Transcript Private Label Profitability: The Precipice Of An Explosion

Private Label Profitability:
The Precipice Of An Explosion
Sunday, November 14, 1999
Chicago
8912 E. Pinnacle Peak Rd. Ste 650 Scottsdale, Arizona 85255
Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: [email protected]
Today
 The
gathering storm of Private Label energy in
the United States
 What
is required to survive and thrive as a
private label manufacturer or supplier
Hoyt & Company:

Marketing and sales strategists

Involved with Category Management from the start:
 Specialists in Category Management and trade promotion spending

Over 100 projects with 30 of top 100 advertisers since 1985:
 Annual category business plans
 Re-engineering organizations to function effectively in Category
Management
 All systems and processes relating to Category Management
 Restructuring trade promotion spending and tracking to support
Category Management strategies and implementation requirements
and to maximize efficiencies of trade promotion spending

Made every mistake humans can make.

You are about to benefit from 12 years of trial and error.
The Gathering Storm
Hoyt & Company Believes That the Private Label Business in the
United States Is on the Precipice of an Explosion:

Past growth cannot be used as a predictor of future
potential.

Consolidation and determination to increase profits
make it a whole new ball game.

Private Label suppliers face both huge threats and
huge opportunities.

The U.K. provides an almost line-by-line benchmark
for what we believe will be the Private Label trajectory
in the U.S. over the next 5-10 years.
The Most Distinguishing Factor of the U.K. Marketplace Over the
Past 25 Years Has Been the Astounding Growth of Private Labels:

Between 1975 and 1998, Private Label unit share
jumped from 25% to 43% of total U.K. packaged good
sales while dollar share jumped from 20% to 36%:

Non-packaged goods private labels in the U.K. now
account for over 80% of all goods sold in the meat,
fish, poultry, fruits, vegetables and deli
departments.
The Most Distinguishing Factor of the U.K. Marketplace Over the
Past 25 Years Has Been the Astounding Growth of Private Labels:

It is clear that there is a consistent relationship
between Private Label growth and retailer
consolidation:
Top 5 Supermarket Chains, U.K. 1975 - 1998
1975
1998
% +/-
Top 5 SOM
22%
63%
1865
Private Labels
24%
43%
79%
Source: PLMA, Tony Cowling, Taylor Nelson, Mark Husson
Key Private Label Drivers – U.K., 1975 - 1998:
1. 1970’s & 1980’s – Sainsbury Private Label Objectives:

Give Sainsbury name status of a major brand

Offer own labels competitive on quality to major national
brands at consistently lower prices

Use national brands to promote categories and add
excitement (i.e., build traffic)
2. Late 1980’s, Early 1990’s – Enter The Mass Merchandisers:

QwikSave – Built business on price and cheap P.L.s

Discount share of market catapulted from 9% - 15% between
1989 and 1992

Supermarkets responded with own cheap P.L.s – e.g., Tesco
with BOL
U.K. 1975 - 1998 (cont’d):
3. Since 1992:

1992 – Analysts concerned about impact of low price brands
on retailer profits

Sainsbury introduces first successful premium private label
with Novon in the highly competitive HDLD category:


Between 1992 and 1996, private label share of HDLD
catapulted from 8-16%

Sainsbury Novon share doubled from 15-33%

Lever’s share of HDLD nose-dived from 40-30%
Sainsbury immediately followed with Classic Cola which
chopped Coke and Pepsi share in Sainsbury stores from
85% - 40% in less than one year
U.K. 1975 - 1998 (cont’d):
3. Since 1992, cont’d

Tesco retaliated with Virgin Cola (controlled label) which at
one time captured 25% of Tesco’s CSD sales

Virgin is now being phased out by Tesco in favor of
Tesco’s own label
Net On U.K.:

Over 43¢ of every dollar spent in U.K. supermarkets is now
spent on private labels.

U.K. private label brand marketing has all of the
sophistication as national brand marketing in the United
States:



“Store Brands” – Premium P.L.s priced to compete with
nationals and deliver sufficient profits to fund
advertising and promotion campaigns.
“Traditional P.L.s” – NBE’s to capture conventional
private label consumers and offer high value for price.
“Cheap Budget Own Labels” – Minimum acceptable
performance, packaging and priced accordingly.
Net On U.K. (cont’d):

U.K. private labels now growing at a steady 1% per year
while national brands continue to decline, in some
categories as much as 2-3% per year.

