Follow-Ups

The Trend to Smaller Stores
Last week we noted Meijer’s new down-sized store format, and here’s an article about Wal-Mart and Target doing much the same thing.

Target and Wal-Mart have both told analysts they are creating smaller stores that could fit in the heart of densely packed cities where they have no presence. But analysts warn that creating a small store doesn't just mean shrinking a big one. Big box retailers need to whittle their merchandise to suit shoppers who live in smaller spaces, use public transportation and prefer eating at coffee tables to large dining sets. They also need to figure out how to make money if they cannot stock as many high-profit margin goods, like clothes, to offset brisk sales of low-margin items, like pasta sauce. "When you have a big box mentality, your orientation is toward lots of SKUs (items) across lots of categories," said Leon Nicholas, director of retail insight at Kantar Retail. "When you try to move into a small box the question then becomes do you cut SKUs or do you cut categories so far ... that you lose that one-stop-shop kind of mission?" Or, he said: "Can you be Wal-Mart in a small box?"

Online: Pricing, Conversion
There has been discussion and commentary concerning online retailers who hide their prices, apparently in response to manufacturers who don’t want to facilitate comparison shopping that would lead to eroded margins. As a consumer, I hate it when I can’t find the price – online or in-store – but as a marketer I understand the suppliers’ sensitivity.

The missing prices are part of a larger battle sweeping the world of e-commerce. Wary of the Internet’s tendency to relentlessly drive down prices, major brands and manufacturers — and now, book publishers — are striking back, deploying a variety of tactics and tools to control how their products are presented and priced online. “You are seeing firms of all types test the waters” with strategies to control online pricing, said Christopher Sprigman, associate professor of intellectual property at the University of Virginia School of Law and a former antitrust lawyer at the Justice Department. “They feel they have more freedom to do it now.” In many cases that freedom stems from a 2007 Supreme Court ruling in the case of Leegin Creative Leather Products v. PSKS. The ruling gave manufacturers considerably more leeway to dictate retail prices, once considered a violation of antitrust law, and it set a high legal hurdle for retailers to prove that this is bad for consumers. Ever since that decision, retailers say manufacturers have become increasingly aggressive with one tool in particular: forbidding retailers from advertising their products for anything less than a certain price.

I’ve mentioned before that I wonder how much longer the Leegin decision will stand before Congress overturns it.

In Australia, the two giant retailers who almost totally dominate that country are taking the opposite tack – putting more pricing online as proof of their price-cutting:

Woolworths' move to put the price of 5000 products online has been cautiously welcomed by consumer advocates, and has its major rival looking at following suit. The grocery giant yesterday took what it called "the first step in the journey" by posting the information online, but admitted it had some way to go. Its move follows criticism … of recent claims by both Woolworths and Coles that they were lowering prices, without providing hard evidence. […] Woolworths earlier said it was permanently reducing prices of 3500 products - but provided just 16 examples - while Coles said it was committed to uniform statewide pricing.

And our interesting factoid of the week: Here’s a chart of the top ten online retailers by conversion rate. Interesting that most (except Amazon) are relatively smaller niche sites – but that may explain why they convert relatively higher percentages of shoppers.

Private Label
There’s always more news in the private label arena. Wal-Mart is experimenting with private label spices, a move that must have folks at McCormick tossing and turning all night:

McCormick generates 11% of its revenue from sales to Wal-Mart, mainly by selling brand-name spices. But Wal-Mart has considered switching to private-label spices, testing the idea by replacing McCormick products with generics in some stores. True, McCormick's sales at Wal-Mart may not be wiped out altogether if such a switch gathered pace. The company also produces private-label spices that could replace some of its brand-name products on Wal-Mart's shelves. Even so, McCormick's margins could take a big hit. The company's generic spices sell for 30% to 40% less than its regular products.

