ROSEMONT, Ill. -- While private-label products offer grocers some leverage against consumer packaged goods manufacturers, retailers need to guard against becoming too deeply involved with brand management, said Meredith Adler, equity analyst, Lehman Brothers, New York.
"The investment community does not want retailers to become brand managers," she said in a presentation at the Private Label Manufacturers Association's "Store Brand Mania" trade show here last week. "It doesn't want them to take those risks, and frankly, they don't have the cost structure to allow them to do that.
"To develop this business, you need to have brand management expertise, and there is a cost associated with that. If you are going to have a strong brand, you need to spend money."
CPG manufacturers devote considerable resources to bring new products to market, she noted. "I'm not sure that the profit structure of the retailers permits them to take on all the functions CPG companies do today. They gather an awful lot of consumer research and they spend a lot of marketing money.
"It seems to me that nobody wants the retailers to duplicate that function unless they are assured of success because they are going to have to take on risks that it is not clear they have the profit margin to handle," Adler said.
Brian Sharoff, president of the PLMA, New York, said Adler's point rings true with some retailers, but the biggest ones are willing to assume responsibility for running their brands. "They know that the rewards justify the efforts," he said.
Adler and Frank Dell, president, Dellmart & Co., Stamford, Conn., commented on the proliferation of private-label items. But Dell said retailers should be the marketers of their private labels, not just the merchants. "They need to think about when and how to promote it. They need to price it right. They can't count on a category management dominated by national brand people to get their message across," the consultant said. Looking ahead, Adler said retailers are going to spend more time on private-label strategy and promotion. "You might end up seeing fewer SKUs as they focus on what really works and what doesn't," she said.
With consolidation, the economics of the volume-based, private-label business have become more attractive to retailers, she added.
"We've also seen a big increase in category management [for private label] on the part of retailers. This is a more sophisticated look at what consumers want. Retailers must understand what they want from a particular category; for example, whether it drives profits or sales, and then design a product offer within that category to meet their goals," she said.
"The more sophisticated retailers -- and I would put Safeway in that class -- have very well-developed category management plans" for private label, Adler said.