Supermarkets are now the second largest advertisers in
the country, behind only automobiles:


Tesco, Sainsbury and Asda are each individually
among the top 10 advertisers in the realm.
The amount of exposure the U.K. consumer has to retail
organizations in the U.K. is overwhelming compared to
that of major branded suppliers.
Net On U.K. (cont’d):

In many categories, the demarcation between national
brands and store brands has been so diluted that the
consumer no longer distinguishes between the two, much
less cares.

The “balance of power” struggle in the U.K. is over. U.K.
retailers:

Control the shelves

Control the windows

Control the “telly”

Control the distribution
Counter Arguments – “It Will Never Happen
Here – The U.S. Is Different!”

The U.K. is small geographically vs. the U.S. which is very
heterogeneous and regionalized in nature.

The U.S. consumer is habituated to national brands and has
more disposable income than the U.K. consumer.

Advertising costs too much in the U.S. and retailers would never
be able to afford the sustained advertising necessary to
establish a store brand as a national.

Meanwhile, U.S. national brand manufacturers are much more
powerful than in the U.K. and are not just going to sit idly by
while supermarkets and other retailers chip away at their
franchises or shares.
All This May Have Been True In The Past
BUT...
While Hoyt & Company does not wish to degrade or
minimize these arguments, we believe that there is
presently a combination of factors at work in this
country which will shortly and inevitably bring fierce
and renewed retailer energy behind the private label
sector – energy, power and commitment unlike any
other country has experienced before.
Factor #1 – Consolidation:
Top 5 Industry Players – Food
Year
% ACV
1992
19%
1998
24%
1999
33%
2002E
50%
2007E
60%
Private Label Share Data In Other Countries Show That With Few
Exceptions, It Is The Large, Powerful Retailers Who Invest Most In Their P.L.
Programs And Who Almost Uniformly Have The Highest P.L. Shares:
Top Retailer
P.L. Share ($)
Avg.
P.L. Share
Country
Top Retailer
U.K.
Tesco
45.0
37.1
+21%
Canada
Loblaw
37.0
20.0
+85%
Netherlands
Ahold
33.0
16.3
+127%
U.S.
Kroger
24.5
16.3
+50%
France
Carrefour
20.0
20.5
-3%
Belgium
Delhaize
20.0
16.3
+23%
Spain
Continenté
20.0
12.0
+66%
Source: Mark Husson, Merrill Lynch, 1999
% Difference
Factor #2 – Private Label Profitability:
Private Label gross margins are estimated at 34% vs.
national brands at 24%.
The narcotic appeal of P.L. margins is shown in the
following table which illustrates P.L. profit contribution in
the CLCP category for one major national retailer.
Factor #2 – Private Label Profitability:
Contact Lens Cleaning Products, 52 Weeks, 9/99
Segment
Re-wetting
Weekly
Daily
MPS
Peroxide
Hard
RGP
Aerosol Salines
Liquid Salines
TOTALS
Total Profit
$1,335.7
1,644.3
743.7
2,501.5
38.9
1.9
1,103.9
61.4
193.6
$7,625.0
P.L. Profit
P.L. % Total
Total Vol.
P.L. Vol
$189.4
352.6
10.9
1,778.3
–
–
–
–
–
$2,331.3
14%
21%
1%
71%
–
–
–
–
–
30.6%
5,156.9
6.1%
Factor #3 – Need For Differentiation On
Basis Other Than Price:

60% ACV among five supermarkets will escalate competition to
unprecedented heights:
 Not two years ago, one often-quoted survey noted that over
83% of consumers thought all supermarkets were alike.

Supermarkets cannot compete on price and raise profits at the
same time.

One of supermarkets’ key weapons will be premium Store
Brands:
 Wal-Mart is already on this track
 Consolidation –> Increased Store Penetration –> makes
advertising cost-effective
 60% national penetration is magic number – reason why WalMart wants so desperately to get into the East
Consumer Migration Across Channels Only Intensifies
Competition And Exacerbates The Need To Differentiate:
1999:

100% of consumers shop supermarkets 1.8 times per
week.

