TORONTO -- David Nichol's got religion.
His religion is superpremium private label, and he wants you to believe, too.
Indeed, according to Nichol, if supermarket operators don't get religion, and get it fast, they're liable to find their own personal Armageddon opening up just over the next hill.
The world is not getting kinder, for consumers or supermarkets, in Nichol's vision.
"In the future, there will be an enormous
pressure on American consumers to protect whatever measure of their standard of living that can be saved," said Nichol in an interview here.
"Consumers will be value-starved. It is a fact of life that the most efficient way to deliver value to consumers is through a superpremium private label. Those retailers who don't force themselves to learn the skills necessary, and get those products to their consumers, are dead."
Nichol's vision is based on more than pure faith. It is grounded in his past experience as the sharp brain and discerning palate behind the President's Choice line at Loblaw International Merchants. He built President's Choice into a 1,500-item success story, currently the most well known of all superpremium private labels in North America.
It is also based on what he's seen in Europe, especially in the United Kingdom, where devotion to high-quality private labels has helped leading supermarket chains reap heavenly profits. He is convinced that the European model of retailers wielding controlled brands to reshape their image and gain the upper hand from national branders will be brought to bear on this side of the Atlantic.
Now, as the president of private-label soft drink supplier Cott Corp., Nichol is getting ready for a private-label New Age. He exudes zeal, but doesn't bang the lectern while preaching. Rather, he speaks with the confidence of a man who is sure he sees where things are headed and knows what needs to be done.
"This was a watershed year. I think that when they look back at the history of private label -- at least at the segment I am interested in, the superpremium retail controlled brands -- the seminal moment will have been when Consumer Reports did a survey on what consumers thought was the best packaged chocolate chip cookies in North America and The Decadent Chocolate Chip Cookie was selected as No. 1," he said, referring to one of the earliest President's Choice products. "You are going to see an entire generation of New Age private-label manufacturers. And the old cheap and nasty guys who tried to imitate Tide -- they are dead," he said.
Nichol saw other signs of retail brand ascension this year, in the loud protestations of the pharisees. Big national branders have been talking and acting tougher than ever toward store brands, an indication to Nichol that "branders are taking store brands a lot more seriously."
Among the signs of this were the lawsuit filed by Procter & Gamble against a customer, accusing the retail drug chain of trade dress infringement; and a speech given at the InterBev Convention last month in Atlanta by Coca-Cola President Douglas Ivester, in which he labeled retail branders as "parasites."
"When Procter & Gamble sees the kind of penetration that, say, Wal-Mart gets with its Equate line, I would think they are going to become hypersensitive to anybody who they think is passing off on their trade dress," Nichol explained.
The "parasite" speech in Atlanta is an even sharper example national brand companies protesting too much, he added. In the talk, Ivester blasted private labels for eroding category profits and adding nothing in terms of product innovation. He also chided some national brand suppliers for behaving like "sheep" in the face of cheap private-label competition.
Nichol said that two years ago, Coke officials were dismissing private-label soft drink gains as a recessionary phenomenon poised to fade as the economy improves. "Now, that the president of Coke would take most of a speech at an international convention to attack the producers of private label shows that there has been a change in their attitude. They now see private label as an incredible threat.
"Coca-Cola has always been portrayed in the image of the Southern gentleman. Well, this sounds like a change in culture. This industry is changing very rapidly, and I think it is disconcerting to them. When we hear top Coke executives publicly using the kind of language being used lately, I think we are seeing the rise of the Southern barbarian," Nichol said.
Nichol said companies like Cott and the retailers they supply are giving Coke and Pepsi cause to fret. "Cott has 24% of the cola market in California. Coke and Pepsi in Canada will lose $150 million this year. That's very disturbing.
Recent scanning data showed declines in private-label soft drink sales in the United States, but that's not bad news to Nichol.
"I think that is the best example of what is going to happen with private-label grocery categories. If you take a close look at those numbers, what you'd see is that the declines came in the cheap and nasty side of the business, while there was continued growth in premium retail brands," he said.
And scanning data is just one way of looking at the impacts. Nichol said category profitability is changing for retailers, at least those who are aggressive with store brands.
At a number of major accounts we deal with in the U.S., Coke and Pepsi have just wheeled up to the warehouse with truckloads of thousand dollar bills, trying to protect their shelf space.
"Retailers, as long as they continue to support their brands, are seeing that the higher the penetration of private label is, the more money they are getting from national brands. We know from our experience with Wal-Mart, for instance, that Coke has been very responsive with money that was not available before."
