PRIVATE EYE

With an eye on national brands' innovation, pricing and promotion efforts, retailers are strategically positioning their multi-tier private-label lines. Since company-brand profit margins are, on average, 10% higher than those realized by retailers on a national-brand item's sale, many are learning it pays to be diligent. Take, for instance, Safeway's premium, 150-product O Organics line, which fills

With an eye on national brands' innovation, pricing and promotion efforts, retailers are strategically positioning their multi-tier private-label lines.

Since company-brand profit margins are, on average, 10% higher than those realized by retailers on a national-brand item's sale, many are learning it pays to be diligent.

Take, for instance, Safeway's premium, 150-product O Organics line, which fills a space not currently occupied by any one major national brand. Sales of the certified organic products, which range from canned items to frozen foods, beverages, produce, dairy and eggs, totaled $160 million during the line's introductory year in 2006.

Even by national-brand standards, “this would have been a blockbuster launch,” Steve Burd, chairman, president and chief executive officer of Safeway, told the Chicago Tribune last week.

The line, which will be extended to include offerings for infants and toddlers, was created because the retailer didn't want to wait for others to develop what its customers were asking for.

Similary, company-brand initiatives launched by Whole Foods Market, Wild Oats Markets, H.E. Butt Grocery Co., Loblaw Cos. and Sainsbury's have capitalized on the dearth of healthier, kid-friendly offerings in their respective markets.

“About 85% of private-label products have national-brand equivalents, but a number of retailers are also successfully developing specialty products that aren't competing with a national brand,” noted Ned Dunn, president of Dunn Consulting and former president of Harris Teeter.

Supermarkets are indentifying categories with private-label potential by taking cues from national brands.

“There are a lot less opportunities for private label when there is a high level of innovation by national brands,” noted Sheila McCusker, editor of Information Resources Inc.'s “Times & Trends” report. “A high level of advertising expenditures on the part of branded items are also inversely correlated with private-label development.”

Category conditions including national-brand share, advertising and marketing spending, and innovation are often reflected by the size of the private label/national brand price differential.

According to IRI's “Private Label Market Trends” report, some of the largest retailer-brand discounts in Center Store are tied to paper towels (54%), toilet tissue (49%) and dry packaged dinners (46%), while private-label toothpaste, chocolate candy and frozen meat are commanding sizable premiums of 125%, 55% and 51%, respectively, above their national-brand counterparts.

“For the most part, manufacturer-brand investment through innovation or advertising and marketing has inhibited private-label development [in certain categories], but private label is succeeding with some really unique specialty products, like chocolate candy and other premium items,” said McCusker.

Private-label frozen seafood, which is sold at a 17% premium over the national brands, has earned 5.8 volume share points in the past year, according to IRI.

“That's a category where we don't tend to see strong national-brand presence, so private-label products are moving that pricing needle,” noted McCusker. “In categories like refrigerated meals and meal components, private-label share is actually doubling frozen seafood's rate of growth.”

COMPANY VS. NATIONAL BRAND

When it comes to competing with a national brand for which there is a private-label counterpart, industry experts advise retailers to promote their company-brand items in lockstep with the corresponding national item.

“Sharp retailers are shadowing national-brand price with their private-label products,” said Jim Hertel, managing partner, Willard Bishop, Barrington, Ill. “If you have a hot [promotional] price on the national brand and a non-promoted private-label item, the two might be so close in cost that you end up trading purchases from the private-label to the national-brand item. Retailers need to reduce the private-brand price to a point where they're still ahead of the national brand on a penny profit basis.”

Keeping a close watch on national-brand promotions, however, isn't always easy.

“A retailer might be managing literally thousands of private-label brand items, where the national-brand supplier might only be offering a couple hundred items, so there are challenges for retailers,” conceded Hertel. “Many have the best intentions, but there are only so many hours in a day.”

Rules-based price-optimization software is helping retailers overcome these challenges.

