Recessions get a bad rap

Advertising Age had an article last week about the big increases being seen in private label, “Don't Blame Private-Label Gains on the Recession”.

Not only have private label brands been gaining share for the past decade, experts say these gains are the single-biggest problem facing branded packaged goods players. House brands, once a staple of lower-income households, now enjoy roughly equal penetration among demographic segments. Improvements in quality and packaging have helped removed the stigma attached to buying a no-name product.

The recession has accelerated the growth of private label, but it is a long term trend that was happening before the recession and will (presumably) continue, though at perhaps a reduced rate, when the recession is over. The increasing concentration of retail, and the increasing power of the surviving retailers, virtually ensures it.

That’s an interesting thing about recessions – they speed up trends that already exist, especially speeding up the effects of secular decline. Besides private label, we see similar effects from the recession in media and retail. (I did a similar post on this point almost exactly a year ago).

Some of the biggest (or at least most publicized) hits in this recession have been felt by the big media, especially newspapers. But media watchers have been warning about the effects of media fragmentation for the past few years (I did a presentation on its effects on trade promo at a TPMA meeting three or four years ago – and I wasn’t first), and newspapers have been in decline even longer. The recession has merely exacerbated existing problems.

In retail, department stores are hurting, and several chains (including Linens ‘n Things and Circuit City) have liquidated. But the consolidation of channels has been killing off the also-rans in each channel for years now, and department stores’ market share has been dropping for decades. Again, the recession has just sped up processes that were already in action.

It’s convenient to blame recessions for business problems. But often the recession merely exposed the problem, it didn’t create it.

Some brand marketers may want to believe that the recovery will solve their problems with private label, and media people and retailers may have similar dreams, but the recovery will solve nothing if the underlying problems are not addressed.

Is this the new look for Walmart PL?

Supposedly, this pic (and others here) are examples of the new logo and package design for Walmart's Great Value line.

Couldn't possibly tell you if it's true or not, but it's an interesting look. Not that anybody would ever hire me to do a graphics job for them.

This ties in with the post immediately below, speculating on the effect on suppliers if Walmart's private label efforts are successful.

How high will PL go at Walmart?

Walmart is reformulating and repackaging its Great Values food brand, with the intent to significantly increase its market share (it's already, they claim, the #1 food brand in the country).

Which raises a question: how high will Great Value's share go?

According to Information Resources, Inc., the Chicago-based market research firm, private label accounts for 17.6% of dollars and 22.5% of units at Wal-Mart. One securities analyst — Deborah Weinswig of Citigroup — has been quoted as saying that private label might skyrocket to 40% of dollars at Wal-Mart within the next three years. She figures that if Wal-Mart carries the top three branded products in a given category, it could substitute one of them with its own brand.

Even if, as the article argues, the 40% number is too high, if 30% or so is more like it, that still means major food brands will lose ten to fifteen share points at the world's biggest retailer. What is that going to mean to them?

If Great Value is going to be getting that big a share of sales, then it probably also means, as the Citigroup analyst noted, that some brands will be squeezed off the shelf. Which plays into Walmart's efforts at "SKU rationalization":

So Wal-Mart went deep on benchmarking its competition to understand where the product range started and stopped within a given category. Then it worked to achieve a clear offering — paring down to the right number of SKUs so that categories weren’t diluted and fuzzy. With SKUs cut by 10% to 50%, Wal-Mart has been able to achieve higher sales. Fleming says he hasn’t yet seen departments that have lost sales from SKU cuts.

I'd hate the be the #3 brand at Wal-Mart right now.

Kmart goes PL on shoes

Kmart cut their relationship with Footstar, which had been running its shoe departments, at the start of the year, and is now producing its own shoes.

Kmart has taken its shoe business in-house and is introducing low-priced sneakers endorsed by NBA player Al Harrington and women's shoes aimed at attracting the "frugalista," a retail executive said Wednesday.

"We were neglecting to serve our Hispanic and African-American customers," said Nick Grayston, who served as CEO of Foot Locker's U.S. business before becoming president of footwear for Hoffman Estates-based Sears Holdings Corp. last June.

"We've injected some fashion in our shoes, which had been sadly lacking," he said.

They have a line of men's/boy's sneakers endorsed by Harrington (of whom I've never heard, but I'll assume he's a mildly big deal), priced as low as $19.99 -- which seems to be taking a page out of Steve & Barry's book.

Private label increases retailer leverage

Wall Street Journal reported on current increases in sales of private label products, and made a case for those increases improving the bargaining position of retailers vis-a-vis their brand name suppliers, with particular emphasis on the increases in trade promotion funding that may result.