To Nichol, those kinds of shifts in retailing dynamics are on the magnitude of the Berlin Wall falling. What not long ago would have taken a miracle is now riding a tide that seems unstoppable.
Europe provides Nichol with a lot of inspiration.
"There is a new term we are learning from the Europeans: Nondelisting fees. Listing fees, of course, have been getting a lot of attention here, with manufacturers complaining that the fees to get their products on retail shelves are too high. But U.K. retailers have another major source of revenue. If you have a strong store-brand program, and a Coca-Cola then comes to you with major money to maintain its position on the shelf, then Pepsi-Cola, if it wants to remain on the shelf at all, has to come in with a lot of money, too.
"This is what is becoming known as a nondelisting fee. Across many categories, retailers are going to be pleasantly surprised at how they can make more money by not delisting products than they can by listing products."
Nichol will continue to look across the water for clues to the future of store brands in North America. He'd urge supermarket chains to do the same.
"The extent of European influence on store brands here will be enormous. What the retailer is most concerned about here is getting an extra 1% out of the national brand manufacturers.
"I deal with people like Sainsbury's executives on a daily basis, and I'll tell you their single major priority is to build their brands, and brand their stores, using high-quality products that other retailers don't have.
"Their primary focus, their total focus, is on the consumer. And that has got the European trade press asking questions such as whether there will be a future for national brands at all, especially when you have a retailer like Sainsbury that has 60% of its warehouse shipments in its own brands. You would never find a North American supermarket executive asking that question, but Europeans are asking that now."
Nichol said he encounters doubters when he talks of European influences over here. "They
say, 'Dave, it works in Europe but it won't work here,' because the retail power in Europe is so concentrated. But I say the U.S. is really seven countries, and in the top 10 U.S. markets, the top five retailers have an even higher penetration than the British top five do in their market. It can work here."
More to his point, the European model of branding the store will work here, and will be imported from overseas by companies such as Sainsbury, with ownership stakes in Shaw's Supermarkets and Giant Food; Marks & Spencer, with the toehold of Kings Super Markets; and Ahold, which owns Giant Food Stores, Finast, Edwards Super Food Stores, Bi-Lo, Tops Markets and Red Food Stores. "I am surprised they have not pushed faster in terms of a strong superpremium strategy," Nichol mused.
He is also surprised that some bold retailer has not yet brought to light what he fully expects will be the next North American retail format -- his "angel of death," the format that "all supermarket chief executives should be losing sleep over, waiting to happen."
This is the Samurai Store, and here is how it will happen, in Nichol's canon. "Picture an 80-wash Tide for club stores, which sells at something like $14. Now if a club chain developed a product that would test equal to Tide, under the club's own label, it could sell for about $7 or $8. They could make more profit and they could sell it for half of the price of Tide."
This exists now only in Nichol's vision, because club chains and Wall Street are preoccupied with comparable stores sales, not bottom-line profits.
"I predict that over the next couple of years there will arise a new form of club store, with no sales history, in which the primary emphasis will be superpremium brands. They will be able to undercut the Sam's and Price/Costco clubs by 30% to 40%, and earn more money.
"This is the store every retailer in North America should be worried about. And the superpremium retail brand component in that is essential."
Nichol said the closest thing to such a store now is the box format operated by Aldi, "the school of baby sharks." Aldi's approach, however, is missing the "high-quality component."
Nichol wouldn't say who he's betting on to open the first Samurai Store. But European players Sainsbury and Ahold are likely suspects, he added.
"But the Samurai Store will happen surely before the end of the decade, and eventually every retailer will have to make an investment in extensive superpremium brands that they control."
At present, most North American chains lack the internal structure to fully exploit superpremium retail brands. "In North America, what you will see too many times is that the private-label buyer is a store manager with a bad back." At Tesco in the United Kingdom, private label is the responsibility of a category buyer supported by technical and marketing people, with a reporting chain leading directly to the chairman. "You don't see this yet in North America, because most chains would see that attention to product development as a terrible waste of money and manpower." As a product manufacturer, Nichol will be paying lots of attention. He is assembling a product development team to expand Cott's retail brand business beyond carbonated drinks to fruit juices, sports drinks, iced tea, spring water and nonbeverage categories, including portion-controlled meats and hors d'oeuvres. He said he sees promise for premium store brands in the trend toward healthy eating as well.
Nichol said Cott will concentrate on as little as 10 categories and develop "major business" in them through a network of 100 or more retail customers.
He even expects converts among the national brand community.
"This year you will see major manufacturers who did not contemplate producing retail-controlled brands before decide to shift over," he said. "It's really just like a religion."