marketing Institute in 2002, price was considered a major factor in food purchase for 84 percent of respondents, up from 77 percent the previous year.

With price becoming increasing important to consumers, conventional grocers were facing stiff competition from the price-slashing methods of mega-retailer Wal-Mart. In 2003 Elliot Zwiebach noted in Supermarket News, "Alternate channels of distribution are continuing to flex their muscles and grab food sales away from traditional supermarkets, forcing supermarket operators to adapt and change—or continue to lose market share." Wal-Mart continued to increase its market share, which stood at 12 percent in 2002. The giant discounter planned to expand square footage devoted to food by 8 to 10 percent in its supercenters, and Sam's Club planned food square footage increases of 5 to 6 percent.

Moreover, supermarkets are not just facing off against Wal-Mart. Discounters Costco and Target are also increasing their presence in the grocery industry. In 2002 Costco's same-store food sales increased from 10 to 15 percent, and Target Supercenters ranked twenty-second in the industry, jumping from thirty-third the year before. According to research conducted by AGNielsen, annual trips to the grocery store declined from an estimated 86 in 1998 to 75 in 2001, whereas annual trips to supercenters increased from 14 to 18 during the same time interval.

In order for traditional grocers to survive the onslaught of discounters, they will need to find ways to convince customers to shop their aisles. Richard George, chair and professor of food marketing, at St. Joseph's University, Philadelphia, told Progressive Grocer, "There are things the small

independent operator should always do better than big chains like Wal-Mart. No one should out-fresh them and no one should out-service them.… [Wal-Mart] stores aren't that appealing and the service is not that great. There is a lot of opportunity there, so supermarkets have to consider how they can improve the whole shopping experience. They've got to focus on the customer. People have Palm Pilots and computers, but supermarkets are the same. They still have 25 checkouts and only six open." According to FMI's report, Trends in the United States: Consumer Attitudes & the Supermarket, 2002, consumers are looking for clean, neat stores with a good selection of high-quality fruit and vegetables and high-quality meats. These are the primary areas where traditional grocers can create a profitable and sustainable niche in the retail grocery industry.

Industry Leaders

In the early 2000s, Wal-Mart passed traditional grocery chains to become the nation's leading grocer, with a 12 percent market share in 2002. The grocery business was dominated by the multi-unit and regional supermarket chains Kroger, Albertson's, and Safeway. Other companies with a significant portion of the market share included Albertson's, A&P, Winn-Dixie, Super-valu, Publix, and Food Lion.

Kroger Co. Ohio-based Kroger operates approximately 3,600 stores across the nation, including 2,400 supermarkets. Doing business under approximately 25 banners, only 15 percent of sales are attributed to Kroger stores themselves. Among others, the company owns Dillon Food Stores, Fry's Food Stores, City Market, King Soopers, and Gerbes Supermarkets. It also operates approximately 800 convenience stores under the names Kwik Shop, Loaf 'N Jug, Mini-Mart, Quik Stop Market, Tom Thumb Food Stores, and Turkey Hill Minit Market. Sales in 2002 totaled $50.1 billion, resulting in a net income of $1.04 billion.

Founded by Bernard Kroger in 1883, the company began as the Great Western Tea Company in Cincinnati, Ohio. It immediately set itself apart

from its competitors by being the first grocery store to use print media advertising and to introduce an in-house bakery. By 1902, the company's name had been changed to Kroger Grocery and Baking Company, and the operation had expanded to include 40 stores in two states. Its growth continued unabated ever after. Since the 1960s, Kroger maintained a presence in the drug store market and, in the 1980s and 1990s, concentrated on operating combination grocery and drug stores, emphasizing one-stop shopping. The average size of these stores was 48,745 square feet.

One of Kroger's strengths was its decentralized structure, which enabled it to respond to localized buying habits. This arrangement allowed it to build customer loyalty. Its decentralized structure also allowed for flexibility in its pricing structure. Both "Every Day Low Pricing" and "High-Low" structures were used. Competition for the company's local market shares increased steadily in the early 1990s, especially from Meijer, Food Lion, and Publix. Kroger sold off its more than 100 Time Savers convenience stores in 1994, but as of 1995, the company reported that its convenience store sales per square foot slightly exceeded that of its supermarkets. Nonetheless, convenience sales accounted for just less than 10 percent of Kroger's total sales in 1995. The company relocated, expanded, or opened 116 stores in 1996, increasing overall store square footage by 6.7 percent. The company continued an aggressive growth strategy with plans for acquiring Winn Dixie stores in Texas and Oklahoma in late 1999, and J. C. Stores in Indiana. Kroger also began its foray into jewelry with its purchase of Fred Meyer Inc. in 1999. In July 1999, Kroger also announced plans with U.S. Bancorp to offer a co-branded credit card to Kroger customers.