Last year, Salisbury, N.C.-based Food Lion began leveraging pricing, promotion and markdown software from San Carlos, Calif.-based DemandTec. The 1,215-store chain uses the tools to help merchandise items in its mid-tier company-brand line. It will introduce both premium- and value-tier private-label lines later this year.

“We keep a close watch on national-brand items and try to offer the best price, even when a branded product is on promotion,” noted Kimberly Blackburn, spokeswoman for Food Lion.

DemandTec's price-optimization tool facilitates consumer demand modeling at various price points, as it considers such factors as national-brand pricing, according to Marc Dietz, vice president of DemandTec.

H-E-B, Hannaford Bros., and Giant Eagle are among supermarket users of DemandTec's software, Dietz noted. Safeway is also leveraging the tools to help price its premium Select and O Organics company-brand items.

“When retailers use DemandTec's [software] to optimize private-label prices, they are also optimizing national-brand prices, and for both, this is done with an understanding of national-brand promotions,” Dietz said. “Retailers can use this tool to do ‘what if’ analysis on different price shielding scenarios, such as ‘Is it better to drop the private-label price during the national-brand promotion?’”

Although Lakeland, Fla.-based Publix Super Markets would not divulge whether or not it uses price-optimization software with its private-label lines, spokeswoman Maria Brous noted that both its mid-tier Publix brand and premium-tier Publix Premium lines are sold at a 10% to 30% discount to the national brands.

Brous said that although a number of factors — including manufacturing costs — play into Publix's pricing equation, the quality of its products is not one of them.

“The high quality contributes to the value,” but not the cost, she said. “We still want to offer consumers a great product at a great savings that is between 10% and 30%.”

BOGO PROMO

Publix believes so strongly in the quality of its company-brand products that during a five-week promotion it is giving away one of three weekly designated private-label items to customers who purchase the national-brand counterpart.

“It serves as a great opportunity for customers to buy one item and get the private-label product for free, with no effort on their part,” said Brous, who declined to comment on the cost of the promotion. “We're still in the midst of the [Publix Brand] Challenge, so it's too early to see what the end result of the promotion is going to be. Last year we had such positive feedback from our consumers that we decided to expand it to all of our [901] stores.”

Publix ran the promotion last year on a smaller scale in approximately 100 stores in Florida's Hillsborough and Pasco counties and at select Alabama locations.

Last week's product pairings included a 16-ounce box of Mueller's Thin Spaghetti and a 16-ounce box of Publix Thin Spaghetti; a 26-ounce jar of Classico Tomato & Basil Pasta Sauce and a 26-ounce jar of Publix Premium Basil & Tomato Pasta Sauce; and a 12-ounce box of Velveeta Shells & Cheese and a 12-ounce box of Publix Cheesy Shells. The promotion is currently in its third week.

“That is certainly an expensive promotion to run, but it's compelling on two levels,” said Hertel. “Generating trial among category users is always a good thing, and it's bound to have a halo effect from a general quality perception.”

Private Label vs. Branded Products

Categories With the Largest Price Differential*
PRIVATE-LABEL PRICE PREMIUM PRIVATE-LABEL PRICE DISCOUNT
Toothpaste +125% Toothbrush/Dental Accessories -57%
Chocolate Candy +55% Razor Blades -57%
Frozen Meat +51% Paper Towels -54%
Frozen Dinners/Entrees +39% Air Fresheners -51%
Pies & Cakes +37% Facial Cosmetics -50%
Frozen Poultry +36% Toilet Tissue -49%
Eye Cosmetics +32% Carbonated Beverages -46%
Gum +18% Dry Packaged Dinners -46%
Frozen Seafood +17% Fresh Bread & Rolls -45%
Rfg. Salad/Coleslaw +16% Soap -45%
*Among top 100 categories
Source: IRI InfoScan Reviews, food, drug and mass (excluding Wal-Mart) for the 52 weeks ending Sept. 10, 2006.