Private-label gains come as some name brands lose market share, a shift that industry experts say could benefit grocers on several fronts in their dealing with suppliers. To help further promote their brands, branded consumer goods companies may have to kick in more to a retailer's marketing fund to pay for discounts, two-for-one offers or prime placement in supermarket circulars. Retailers may also get juicier rebate offers from their suppliers, as incentive to help push sales of branded products.

Since PL still only amounts to 16% of volume and with many brands still having a powerful allure to consumers, retailers need to find strategies that balance their marketing of PL and brand names. Trade promotion and pricing will be an important piece of that balancing act..

Part of that strategy may come to include more so-called trade funds that grocers receive from national brands to promote their products in various ways, Karabus's Mr. Weintraub said. This money is usually hashed out in annual contracts, which, with the changing landscape and end of year coming up, are producing some interesting discussions right now.

Additional talks will likely center on price increases that national brands pushed through to retailers throughout the past year as costs for ingredients and fuel rose.

The increasing role of private label and the effect it will have on trade promotion funding and pricing points out (yet again) how vital it is that brand marketers have effective tools for analyzing and optimizing their promotional efforts.

CPG faces pricing pressure

A few CPG companies (e.g., Hershey and Kraft) have raised prices recently -- passing on their increased commodity, packaging, and transportation costs -- and have managed to make the increases stick, with increased revenue the result.

The recent decreases in some of those costs, together with increased sales of private label goods, are now putting those price increases in question. Private label market share is up close to a point thus far in 2008, and retailers are starting to ramp up their PL efforts.

The analyst quoted in this article says:

He said he anticipates that any increased marketing spending made possible by falling commodity costs will go heavily into incentives and price promotion, given the weak economy and rising unemployment. "Everyone I talk to is worrying about what their revenue is looking like in the next few weeks or months," he said. "So value-conscious offers I think will dominate."

Which is pretty much what I said a few weeks ago.

Private label sales set a record

Not a big surprise, really. PL sales have been increasing even in good times, and of course an economic downturn gives PL an extra bump.

Generic brands made up 13.5 percent of all household and personal-care products in September, a record, according to the report, which used data from research firm AC Nielsen.

As the article notes, many branded products have had price increases recently, to offset increased costs of raw materials, packaging (especially plastics), and transportation. Many consumers, predictably, have reacted by switching to lower-priced alternatives.

Private label manufacturer expanding

Perrigo, the largest US manufacturer of private label pharmaceuticals, is expanding their manufacturing facilities:

The expansion will boost manufacturing capacity by at least 10 percent, Perrigo Chief Executive Officer Joseph Papa said.

The company currently has 1.8 million square feet of manufacturing and office space in seven Allegan area facilities.

"Right now, the market demand for health care pharmaceutical products is up 3 percent, while store branded product sales are up 16.8 percent and our sales are up 40 percent," Papa said.

This is Perrigo's second recent expansion:

In September, the company announced the $44 million purchase of JB Laboratories in Holland that added $70 million in annual sales and 160,000 square feet of manufacturing space.

The new normal: private label or inferior goods?

It is pretty much a given that private label market share will increase in times of recession or economic uncertainty. So it was no surprise to read that Wal-Mart has decided to increase its emphasis on private label products.

This is a bit of a reversal for Wal-Mart, which has actually been de-emphasizing private label for the past year or so (their decision to cut back on private label soft drinks drove Cott to the brink of disaster).

But there are some other possible directions consumers can go to save money, and a report from Booz & Company offers some thoughts on an alternative movement toward “inferior goods” in a setting they refer to as the "new normal."

The word “inferior” is used here as economists might use it – goods “that attract consumers more when purchasing power declines.” An example cited is that consumers who once used disposable antibacterial wipes might choose to switch to a private label version; or they might instead switch to an “inferior good”, such as paper towels (or they might switch from paper towels to a washcloth).

Manufacturers who have become used to premiumization – consumers constantly moving up to higher-priced brands within a category, or further up into higher categories – will now need to adjust to the “new normal”, in which consumers trade down.

As always, there are opportunities in any major change, even a downward trend. The Booz report offers as an example how Kraft is positioning its DiGiorno pizza not against other frozen pizzas, but against pizza delivery services ("It's not delivery -- it's DiGiorno"). Preparing a frozen pizza might be an “inferior good” for many consumers, compared to calling Dominos, but if the cost is half, it’s a choice many more consumers might make.

The report offers some recommendations for taking advantage of the new normal. I suggest you read the full report to get the thinking behind each, but they are:

• Don’t blindly lower prices to regain volume. If the consumers are moving to a different category, lowering your price will not necessarily keep them in your category.
• Find the inferior products that will attract consumers as their purchasing power decreases. This might mean introducing a sub-brand (at the risk of cannibalization) or finding new channels or distribution formats (e.g., Starbucks selling ground coffee at the supermarket).
• Cement consumers to your brand. If you attract consumers with your inferior good – give them a brand experience that will keep them around when good times return.
• Make the new normal feel better. Give the consumer a reason to feel good about trading down (e.g., your product is more environmentally responsible).