Family Dollar is also looking to increase its private label share:

Kenneth Smith, Family Dollar's chief financial officer, said the company sees an opportunity to increase consumable private-label sales from current levels of 10% of sales to 15% to 20%. Storewide, Smith said Family Dollar plans to increase private brand penetration from its current 19% level to 25% penetration.

The Sports Desk: Super Bowl Advertising
As we mentioned last week, the Super Bowl came in second last year in viewers to the European soccer championship. We’ll see how it does this year against the Olympics and the World Cup, but it broke all previous records – not only for viewers, but for number of ads run, and a Doritos ad is said to be the most-watched ad ever:

A fourth-quarter Doritos commercial featuring two men attacked in a gym for stealing someone else's Doritos, was seen by an estimated 116.2 million viewers during the Super Bowl, making it the most watched television commercial of all time, according to Nielsen.

In other Super Bowl news, I understand Drew Brees had a good game, too.

Upcoming Webinar Reminder
I’ll be moderating a webinar for DemandTec next Wednesday, Finding True North in Trade Analytics Adoption, and on March 10, we’ll be hosting a webinar by MEI, What Does ‘Trade Promotion Optimization’ Really Mean? Click on the links to get more information and to register.

Follow-Ups

Music and Book Pricing

Most people who buy digital music think it’s overpriced, and it appears some judges agree. So does a recent study by the Wharton School of Business, although their perspective is that the labels would be wise to lower prices because it would increase profits:

The music labels "seem to be charging much higher [fees] than they should," Iyengar says. "If I compare what their profits are when a record company charges a retailer 60 cents a song, I find that [the current] overall profits for the entire channel, which is the label and the retailer, are almost 50% lower than what they could optimally be when the record label charges lower wholesale prices."

This has an impact on the iPad/Kindle discussion above, since book publishers seem intent on following the same path as the recording companies.

In negotiations with Apple, publishers agreed to a business model that gives them more power over the price that customers pay for e-books. Publishers had all but lost that power on Amazon.com’s Kindle e-reader. With Apple, under a formula that tethers the maximum e-book price to the print price on the same book, publishers will be able to charge $12.99 to $14.99 for most general fiction and nonfiction titles — higher than the common $9.99 price that Amazon had effectively set for new releases and best sellers.

We wish them well, but copying the music business, considering how things are going for them, does not seem like a really great idea.

Private Label
Procter & Gamble and Colgate-Palmolive both reported better than expected results, leading to optimism about the resurgence of brands after the tidal wave of private label growth during the recession.

P&G’s sales were up 6.4%, though profits declined slightly, because the increased sales came with heavy marketing costs. Colgate did even better, with sales up 11% and a good profit increase.

"This idea that this economy is causing everyone to trade down is a little bit overly general and too broadly applied," P&G Chairman and Chief Executive Bob McDonald said during a conference call.

But, on the other hand, there’s this: “Unit sales of private label goods have jumped 8 percent since 2007, while brand names have declined roughly 4 percent, according to Nielsen Co.”

Olay Highlights P&G's Push to Extend Brands

Procter & Gamble plans to fight back against private label incursions into its market share by increasing new product introductions, and by using trusted brand names on many of the new products. “P&G ... plans to introduce 30% more new products this year than last, hoping to avoid price cutting by tempting recession-weary shoppers with new product features. Among the planned introductions is a body wash that purports to fight wrinkles. P&G will roll out the product officially next month, adding it to Olay's Total Effects line of anti-aging face creams."

Follow-Ups: Private Label and E-books

The increasing quality of private label products was the subject of an item here a few weeks ago, and tests in San Francisco confirm that store brands are often equal to or better than comparable branded products:

Our five experienced panelists - local chefs, cookbook authors and food professionals - test products blind, concentrating solely on texture, appearance and, most importantly, taste. Time and again, they find that grocery store brands come out on top. In fact, in the 44 tastings from 2009, more than one-third of the winners were grocery store brands.

A steady stream of articles like this will begin to put greater pressure on brand name marketers to find ways to justify their price differential.