94% of consumers shop mass merchandisers 2.3 times per
month.

86% of consumers shop drug chains 1.3 times per month.

52% of consumers shop convenience/gas 1.1 times per
month.

49% of consumers shop clubs 9 times per year.
Source: A.C. Nielsen, Channel Blurring Study, 1999
Factor #4 – Rapidly Growing Population
Segments To Whom Private Labels Appeal:

Elderly

Lower Incomes

Lower Housing Values

Large Families

Higher % Working Women

High Levels of Education
Source: Stephen J. Hoch & Sanjay K. Dhar, Wharton, Feb, 1996: “Why Store Brand Penetration Varies By Retailer”
Average HH Income – Despite What The Government
Might Claim, Here Are The Startling And Abysmal Facts:
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
1967
1970
1975
1980
1985
1990
1995
Lowest Quintile
Second Quintile
Third Quintile
Fourth Quintile
Highest Quintile
Median Income
Source: U.S. Census Bureau: 1967 - 1999
1998
If The Average HH Bought P.L.s Exclusively On Every Shopping Trip To A
Supermarket, It Could Save Up To $3,000 Per Year, Depending On Where It
Lived:
P.L. Savings Vs. National Brands, 54 Item Shopping List
Brand-Name
Price
Store-Brand
Price
Overall Savings
$135.70
$91.13
$44.57
Jewel
138.81
114.36
24.25
Safeway
139.33
114.71
24.62
ShopRite
135.91
98.56
37.35
Supermarket Chain
A&P
Avg. of Above 4 Retailers:
$32.69
X 91 Trips/Year:
$2,975
Source: Phil Lempert, 1998: “Store Brands: Their Stock Is Soaring”
The Following Reiterates Why The Prospect Of Buying Private Labels To
Save Up To $3K Per Year Is So Powerful For The Average American,
Particularly If He/She Felt They Could Get NBE (Or Better) In The Process:
Share of Aggregate HH Income By Quintile: 1996, 1993 and 1998 (%)
60
50
40
1996
1993
1998
48. 9 49. 2
43. 8
30
24. 2 23. 5 23. 2
20
17. 3
10. 8
10
15. 1 15. 0
9.0 9.0
17.5
4.0 3.6 3.6
21.0 24.4
0
Lowest Quintile
Second Quintile
Third Quintile
Fourth Quintile
Middle 60 Percent
Source: U.S. Census Bureau, Current Population Survey, March 1968, 1994, 1999
Highest Quintile
Top 5
Percent
Factor #5 – Dilution and Erosion Of Supplier
Clout And Control:
With few exceptions, the national brand supplier community is in
disarray:

Has not been able to formulate a successful response to retailer
consolidation or ascendancy

Spending more and getting less (TP spending now at 60%)

Focused on the wrong things – e.g., growing the category
instead of own brands (!)

Characterized by unthinking and uncritical acceptance of
industry epidemics such as DPP, ECR, “Partnering”, “Meal
Solutions”, “Solutions Selling” and Category Management.

Meanwhile, brand loyalty continues to erode while P.L. sales
grow at national brands’ expense.
This Is True Of P.L. vs. National Brands In
All Trade Classes:
Food Sales: Private Label Versus National Brand Growth By Format
3.5%
3.2%
Total
20. 9%
Mass Merchants
Drug Stores
Supermarkets
0.0%
18. 1%
7.1%
1.0%
Private Label
National Brands
3.0%
2.3%
5.0%
10.0%
Source: Private Label Manufacturing Association
15.0%
20.0%
25.0%
It Is Also True of Manufacturers Of All Sizes Except Small
Manufacturers Who Either Did Not Know Enough Or Have The
Resources To Get Distracted By The Latest Industry Craze:
Manufacturer Sales Growth By Channel Comparison (1998 over 1997)
Supermarkets
Drug
Stores
Top 10 Manufacturers
1.2%
4.7%
14.5%
3.1%
Next 15 Manufacturers
0.9%
1.5%
13.0%
3.3%
All Other Manufacturers
3.5%
2.1%
13.7%
5.1%
Private Label
3.2%
7.3%
17.6%
5.0%
Source: IRI
Mass
Combined
Merchandiser
Outlets
Net Result – A Tsunami In The Making:
Kroger – #1 At $44B (1999E):