And, amidst all the gloom, let’s maintain some perspective. Bad as the economy is, it will not stay bad forever. Good times come and go, and so do the bad times. We will dig our way out of this and the companies and people who prosper will be those who work now to lay a foundation for future success.

Cott returning to roots

Cott, the private-label soft drink supplier for numerous retailers (most prominently Wal-Mart), seems to be looking to re-emphasize that portion of their business, after making a go at other products:

... the Canadian company, known for making beverages for big retailers such as Wal-Mart Stores Inc. (WMT) and Loblaw Cos. (L.T), said it will host a conference call Thursday to discuss initiatives to "refocus the company on retailer brands."

That was precisely Cott's core business until Brent Willis came aboard as president and chief executive in 2006, bringing along a strategy to reduce reliance on soft drinks and expand into better-selling energy drinks, teas, and vitamin-enriched water.

While a loss of focus on the core business may have been a part of the problem, they had problems with the core as well -- a major blow came a few months back when Wal-Mart announced plans to cut back on shelf space for their Sam's Choice products, manufactured by Cott.

As I noted in this post, it's never a good idea to allow one account to become 40% of your business, as Wal-Mart had become for Cott. In Cott's case, it cost the CEO his job.

Safeway converting private labels to national brands

Safeway is going to make its organic store brands (O Organics) available through competitors.

"We're working with partners that want to take pieces of the organic offer to other markets," Burd said during the call, "and we expect that by the end of this year you will see O Organics and Eating Right at other supermarkets besides Safeway."

The brand sold $310 million last year and was up 50% in the first quarter.

I'm beginning to see a number of cases (including the Dell-Radio Shack rumor noted in the item below this) that we might call "brand-blurring" -- where it isn't clear if something is a national brand or private label.

Private labels going national

I posted a couple of weeks ago about some recent cases of movement away from private label. One of the items I cited was that Sears is apparently considering selling some of their private brands through other retailers. Here's another case, with one of India's leading retailers doing something similar:

To create a separate identity and create national brands of its private labels, Pantaloon Retail has transferred some of its private labels to Future Brands. Pantaloon private labels will now move out of Pantaloon stores and probably have their own exclusive shops or will retail through multi-brand outlets.

"We will use in-house labels in the beginning and then launch pan-India brands at a later stage," Santosh Desai, CEO, Future Brands, said in a statement.

Interesting -- still not a trend, but worth watching.

Reversal in private label trend?

Probably not, but there have been a few straws in the wind recently -- a few more and we may be able to declare a trend.

I noted here a few weeks back that Wal-Mart was decreasing its shelf space allocated to private label soft drinks, in favor of Cadbury Schweppes' products (much to the discomfort of Cotts). There is also the case of Sears, which is considering selling some of its powerful private labels through other retailers. And now we have Britain's Marks & Spencer, which has long sold only its own brands, but is considering introducing brand names onto its shelves.

The trend toward increasing market share for private label is so long established and so strong, that it seems impossible that it will ever stop. But everything stops somewhere (or so we all believe). Whether that point has been reached for private label is impossible to know (and a weak economy seems an unlikely time for a slowdown in private label), but a few more straws and maybe I'll believe.

How Is Wal-Mart Like Booze? -- Part 2

About a year ago, I did a post with this title, the point of which was that a little bit of Wal-Mart might be good for you, but going overboard can leave you with quite a hangover.

Cott is learning the lesson the hard way. Wal-Mart has apparently decided to switch out its soft drink assortment, bringing in more Cadbury Schweppes (RC, Diet Rite, etc) and less Sam's Club. A bit unusual, when mostly we hear about more private label rather than less. But not something earth-shattering -- unless you're Cott, and you make Sam's Club, and Wal-Mart is 40% of your volume.

Shares in Cott Corp. were crushed yesterday, after the company confirmed Wal-Mart Stores Inc. will reduce the amount of shelf space it devotes to the company's carbonated soft drinks.

The company's stock dived about 38% on the Toronto Stock Exchange to $2.50. The drop came on the heels of a 20% decline the previous day amid rumours the Arkansas-based retailing giant would cut space and marketing support for Cott brands.

Macy's and Hilfiger make a deal

Macy's is going to be the exclusive distributor for Tommy Hilfiger apparel.

Beginning in the fall of 2008, Mr. Hilfiger will restrict sales of his men’s and women’s sportswear lines — from hoodie sweaters to puffer coats — to Macy’s roughly 800 stores. The combined lines are estimated to have annual sales of at least $200 million.

It's becoming very hard to come up with a clear definition of "private label".