We also discussed, just before Christmas, the growing popularity of e-readers and the concerns they are raising among publishers, who are looking for a way to battle the downward pressure e-books will put on prices for ‘real’ books. We suggested that this might be the year when e-readers reach critical mass. Looks like we may have been right:

Amazon's Kindle hit an important and startling milestone yesterday: On Christmas, the company sold more Kindle books than physical books. Yes, this is obviously the result of everyone who got a Kindle for Christmas (lots of folks) firing it up and ordering a bunch of eBooks on a day in which most physical-book readers weren't shopping. But it's still important and impressive.

I’m waiting to see if publishers will have a strategy for digital books that works better than the record labels’ response to digital music.

Poll Results: Co-Branded Private Label

Last week, we discussed the idea of co-branded private label, and asked "Will brand marketers soon begin offering co-branded private label products with their key retailers?"

• 14% Yes – and it will become a significant share of sales for those who do
• 38% Yes – but it will be limited in the next few years
• 48% It's not going to happen to any meaningful extent

It seems that our readers think co-branded private label is unlikely to have much impact in the short term.

Where is Private Label Going in 2010?

National brand manufacturers have been growing increasingly nervous about private label. Throughout the recession there has been a constant stream of articles and predictions about the growth in PL sales (especially in consumer packaged goods, but also in many categories of durables) and about where the future might lead.

In the food category, PL growth this past year was more than double that of branded products, and "a reasonable estimate is that private label accounts for roughly 20% to 25% of food sales across categories for most retailers (more in retailers that emphasize store brands)." To make things worse for the brand manufacturers, the stores that are showing the greatest growth, the discounters and limited assortment stores such as Save-A-Lot and Aldi, are the ones that emphasize private label, with Wal-Mart and Target having redesigned and expanded their Great Values and Up&Up lines in 2009.

Now an industry pundit, Phil Lempert, has predicted that 2010 will see branded food manufacturers producing co-branded private label products with key retailers. I'll be honest; I'm not sure what "co-branded private label" means, canned peaches at Wal-Mart being sold under the 'Great Values by Del Monte' label?

I don't see what Del Monte would gain. Yes, they would get some incremental sales, but they could get that by providing ordinary private-labeling services to stores, as many brand manufacturers have been doing for years. But I can sure see what they lose, their brand name soon would be worth little.

However, as you'll see in the article, while they agree it's a bad idea, industry observers think that some brand name suppliers will go for the quick buck.

Another approach to private label is being taken by Meijer. The Midwestern supercenter chain is re-launching its Meijer Gold line with eighty new products, focusing on smaller manufacturers who can provide innovative recipes such as Sugar-Free Maple-Praline Syrup, Smokey Mozzarella Cheese Spread, Porcini Truffle Tortellini, Crab Puff Pastries, Biscotti Munch Chocolate Caramel Cookies and Michigan Apple Cheesecake.

The new Meijer Gold products, released Nov. 15 at all 190 Meijer stores, are original recipe items either made by a local company within the Meijer footprint or by a family owned business. The line also features interesting foods endemic to a particular place or country. That cocoa I loved comes from a Pacific Northwest family known for producing luscious chocolate recipes. There is also lemonade from an original family recipe in France, mustard from an age-old German recipe by a long-time Midwestern company, salsa from an acclaimed family-owned southern California producer, and cream pasta sauces from the legendary Chicago restaurateurs, the Mugnolo family.

This approach may represent an even bigger threat to manufacturers of brand name products. Until recently PL products were copycats, and the brands could stay ahead by innovating; and until recently, PL products were generally inferior. But now many stores offer products under their own name that are roughly at parity with the brands, and some of the retailers are beginning to innovate.

The threat of private label is one that has been talked about for years, but thus far I haven't seen a solid strategy for overcoming it. The growth of private label has come unevenly, speeding up during recessions and easing a bit when times are good. But the ever-increasing concentration of the retail marketplace means that the growth will continue, good times or bad. How will suppliers respond?

