Private Label Threats to Shelf Space Require Stronger Retailer Collaboration
Wal-Mart Stores’ Culinary & Innovation Center works to expanding private label variety and improve product formulations!
In a time of unprecedented threats to large consumer goods manufacturers, maybe the clearest existential threat is the advent and continued rise of Retailer Private Label brands. Very few industries have a business model in which a company’s customer is also its direct competitor.
Private labels started as a “generic” way to round out entire categories with lower price options for consumers but they have now evolved into significant loyalty plays for retailers. Walmart’s CEO Doug McMillon, speaking at the Bank of America Merrill Lynch 2017 Consumer & Retail Technology Conference in New York last May, noted that although Walmart had long relied on its private label as a “name brands for less,” it now increasingly looks at private label to drive loyalty, noting “Product-driven (store) loyalty becomes even more important than it was in the past.”
Consider this: Kirkland Signature label now comprise roughly 26% of Costco sales, typically competing with name-brand products that have traditionally dominated their categories. Target, is dedicating major marketing spend behind 12 selected private labels, each with a portfolio of products competing in such categories as men’s and woman’s fashion and home goods.
Walmart, in addition to its traditional private label offerings, recently launched its first internet private label line called “Uniquely J” through Jet.com which includes more than 50 grocery SKUs and other consumables in the cleaning, paper and food storage categories. Our new omni-channel world has therefore resulted in the proliferation of private label competition across the physical AND e-retailer channels, including pure-play e-retailers.
Amazon, in addition to its newly added private labels from the WholeFood’s acquisition, already had over 45 distinct online Private Labels. Although roughly 85% of Amazon’s private label sales come from its AmazonBasics line, (showing that "Amazon-labeled” product already has marketing upside), a recently launched brand “Mama Bear” focuses on new parents buying diapers, baby foods, snacks and accessories. Meanwhile, Amazon’s Presto! private label hawks bio-based cleaners, detergents, dish soaps and more. Companies like Procter & Gamble and Kimberly Clark have to be vigilant.
The private label phenomenon is a rare double hit on branded manufacturers: 1) it threatens shelf space, whether physical brick-and-mortar shelf space (where 88% of goods are still sold), or high-growth, virtual on-line shelf space (that is, the first 2-3 pages of search results where the majority of purchases are made) and 2) it is a direct assault on brand margins. Walmart’s McMillon succinctly sums it up: “The widespread availability of name-brand products online will compress the margins of those products over time.” This, coupled with lower-cost options with high retailer visibility and brand equity, make these dangerous times indeed.
So, what are traditional CPG manufacturers with higher margin branded products to do? How do they navigate this strange, apocalyptic marketplace where you’re in mortal combat with your customer base and channel partners? How do you grow, let alone not die?
There are a few things which immediately come to mind as essential:
1) Continue R&D and quality differentiation,
2) Build loyalty by increasing consumer intimacy and personalization,
3) Establish alternative channels to the consumer and
4) Differentiate by proliferation of SKU’s, creating new dimensions of beloved products (think Oreo), and adjusting packaging to focus on name advantages.
But one key element of every good business strategy is to focus on the customer---in this case, your competition. What do you do for them? How do you make them more successful? Show them this, and they are more likely to keep and promote your brands. If you can’t show them, then you are at risk.
It’s no secret that retailers themselves are in an existential battle for survival. The reason they have converted sleepy private labels into loyalty plays is because they have to. Every retailer, big small, brick or online, is grasping for ways to differentiate. Your product doesn’t do that for them, their product does. Still, your product, and your relationship with them, DOES HAVE something to offer: Throughput, profitability, base-line credibility as loyal consumer do not want to shop where you are not. Retailer Collaboration must be a key CPG Strategy.
Mindtree can help. Our unique experience and offerings around better collaborative relationships with your retailers can help maintain not only your relevance in each channel, but help it grow. Take the need to quantify and optimize profit and throughput for your retail partner: point-of-sale (POS) data integration is essential for companies to build tighter relationships with retailers. Mindtree’s Digital and Relational Solutions (RSIs) provide a competitive edge by in allowing CPG companies to leverage POS data for promotional insight and intelligence, improve demand chain efficiency and enhance their top and bottom lines with an end-to-end solution.
Our Relational Solution offerings, for example, include an end-to-end solution called POSmart. POSmart imbeds an open data integration tool called “BlueSky Integration Studio” (BIS), which provides POS validation and cleansing processes and RSI’s browser-based BlueSky Portal.
BIS can access any data source and target any database. RSI understands CPG companies need for more information and thus the need for an open architecture. POSmart co-exists with other solutions, and this allows companies to leverage prior investments in existing tools and skill sets. Once deployed, the ability to SHOW a retailer your value as part of the assortment plan is significantly enhanced.
Times are unprecedented. CPG companies need an unprecedented level of collaboration with retailers to continue to be relevant, and more importantly, grow.