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The Role of Private Brands and the Retail Planning Process

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Retailers facing these conditions for years have seen their margins squeezed. They had to consolidate to survive. National brands still exert a lot of bargaining power over the stores (excluding Walmart, of course, which is a phenomenon of its own and won’t be covered here), since there could be many channels to sell a product, but only one particularly hot product manufactured by a single maker, that every customer wants. Still, stores do have leverage in how they run features and displays and make decisions over the product placement on the shelf. Also, the manufacturers have traditionally chipped into the retailers’ bottom line with trade spend dollars – budgets that companies set aside to support promotional activities.

Some of the retailers we looked at do not see fewer customers shopping at the stores, but the amount of dollars people are spending is decreased. Customers might simply not have enough cash on hand to buy products in the same quantities as before. The supermarkets which traditionally sell certain products (e.g., paper towels) in bulk, might perceive this trend both as a threat and an opportunity, and we will come back to this point in a moment.

To stay in business and make meaningful returns for their shareholders, US retailers are now following a significant European and world trend – a proliferation of private brands. Up to 50% of retail revenues in Europe are attributed to private brands, with the number in the US at only about 20%, though rapidly growing. Private brands are, of course, those brands which are owned and produced either directly by retailers themselves, or a pool of retailers. Examples include Costco’s Kirkland Signature or (originally A&P’s) Eight O’Clock Coffee, which later took on a life of its own.

The trend is extremely important to a retailer’s survival for a number of reasons. First, they do not have to pay for CPG manufacturers’ margins. In addition, they manage the value chain and gain additional leverage to use while negotiating with national brand manufacturers. Customers are quite happy to explore these new products. Over the years, the perception of the public has shifted in viewing private labels’ quality as subpar to that of national brands, to considering it the same or even better quality. Customers are increasingly willing to buy private national brand equivalents (NBEs) while saving a few dollars.

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Finally, controlling your own brand helps increase customer loyalty to the store. Retailers have the challenge and the opportunity to figure out what the market’s unmet needs are and use their unique offerings in combination with loyalty programs to create brand equity and earn the loyalty of their patrons. As well, we should not overlook the ability to control packaging and packaging sizes, as price-sensitive customers might have an absolute number in mind that they are willing to spend on a product, not necessarily seeking out the best deal on a per unit price. Those customers are essential to keep in the stores.

Traditionally, private brands can be divided into three categories:

  • Value
  • National Brand Equivalent (NBE)
  • Premium

In implementing the private label strategy, retailers must carefully consider the pricing/positioning structure and figure out an appropriate tiered pricing model, so that NBEs, e.g., do not cannibalize or directly compete with the sales of valued private brands while at the same time undoing with the high-quality perception of NBEs. The latter should be sold at a discount to national brands, or else we can turn the customers away from the stores.

On the higher end, there is nothing preventing retailers from offering premium private brands at a premium price, a perfect example being Loblaw’s President’s Choice brand. This approach will provide consumers with a full range of product and service levels they might ever need.

Drawbacks to the private label strategy include manufacturers possibly foreclosing access to some products, or limiting trade spend dollars available to certain accounts. Manufacturers will continue to innovate, and the retailers might not be very fast at this cat-and-mouse game of catching up and following. There is always a risk that a retailer will find itself offering a number of outdated products consumers might no longer desire.

Ultimately, the decision should be made on what is the appropriate mix of private and national brands at the store. This decision need not be faith-based, fashion-based, or trend-based. Retailers might not want to solely take on the risks of research and development, introducing products that might or might not succeed. This decision should be purely data-driven. The types of questions of interest are:

  • What is the right mix of private, national and regional brands?
  • What are the SKUs that generate most margins?
  • What are the effects of putting an SKU on a promotion?
  • What are the effects of seasonality or cross-cannibalization?
  • What’s the most effective trade promotion strategy with respect to national brands and our own labels?
  • Should we run an everyday low price strategy (EDLP) instead of promotions?
  • What are the most effective features and displays that generate the most return?

There are also those thorny supply chain and logistics issues – not covered here, but all of these other questions can be answered using a trade promotion optimization (TPO) solution. Having the right data is key. At the SKU level, retailers need to understand the exact costs, revenues, lifts, seasonality factors, and all other relevant data. The parameters that represent degrees of freedom would be the number of promotions they can run, the SKUs that need to be on the shelf (or not), and need (or not) to be on a promotion, and if the SKU is on a promotion, then what is the appropriate level of discount, or the appropriate length of the promotion, along with a multitude of other variable parameters imaginable.

Then comes the power of technology. The appropriate optimization technology that can run billions of analyses instantaneously will come up with a mathematically optimal solution that will rationalize the SKUs and the promotional calendar, with the right mix of private and national brands, while maximizing the revenue or profit as we set it out to do. These powerful technology solutions exist now, and retailers must use the innovations available in the marketplace to stay ahead of the competition. The Excel times of planning the promotional and merchandising activity are over.

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