P.L. Brands now account for 25% of sales

Own P.L. manufacturing facilities

Centralized P.L. purchasing

Three tier P.L. program – premium, traditional and value

Just bought Fred Meyer where P.L. sales are 18% and
mainly in G.M. versus Food
Kroger (cont’d)

If Kroger can get Fred Meyer P.L. food sales to 25% in three
years, Kroger’s P.L. sales would be $10B and incremental
gross profits would be almost $100MM. This means that
Kroger’s:

P.L. segment only would be larger than Heinz, Pillsbury
or Best Foods

Profits would grow from 2.8 to 4.0 or 43%

Reality is that Kroger’s P.L. sales will grow to more like
30% when Kroger shifts focus from reducing operating
expenses and assumes role of marketer.
The Other Players:

Albertson’s-American – #2 at $36B:


American got 30% of its profits and 20% of sales
from just 8% of its P.L. SKUs
This gives Albertson’s huge opportunity to grow its
own P.L. sales from current levels (16.5%) to
American Store’s levels (20.2%)
The Other Players:

Safeway – #3 at $27B:

Wins Titanium Award for developing and
establishing a beautifully-packaged, quality “store
brand” with Safeway Select.

Has the P.L. formula down pat: Is country leader
with P.L. share at 25.5% of unit sales.

Can leverage Select brand name plus P.L.
experience in Von’s, Dominick’s and Carr
Gottstein.
The Other Players:

Ahold – #4 at $22B:

Can leverage European P.L. expertise against
Bi-Lo, Stop & Shop, Tops, Finast, Cleveland and
Giant, Landover.

Procure on an international level.

37% P.L. penetration in Netherlands.

37% becomes the floor (not the objective) in the
U.S.
In Total, The Handwriting Would Appear To
Be On The Wall:
Key Players
Kroger
Wal-Mart
Albertson’s
Safeway
Ahold
Totals
$ Sales (B)
Share of Market
1993
1998
$44
39
36
6%
0%
3%
10%
9%
9%
27
22
$168
4%
2%
15%
7%
5%
40%
% P.L. Share of Total (Units)
1993
1998
22.0%
24.5%
14.0%
17.4%*
20.5%
16.0%
17.8%
16.5%
20.2%*
25.5%
20.5%
21.2%

All need to differentiate on basis other than price.

No evidence that consolidation ambitions have peaked.

All have size, resources and economies of scale to become own
marketers and take over role of “Category Captains” themselves.
* American
Surviving And Thriving As A P.L.
Manufacturer or Supplier
Threats To The Independent P.L.
Manufacturing Community:
1) Retailers developing own manufacturing capabilities as their P.L.
grows and becomes cost effective to take in-house.
 Kroger
 Safeway
2) National Brand manufacturers who have adopted P.L. supply as a
contingency (or even survival) strategy:
 Protect National Brand franchise
 Cover operating costs
 Already producing to NBE standards
 Can leverage current I.T. and R&D to capture and maintain
Private Label edge
3) “I Saw The Enemy And It Was Us!” – Lack of size, clout,
resources and information technology to deal with mega giant’s
demands in what, by definition, is a low margin business.
Given this environment, the key questions
for private label suppliers is what are the
meaningful ways one can differentiate
oneself and create value for retailers over
and above the obvious?
Let’s Start With The Obvious, Because This
Is The Baseline:
Key Success Factors That Characterize
Retailers’ “Best” Private Label Suppliers
Very Important
Important
Not Important
Consistent Product Quality
100%
0%
0%
Complete/Timely Deliveries
98%
2%
0%
Promotional Support
52%
36%
11%
Flexibility On Price
49%
51%
0%
Innovative Product Ideas
49%
49%
2%
Below Average Product Costs
44%
42%
14%
In-Store Sales Service
14%
44%
42%
Source:
PLMA, “Blueprint For Growth” Current Salmon Associates, 1998
Based On Responses From 45 Leading Retailers
How Independent Private Label Manufacturers Stack-Up Against National
Brand Manufacturers In Meeting These Needs Suggests That “Pricing
Flexibility” Is Currently The Independents’ Strongest Selling Point:
Which Type of Supplier Is Better Equipped
In Regard To The Following Factors?
Performance Measures
Retail Margins
Pricing Flexibility
Ability To Work With
Product Quality
Consistent Delivery
Promotional Support
Packaging
Equipment & Technology (Plant/Machinery)
Category Management
EDI
Product Innovation
ECR
Source:
Private Label
Suppliers
96%
84%
69%
39%
34%
22%
21%
20%
9%
9%
2%
0%
National Brand
Suppliers
4%
16%
31%
61%
66%
78%
79%
80%
91%
91%
98%
100%
With Regard To Price:

Low price is NOT a viable or sustainable strategy for
P.L. manufacturers long-term:

Anyone with deep pockets can emulate low prices
and outlast you

Perrigo and Paragon are not the lowest cost
suppliers in their categories and did not build their
businesses slowly on price
With Regard To Price:

Price IS a major component of the P.L. sales mix but
must be balanced with other factors to provide you
with a signature reason for being – for example:

Identifying new product opportunities and
developing new products to meet them

Consistent quality

Consistent delivery

Promotion support

All of the above
It Is Obviously Impossible In A General Meeting Like This To Address Each
Supplier’s Particular Issues, But Here Are Some Guidelines Which Will Help
You Survive and Thrive In The New Environment:
1. Do not try to be all things to all retailers:

Different retailers have different definitions of
“value-added” and even these may vary in degree.

Know how each retailer defines value-added and
target those retailers whose definition most closely
approximates your core competencies.
Guidelines, (cont’d)
2. Be able to say who you are what you stand for in one
(short) sentence:

For example:


“One-stop shopping for high quality store brand
products”
Do one thing right and build your reputation on it
Guidelines, (cont’d)
3. Understand what you are good at and be honest with
yourselves about what you are not good at:

Do not expand into areas outside of your core
competencies as this will only dilute your image
and drain your resources
Guidelines, (cont’d)
4. Know your costs:

If you do not yet have an activity-based costing
(ABC) system, get one

As chains get bigger, P.L. margins will go down

Success or failure may be a matter of pennies – as
it has been for years in the supermarket business
Guidelines, (cont’d)
5. Avoid making promises you cannot fulfill:

“If you take us on, we’ll put one person on-site to
manage the business.”

“We can process and deliver within 7 days.”
Guidelines, (cont’d)
6. Hire the best people you can afford but stay lean:

Particularly important with those who represent you
on the front line

Leverage big company training and expertise
Guidelines, (cont’d)
7. Do not build in unnecessary quality:

Once NCE is past, you are back in a price game

Better to devote the funds to new product
innovation or operational improvements
Guidelines, (cont’d)
8. Dig for the details that will make a difference and set
you apart. For example:

Most supermarkets are leaving millions on the table
because the price gap between P.L.s and national
brands is too big vs. consumer expectations

All of this is carefully detailed and publicly available
in a nifty little report from Wharton. Using
information like this to help your key accounts
increase profits is far more powerful than cutting
your costs another 10¢.
Death Strokes:

In the future, if your answer to, “why should we buy from
you?”, is: “Because we are the lowest cost brand” – you
are committing suicide.

“We’re just as good as the supplier you are using” –
provides no real point of differentiation (and pisses off the
buyer).

“I’ll match anybody’s price” – indicates that the supplier
does not understand his own costs and is potentially
unreliable as a long-term source.

“Just tell me what you want and I’ll make it for you” –
conveys the message that you are not much more than a
street walker.
Net:

Pick your ground and plan your flag – stand for something that
leverages your core competencies and be able to communicate
this simply and effectively.

Develop a strategic approach to expanding sales and profits:


A “strategy” is a course of action build on an understanding
of one’s inherent or indigenous strengths which results in a
predictable growth curve and which forces your competitors
to define their own strategies by what you are doing.
Wal-Mart’s “always low prices” strategy has forced
supermarkets to react to Wal-Mart for the past 15 years –
mostly without success.
Net:

If you have not done so already, reengineer your organization to
develop an answer to the following question:

“What are you going to do to help us sell more product, not
just more of your products?”
Thank You,
It Has Truly Been An Honor