Follow-Ups: The New Frugality, Private Label

We’ve often discussed the question of whether “The New Frugality”, the idea that recessionary cutbacks by consumers will be permanent, is for real. The New Yorker doubts it, citing similar forecasts in the past:

Recessions regularly give rise to assertions that consumers will begin spending more responsibly. Toward the end of the 1990-91 recession, for instance, Fortune reported forecasts of the “death of conspicuous consumption.” Time ran a cover story on the return to the simple life, arguing that “after a 10-year bender of gaudy dreams and godless consumerism, Americans are starting to trade down.” Consumer-behavior experts predicted that people would be more frugal in the nineties, and consumers themselves said they planned to cut back on spending. It didn’t happen. A decade later, the bursting of the Internet bubble and the impact of 9/11 led many to predict that Americans would consume less—and we all know how that panned out.

Another regular topic here is private label, and we just saw a leading apparel brand turn itself into pretty much a private label, as Liz Claiborne signed an exclusive agreement with J.C. Penney, which means they are leaving Macy’s:

Liz Claiborne's plan to sell its namesake sportswear only at J.C. Penney Co Inc stores and on a television shopping network highlights a new turn in the ongoing rivalry between the mid-tier department store chain and its slightly more upscale rival Macy's Inc.

The decision Claiborne announced on Thursday to sell its Liz Claiborne and Claiborne brands exclusively at Penney ends a decades-long relationship between the brand, founded in 1976, and Macy's.

Wal-Mart Private Labels in Bharti Stores

India's leading financial paper reports that Bharti, Walmart's partner, is introducing several Walmart private label brands in their Easyday grocery chain. The Great Value and George brands, among others, are also being sold in wholesale outlets that are a joint venture between Bharti and Walmart, meaning that they might also be found in other stores.

Safeway CEO Sees Glut of National Brands

As a follow-up to our previous articles about private label and SKU rationalization, this article quotes Safeway as saying that there may be too many national brands in some categories: "'I do think that there probably are more national brands out there in various categories than there really needs to be,' Burd said Wednesday at a Goldman Sachs retail conference. 'The situation might put some pressure on consumer-product companies to rationalize their product lines,' he added." Scary words if you're not a category leader.

It Pays to Buy Store Brands

So says Consumer Reports. In their October issue, they say: “In blind tests, our trained tasters compared a big national brand with a store brand in 29 food categories. Store and national brands tasted about equally good 19 times. Four times, the store brand won; six times, the national brand won.” Private label quality has unquestionably improved in recent years, and this test just confirms what many consumers have decided on their own. National brands are going to need to find new ways to justify their price differential, or be forced to fight exclusively on price, which seems like a losing battle to me.

Poll Results: Decline of Secondary Brands

We discussed the shrinkage of market share for secondary brands, and asked, “Is the market going to continue shrinking for brands that are not #1 in their category?” The overwhelming majority think that these brands will continue to lose share, although most of them think the rate of decline will slow as the economy improves.

• 28%: Yes, the pace of shrinkage will continue.
• 47%: Yes, but the rate of shrinkage will slow a bit after the recession.
• 25%: No, things will stabilize or perhaps even improve for those brands.

The Disappearing Middle

I came across three articles this past week that I think come together to tell us an interesting story. Two of them will be no surprise – they tell us things we’re all well aware of – but the third gives us a graphic (literally) example of what the first two may mean in the long term.

First, we are told by Nielsen that private label sales volume is up:

Dollar sales grew by 7.4 percent to $85.9 billion within food, drug and mass-merchandisers (including Walmart), with shares recorded at 16.9 percent. This reflects an increase of 0.7 points from the previous year. Growth peaked in 2008 but then slowed slightly in 2009 with falling commodity prices and increased retail discounting.

Unit sales similarly experienced high growth during the same period. Sales increased by 5 percent to 39.5 billion units and unit shares rose by 1.3 points (a total of 21.5 percent).