Albertson's. The nation's second largest grocery retailer in 1999 was Albertson's. Its purchase of American Stores Company in June 1999 launched it into one of the top spots in the grocery industry. The company had $35.6 billion in sales for fiscal 2002, with a net income of $485 million. In 2003, the company ran 2,300 outlets in 31 western, mid-western, and

southern states including Jewel Osco, Acme Markets, Sav-on, Seessel's, and Super One Foods. Many of its operations are combination food and drug stores, a strategy that Albertson's pioneered.

Albertson's was founded in 1939 in Boise, Idaho. An innovator in the grocery industry, Joe Albertson introduced such services as scratch bakery, magazine racks, homemade ice cream, and automated machines that held donuts. The first store was also the largest of its time—10,000 square feet—eight times larger than typical stores.

Alberston's continued to post profits into the 1980s. The company continued building larger stores, implemented electronic scanning, and offered personalized customer service. In 1988, it opened its first mechanized distribution center in Portland, Oregon, covering more than 500,000 square feet.

In the late 1990s, Albertson's became one of the leading names in the industry. With more than $567 million in net income, it had plans for growth into 2004 included building 1,850 new stores and remodeling 730 existing stores.

Safeway Inc. As the third largest supermarket chain in the United States, Safeway had 2002 sales of $32.4 billion but a net loss of $828 million. Since going public in 1990, California-based Safeway has pursued a course of vigorous expansion that included its 1997 acquisition of the 320-unit California chain The Vons Companies, Inc. In 2003, Safeway operated approximately 1,800 stores, primarily in the West, Southwest, and mid-Atlantic regions. Safeway also had substantial holdings in Canada and Mexico. Like its competitors, Safeway continued to close nonperforming stores and to seek other ways to reduce costs. The company struggled to remain viable during the first years of the 2000s, sustaining significant losses during 2002.

Workforce

According to the U.S. Department of Labor, Bureau of Labor Statistics, there were three million workers employed by retail grocers in 2001, down from 3.5 million in 1998. Sales-related occupations accounted for nearly 44 percent of workforce, which included over one million cashiers with a mean annual salary of $16,940.

By sheer employee count, the workforce was concentrated regionally in the Southeast, Mid-Atlantic, Great Lakes, and West Coast states, according to the Bureau of Economic Analysis. More than a quarter of the industry's labor was located in the Southeast alone. New England, the Plains states, and the Rocky Mountain states employed proportionately fewer workers in the grocery industry; combined, these regions accounted for just 16.2 percent of the total industry work force. Labor recruitment and retention remained an issue in the early 2000s. A survey by the Food Marketing Group found that labor costs, including warehouse, supervision, and staff, represented an average of 69 percent of a food distributor's total cost of operation and that 38 percent of survey respondents reported an turnover rate greater than 20 percent.

The labor pool is expected to decrease for grocery executives as well, due to increased jobs with Internet and other companies. According to the Progressive Grocer, "a myriad of executive recruitment firms, colleges and universities, other retail channels, manufacturers, homegrown executive training programs and oldfashioned networking will become increasingly important in an industry where the shortfall in talent could reach critical proportions in less than a decade."

Overall, unionization has declined somewhat in the industry. Although supermarket workers remained unionized at many chains, the entry into the market of nonunionized competitors, such as warehouse clubs and discount outlets, pressured the traditional chains to break the power of the unions. The industry experienced regional strikes in most years of the 1990s. In 1995, Safe-way, American's Lucky Stores, and Save Mart stores were targets of a 9-day work stoppage in northern California and Oregon. Profits

in 1996 for two of the industry leaders, Kroger and Safeway, were dampened somewhat from a 44-day Colorado strike against both chains. In the same year, Safeway suffered a 40-day walkout at its Canadian stores in British Columbia, where replacement labor was against provincial law and its stores were forced to close until a labor agreement was reached. Safeway's Canadian holdings continued to experience disputes with organized labor into 1997.

