Private label keys revolution in food business

Discount Store News, April 19, 1993 by Pete Hisey

MIAMI -- The future is bright for private label products, speakers told the annual Private Label Manufacturers Association executive conference, held here in late March.

The big winners in the food wars of the next decade will be private label suppliers and discounters, so-called "Samurai food stores," like Aldi and Loblow's No Frills. David Nichol, Loblaw's chairman, told an overflow audience. "With their own [high-margin, low-cost] brands accounting for over 50% of sales, the Samurai food store will be able to sell America's leading natioanally branded food products at or below cost everyday," Nichol said.

Quoting Oppenheimer analyst Gabriel Lowy, he added that while traditional supermarkets spent the last decade on an unprofitable strategy of buying a new set of cherry pickers ever week, "the clubs, Kmarts and Wal-Marts concentrated on the effective use of technology to gain permanent cost advantages over traditional supermarkets. These discounters are totally committed to finding the next new way to bring prices down for the consumer and they fuly realize that retailer-controlled brands are always the most efficient way to deliver goods to the American consumer."

Industry consultant Wes Bray of Market Growth Resources noted that "wholesale club customers are ready for club brands." While on the surface, private label and the membership club concept seem to be at odds, as the clubs reach saturation level in the next two years, a private label strategy will be "absolutely imperative to long-term survival."

The clubs' growth rate is slowing, he said, and the "Field of Dreams" philosophy (build it and they will come) is now obsolete. With the field nearly saturated, a decline in number of shoppers per unit is inevitable, he said. Clubs will be forced to differentiate themselves from each other and newer category killers like office supply superstores and deep-discount grocery operators like Aldi. And for the first time, they'll have to promote, trying to grow by taking away markets share from competing clubs.

A natural weapon will be private label, which will reinforce price advantage, offer points of differentiation, enhance margins as membership income and income from inventory float erodes, and appeal strongly to the value conscious consumer, Bray said. Bray said that only Pace at present has a strong integrated PL program (PMW), but Sam's is introducing some of its parent Wal-Mart's private label products (primarily soda and snacks, and a Bakers and Chefs program of cooking staples like flour and sugar). Costco is looking hard at the concept, and Price Club may accentuate its Signature label. Pace plans to upgrade its PMW label with more products and better packaging, he added.

"The club's absolute core concept is delivering high quality at the lowest price," he concluded. "An aggressive private label program fits, and is really one of the clubs' last untapped options."

Gary Charboneau, newly named vp of marketing at drug discounter Duane Reade, delivered a strategic overview of private label pricing strategies, comparing two major drug chains (CVS, Walgreen) and one discounter. Wal-Mart. In a price comparison, Wal-Mart's Equate label easily bested both drug chains' programs.

"Wal-Mart wants Equate to be very, very low cost, and they're probably a lot cheaper than they have to be to get consumers to switch from the brands," Charboneau said. "Walgreen thinks 25% is savings enough, while CVS wants to offer dramatic savings, but still retain great margins."

Sample prices: On Advil 100 count, and PL equivalent, CVS prices, respectively, were $8.55 and $4.99 for 120 tablets; Walgreens' were $8.99 and $5.99; and Wal-Mart's prices were $6.78 and $4.78 for two 100-count packs.

Apart from pricing strategies, which are significant, Charboneau noticed other significant differences. Both CVS and Wal-Mart had distinctive and consistent packaging throughout the store; Walgreens' program, on the other hand, was a mishmash of brand names, logos, and packaging. "Customers want savings and superior performance," Charboneau said. "Strong packaging and a family look deliver that message."

He urged manufacturers to speed up introduction of new private label products. "With national brands, the first 18 months after introduction are the key, because of national advertising campaign. That's the time to be on-shelf with store brands. Faster introduction is more important than saving a few cents; anything that speeds the process up is, like drop shipping or single-box dislays, will add value to the retailer."

Lunde and Co.'s Ron Lunde investigated the comparative advantages of high/low and EDLP strategies, and found the perceived wisdom in the industry riddled with myths. The actual net shelf price average on a $1 item was close to indistinguishable; $1.0264 for high/low vs. $1.0026 for EDLP. EDLP retailers in the grocery industry promote just as much as high/low retailers, and cost of doing business, again in the grocery industry, was very similar, at 19.5% for EDLP retailers, compared to 20.8% for high/low. However, if A&P, at 26%, is factored out of the high/low category, it's a dead heat. While EDLP averages about 2% less in gross margin, a good high/low operator can "offer the lowest tape in town" by combining coupons, specials and promos, Lunde said.