Tuesday Quick Notes

Dollar General was bought by private equity firm KKR. Seems to be a lot of private equity action in retail; my knowledge of finance is minimal (or less), so I won't bother to speculate on why, I just note the fact. The price is $6.9bil.

Carrefour's chairman resigned in an apparent rift with the company's leading family. Coincidentally or not, at the same time it was announced that a private equity firm (is there a pattern here?) had also bought a large stake.

Payless Shoesource bought one of their private-label suppliers, "Collective Licensing International, which owns the Airwalk brand of shoes sold exclusively in Payless stores since 2003."

I nailed it!

Okay, I didn't nail it exactly, but I was close.

Over a year ago, in this post, I speculated that Wal-Mart could carry their private labeling of music to the point of establishing their own record label:

The question is, could Wal-Mart apply the concept of private label to music -- could they, in short, become a label themselves? And the answer is -- you bet they could! In fact, some estimates are that, in country music at least, Wal-Mart accounts for 50% of sales.

I nailed the concept, but I had the wrong party. According to this article, Starbucks has decided to establish their own record label:

Having already proven that it can sell other companies' music, coffee giant Starbucks is planning to launch its own record label and is close to a deal for the next album from former Beatle Sir Paul McCartney to be its first release, according to sources familiar with the plans.

The formation of Starbucks Records, as the unit is expected to be called, could be announced as soon as this week, according to these sources.

So who's next? I still think Wal-Mart, with their 50% market share of country, but Target and Best Buy seem like good options as well. The times they are a-changin'.

More private label music

I've posted several times before (here and here, for example) on the subject of music going private label -- a phenomenon that once would have seemed impossible.

Private label began, after all, in commodity categories, and few things are less commoditized than music. It's easy to substitute generic creamed corn for the branded product, but less so one singer for another.

And yet, it seems that a form of private label -- exclusive distribution deals -- is increasingly hot in the music biz.

USA Today reports here on several such deals:

As national music chains dwindle, big-box retailers such as Target and Wal-Mart are taking cues from Starbucks and iTunes by adding more exclusive music to their shelves. Target's new Spotlight Music Series offers 15 discs, including new adult-contemporary music, genre compilations and mixes handpicked by Avril Lavigne, Jason Mraz, Dave Matthews and others.

This is the first article I've seen, by the way, that references the private label analogy:

"It's private branding," says Christman. "How many companies make their own cereal for a supermarket chain? How many companies make their own detergents for a discount retailer? That's a set retail strategy."

You read it here first.

HP goes CPG

Hewlett-Packard is employing tactics from the world of consumer packaged goods, demonstrating once again something I (and others) have been noting for a while – the growing convergence of the two wings of trade promotion in consumer products, CPG and consumer durables.

BusinessWeek reported recently that HP is making payments to retailers to get them to stop selling private label cartridges for HP printers:

Those executives say the company has approached chain stores that sell store-brand cartridges compatible with its printers and offered them incentives if they end the practice.

Staples is offered as an example. The article goes on to raise questions about the legality of the practice, which is of interest, of course. But I was more struck by how HP, an iconic company in the high-tech arena, is using a marketing tactic more identified with the selling of canned peas.

The fact is that the convergence I spoke of is one-sided – trade promotion practices among consumer durables companies are emulating CPG. And the reason is the one that drives almost all practices – the nature of the channel. As more durables products are driven through big-box retailers (and even B2B products, in many cases), trade promotion programs must be modified to meet the needs and demands of the retailers, and, in this case, to allow the manufacturer to charge a premium price for their branded product. If it works for Del Monte at Kroger in charging an extra fifteen cents for canned peas, it should work for HP at Staples in pricing the ink cartridges a couple bucks higher.

The case also demonstrates how a product can morph in terms of its category. Are ink cartridges a B2B product, or a consumer durable, or CPG? The answer, I suspect, is yes and yes and yes, demonstrating the difficulty of developing channel programs today, and demonstrating the need to constantly re-evaluate the nature of your product.

Nike doing private label with Payless

Nike is introducing a new brand of athletic shoe, Tailwind, as a private label at Payless stores. The shoes will be made by Nike's Exeter group, which markets the Starter and Shaq brands.

Discount shoe retailer Payless ShoeSource Inc. has paired up with a subsidiary of Nike Inc. to market a high-performance $34.99 running sneaker, a move that both companies hope will take advantage of a highly lucrative market.

Under the terms of the multiyear deal, Exeter Brands Group LLC, a wholly owned subsidiary of Nike, will design and produce the shoes under the Tailwind collection, while Payless will serve as the exclusive retailer.

The question is why Nike wants so many brands at the low end. One thought is that they intend to pursue a private label strategy with mass merchants, with Tailwind exclusively at Payless, Starter at (mostly) Wal-Mart, and Shaq at other mass outlets.