Branded manufacturers need to treat own-label suppliers as branded competitors, analysts say

Branded manufacturers need to treat own-label suppliers as branded competitors, analysts say

Private label sales have been growing in the US for a number of years and have been further boosted by the recession. Branded manufacturers have to fight back, but how? Ben Cooper went in search of some answers.

One of the truisms trotted out regularly during the recession is that private label has flourished. Times are hard and consumers are looking to save money – it’s hardly rocket science. 

However, the growth in private label in the US is about more than the downturn. The upward trend in own brands had been observed prior to the recession, and more importantly analysts universally believe it will continue even after conditions have improved. According to SymphonyIRI data, store brands represented nearly 18% of spending on consumer packaged goods (CPG) in 2009 and more than 23% of all CPG products sold.

So for analysts and consultants the game has long since changed from telling branded companies that the 'private labels are coming' to 'they are here to stay and this is what you have to do to compete'. And in this regard CPG companies are not short of advice.

The 2010 American Pantry Study: The New Rules of the Shopping Game, a joint report from Deloitte and the Harrison Group, published last month, is the latest to set out the new world order. It aims to provide CPG companies with “a sophisticated understanding of the consumer and how to compete in this environment”. 

In essence, the research paints a picture of a US consumer who is more resourceful and more careful about how they spend their money, with the acceptance of private label a key facet of that new way of thinking.

The researchers conducted an online poll of 2,000 US consumers in April 2010. As many as 74% said they were more open to trying private-label products than two years ago. 

Only 32% said they felt they were sacrificing when buying a store brand and only 35% said they intended to purchase more national brands rather than store brands as the economy improves.

In another recent publication, The Battle for Brands in a World of Private Labels, Deloitte lays out a seven-point guide for branded companies to deal with private-label competition.

Firstly, “be a brand that the retailer cannot be” by concentrating on attributes that are harder to replicate. For instance, “leadership in exclusivity, product safety, social causes, innovation and sustainability can help build distinctive advantages that translate into competitive advantages”.

CPG companies should aim to create irreplaceable “destination brands” that consumers “expect to see at the store and will change shopping patterns to find and purchase”. Destination products use claims, certifications and supporting data that are difficult to replicate, Deloitte states. 

Creating and maintaining such a presence in the new climate will not be easy, however. According to the American Pantry poll, 51% of consumers say there are only two or three brands that they cannot live without. Competition for destination brand status has never been higher it would appear.

In addition, Deloitte urges brands to “shed homogeneity”, for example with local variants, and develop retailer-specific product portfolios that “surround private labels”, competing against low-end, mid-range and premium products.

Another key element in the defence strategy is making brands more resilient to ‘me-too’ competition. Frequent refreshing of packaging design, maintaining a “pipeline of new product launches using unique R&D supply chain capabilities”, and protecting intellectual property vigorously will all help brands defend themselves from imitation.

Deloitte says brands should leave retailers “bricked and mortared”. In other words, they should invest more in direct-to-consumer and online sales. While it is retailers who have arguably led the way in using online channels, the report contends that brands can benefit from developing non-store channels, both for core products and niche variants that retailers will not stock. Meanwhile, offering consumers automatic stock replenishment via their websites has already proved successful in the personal care sector.

The report also counsels against excessive or “reckless” promotion. “Excessive promotions train the consumer to wait for deals and can shift the focus from product attributes to prices.” CPG companies “should more actively consider non-price-related promotions”.

This point is reiterated by Sean Seitzinger, senior vice president, consulting and innovation at SymphonyIRI Group. “Manufacturers who try to fight private label with price in most cases are actually accelerating the adoption of private label,” he tells just-food.

According to Seitzinger’s research into consumer attitudes, only 10% of consumers now think manufacturing brands are better than retailer brands. He also reveals that 35% of shoppers now choose their retailer on the basis of the private label offering. 

Seitzinger advocates a targeted approach to competing with private label which can be “like fighting a battle on a thousand fronts”. “Fighting private label isn’t about fighting everywhere, it’s about knowing where to fight, so which markets, which retailers, which shoppers. Poor investment of resources has really hindered a lot of manufacturers making a lot of progress on this issue. They’re spending in the 80% of the markets where nothing is going on and missing spending in the 20% of the markets where something is happening.”

In particular, targeting “switchers” is critical. “Most retailers actually at a store level can identify potential private-label switchers and develop programming to drive them to switching behaviour.” Most manufacturers, Seitzinger says, are “woefully behind” in developing similar programming aimed at retaining potential switchers.

So segmenting markets and consumers, “to determine where the hot and the cold spots are to fight back” is crucial. While all major CPG companies have the capability to do this, Seitzinger says, “most have not been doing it”.

By the same token, branded companies are able to build up “tremendous competitive knowledge” about their number one competitor but have been slow to apply the same rigorous intelligence-gathering to own labels. This appears to be true of many aspects of the fight against private labels. 

Branded companies have the know-how to fight against other brands and have been doing so for years, and also have the resourcefulness and the resources to adapt. But they have been slow to apply these techniques to battling private labels.

However, Seitzinger believes major CPG producers that wise up to the challenge can combat private label, as companies such as P&G, Heinz and Kraft are showing. “The reason why manufacturers in their categories have been around for a hundred years is their ability to continuously reinvent their business, reinvent their supply chain, reinvent their relationships with consumers.” 

So fundamentally this is about branded companies treating private labels as branded competitors, recognising their strengths but also capitalising on their weaknesses, just as they would with any other brand. Pat Conroy, vice chairman and US consumer products leader at Deloitte LLP and co-author of both Deloitte reports, suggested in a recent podcast that consumers now see private labels as brands in their own right. The wealth of research and advice being directed at the brands themselves can be summed up thus: ‘Go, and do thou likewise’.