All store brand food and non-food categories experienced better performance versus brands, but edible departments saw the greatest uptick in both dollar and unit sales.

No big surprises there. The second non-surprise is that Walmart (and others) are cutting SKUs (we discussed SKU rationalization here are few weeks ago). This article, from The Guardian in the UK, ends with a mention of how trade promo might play into Walmart’s shelf decisions:

"Wal-Mart has been brutally honest with suppliers about the number of products it wants," continues Roberts. "The implication for vendors is that those who choose not to contribute more to Wal-Mart's marketing efforts might find themselves off the shelf."

But what does this mean for suppliers if there are fewer products on the shelf, and more of those products are private label? Pretty obviously it means that the future for some brands is looking bleak. Again, not a surprise, but let’s look at a graph from the third article (found in The Economist) to see just how bleak it might be.

The figures are from Germany, where private label share is much higher than in the U.S., but I suspect the trendlines would be very similar here and in most developed countries. Premium brands were up ever-so-slightly through 2008 (and probably down a bit this year). The category leaders’ share held roughly steady. But “other brands” took a huge hit. These brands, numbers two, three and below, constituted more than half the market only ten years ago, if I’m reading the graph properly, but had dropped to barely a third last year.

It is these brands that are going to be cut? Of course. The leader will stay, the store brand will stay, and the premium brand will (likely) stay. How can they battle expulsion? Well, they can, of course “pay to stay," as The Guardian suggests, though one suspects the effect that would have on margins, on other forms of marketing, and on R&D would make it only a short-term survival tactic. Another tactic might be to make oneself important to the retailer in other ways – e.g., by providing information, analysis, and insights, which retailers say they want from their suppliers. That might allow a secondary brand to differentiate itself from the rest of the pack enough to be the designated survivor.

Best Buy Increases Its Emphasis on Private Label

A couple weeks ago, we had an item in our newsletter about the possible spread of private label into automobiles (if Saturn dealers get their wish to buy the brand name from GM). One of the things that has been fascinating in recent years has been the spread of private label out of the fast-moving consumer goods category. As the recession bites and people are looking for savings, many more are experimenting with private label products in grocery and often finding that they are satisfied with the quality. I wonder if their experiences will make them more willing to try private label products in other categories.

Best Buy seems to be betting that they will, and are expanding their PL offerings with significant success. Their own brands of TVs (Insignia and Dynex) now account for about 5% of the total flat-screen market. One effect of this has been to freeze out low-priced suppliers, such as Vizio, whose products might compete with Best Buy's.

The Irvine, Calif., television maker has talked with Best Buy about selling in its stores, but worries that Best Buy would give its products short-shrift. "We couldn't go in and be constrained by comments like, 'Don't hurt my house brand,'" said Vizio co-founder Laynie Newsome.

Best Buy acknowledges that it is choosing not to carry some low-priced electronics brands that would compete with its private-label offerings.

One of the big differences between private label CPG and electronics or some other consumer products is that there's a certain amount of ego wrapped up in owning a prestige brand of TV or cell phone (or shoes or cars) that is considerably less of a factor with mayonnaise or ibuprofen. Another difference is that private label CPG has had its greatest success in products viewed as commodities by consumers; in non-commodity categories, brand name suppliers have managed to maintain share in many cases by innovating. Categories, such as consumer electronics where innovation is so rapid, seem like unlikely places to find private label success. But it appears that Best Buy is actually doing some innovating.

Best Buy believes it can prosper in private-label electronics -- an area that has historically flummoxed U.S. retailers -- by using the mountains of customer feedback it collects from its stores to make simple innovations to established electronic gadgetry. […]

Popular products included a global-positioning system with Google Inc. search capabilities, a high-definition radio receiver that displayed the names of songs, and stripped-down digital picture frames without pricey extras such as music-players.

It seems to be working: "Sales of Best Buy private-label electronics soared 40% during the past fiscal year…"