Research and Technology

The grocery industry is now facing challenges and increased competition due to Internet shopping. For example, according to a November 1999 Progressive Grocer article, "online shoppers will be able to name the price for their favorite name-brand grocery items. Beginning this month in New York, New Jersey, and Connecticut, Priceline.com—the Internet service that offers airline tickets and other high-priced items at consumers' bids—is licensing its business method and trademark to The Priceline WebHouse Club Inc. WebHouse club members name their grocery store of choice (including A&P, King Kullen and Gristedes) and pick products from more than 140 categories of perishables, non-perishables, canned foods, and pet supplies, along with two or more of their favorite brands. Accepted requests are confirmed within 60 seconds and immediately charged to the customer's credit card. The customer then goes to the store to pick up the items." Another example of such a site is Homegrocers.com. Along with grocery stores offering shopper friendly sites, third-party companies are looking to team up with local grocers to provide services to online shoppers.

Electronic couponing and U-Pons became available in the late 1990s. Many grocery store chains offered printable electronic coupons that are available on company Web sites. In September 1999, Kroger began offering U-Pons on it Web site. This electronic form of saving allows customers to select coupons they wish to receive. The coupons are then mailed to the customers' address in three to five business days. Retailers expect that tracking coupon performance will be much easier with this process.

Research in the grocery industry has also focused on technologies to help stores reduce costs and increase efficiencies. Retailers continue to invest in technologies that will improve their accounting, ordering, receiving, and scheduling systems, particularly to integrate these operations—otherwise done on paper in some cases—into a single computer system. In 1998, for instance, Grocer Systems Support software—marketed by GSS—offered programs for inventory control, bill-back tracking, direct buy ordering, shopper tracking and analysis, direct store delivery, cashier security analysis, and accounts receivable analysis.

One of the most revolutionary of these is Efficient Consumer Response (ECR), a scanning system. The system works as follows: a customer selects a product and takes it to the cashier for checkout; the cashier runs the item through the scanner, which records the transaction; the scanner then sends a record of the sale to a central computer system, which itself is networked to the product manufacturer's computer; the manufacturer notes the sale and automatically orders a replacement on a just-in-time basis. An automatic ordering system enables the product's manufacturer to match production with demand using this information about product movement and fore-casting techniques. The result is that product production becomes directly linked to consumer demand, obviating the need for the retailer to store large amounts of inventory. When the merchandise arrives at the store, the computer system acknowledges its receipt and issues a computer-generated payment for an electronic fund transfer payment. This system eliminates the need for paper invoices and streamlines the accounting process.

The second phase of ECR, crossdocking—moving products from a supplier's truck through the distribution center and onto a store-bound vehicle without putting them into pick or reserve slots as defined by Stores magazine—was introduced to reduce warehouse costs and increase service. However, the grocery store industry has been slow to implement this process in comparison to the department store industry.

Supervalu opened one of the first crossdocking facilities in 1996, one that the grocery industry looked to as a model. According to Stores magazine, "in order for crossdocking to take root, retailers will need to become more adept at forecasting demand and more confident when making sourcing commitments. Expanded use of advanced ship notices (ASN) and 128 labeling, now in the early stages of implementation, are also crossdocking enablers." In 1998, only 15 to 20 percent of grocery items were crossdocked.

On the consumer side, several further technologies were implemented in the late 1990s. Many grocery stores installed at the point-of-sale (POS) various card-scanning devices that allowed customers to pass their credit, debit, or store-issued check cards through the scanner at the counter. Particularly for shoppers paying by check, use of store-issued magnetically encoded identification cards, or check cashing cards, represented a significant convenience over the common practice of requiring the customer to provide multiple forms of identification at the point-of-sale each visit. The results for retailers who implemented such systems were speedier checkout lines, more thorough validation of checks, and a reduction in bad checks being passed.

Stores magazine reported that in 1999 there was a "plethora of options—including credit, debit, electronic benefits transfer, smart cards and customer self-checkout—initiating changes in the mission critical front-end POS systems deployed by supermarkets. In an effort to improve customer service, enhance operations, keep pace with their competitors and, above all, lower costs, operators are exploring new payment technology and looking to update POS applications."

Read more: SIC 5411 Grocery Stores - Description, Market Prospects, Industry History http://www.referenceforbusiness.com/industries/Retail-Trade/Grocery-Stores.html#ixzz1KHXlf1HV

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