CONSULTANTS TO THE AFTERMARKET

Bill Wade

 

Global Trends for Private Label Products (PLP) And Aftermarket Implications

By Bill Wade - Wade&Partners

Private label has become an especially hot topic in the automotive and heavy duty distribution businesses. Bruce Merrifield and Bill Wade are working on a joint project in this area, with an announcement of the results coming soon.

In the meantime, we have talked at length with Dr. Jan-Benedict Steenkamp of the University of North Carolina, who recently has published an authoritative and very well researched book on this vital trend.

This article summarizes some of the book’s highlight findings and then poses some questions for aftermarket players ... groups, suppliers, distributors and private equity sponsors ... to think about.

Anyone who is occupationally affected by or intrigued with the rapid increase in global private label products (PLPs) sales should carefully read the book Private Label Strategy: How to Meet the Store Brand Challenge. (Published Jan/07; authors: Kumar and Steenkamp.)

This well written and comprehensive book focuses on the global best practices for consumer PLPs or “store brands”. But, many of the book’s statistics, economic studies and summary guidelines can be readily applied to the accelerating sales of PLPs within automotive/heavy duty/industrial aftermarket distribution channels.

Private label sales are growing at the expense of manufacturers’ brands around the world:

  • Worldwide (retail) PLPs’ total sales have passed $1 trillion.

  • Total PLP share of global, retail sales was approximately 14% in 2000 and on trend to hit about 22% by 2009, a 50% increase.

  • In North America, the share gain appears to be going from 20% to 27%. Wal-Mart has, however, already achieved 40% of its sales on store brands.

The US is actually a laggard in total private label sales among first world economies. Western European countries range from a low of 25% to a high in Switzerland of 38%, and the US will presumably close some of that gap as retail consolidation catches up with Europe’s.

Store brands are present in 95% of consumer product goods categories. Even Barnes and Nobel is shooting for 10-12% of its sales to be on store brands by 2008. Their Sparks Notes series, for example, is an equal or better quality knockoff (at least they have more pages) of the Cliff Notes series that we relied on in high school, but costs $1 less per volume.

Number one factory brands around the world are still – on average – growing very slowly, so private brand growth is coming entirely – again on averages – out of the share that has belonged to all of the other, lower-ranking, brand names.

The simple reasons for why store brands are succeeding are:

  • Too many name brands have become unchanging commodities ... that can be reverse engineered – quickly, accurately and cheaply – then made and sold for a lot less than the brand name goods.

  • Consolidating store chains control the retail location traffic and shelf-space for displaying the copy cat products right next to the targeted brand product with unconditional satisfaction guarantees.

  • Consumers (including functional consumers such as repair technicians) continue to test the products, find real value and spread the word.

  • PLP sales have shifted supply chain profit power to the retailers from the name brand manufacturers.

  • One third of consumers are loyal to the stores (as a brand itself) that they shop at; 50% are still loyal to name brands and will go to whatever store stocks them; and 27% are undecided.

Doesn’t this sound pretty familiar to anyone who has competed in the North American aftermarket in the last few years? Between ’96-’03 retailers gained 5 share points of the combined manufacturer-retailer profit pool and 50% of the incremental growth in the total supply chain profit pool.

Retailers (and Distributors) Deploy a Range of PLP Brands

Generic. The original, generic private label store brands were historically of inferior, even shoddy quality and sold at the lowest price as a minimally sufficient solution. After declining to low-levels of total sales, value labels are making a comeback with better quality and unconditional satisfaction guarantees.

Copy Cat. 50% of all PLPs are “copy cat” products that clone the quality and look of the best selling brand items as close as is legally possible.

Premium. Many stores now also have “premium” label products like: “President’s Choice” (at grocery chains), “Sam’s Choice” (at WMT) and “Kirkland” (at Costco). These products usually are of better quality than the target brand, but still sell for less.

Supply chain value propositions. Some stores have total supply chain value propositions with focused business models that allow deep discounts on both copy cat and unique product brands. These include Aldi and Trader Joe’s (food stores) and Ikea (furniture). These players have grown the fastest, made the best return on assets, but also are the most restricted by their tight strategic scope.

Average Price Discounts

Research shows that he average price discounts from the name brands for the different qualities of private labels are.

  • 56% if the PLP brand is perceived to be inferior (generic/value);
  • 37% for Copy Cat brands of equal quality;
  • 21% for Premium store brands.

One study concluded that 23% of the name brand’s price premium was derived from the “imagery” effects that advertising has on consumers’ minds over time.

These averages, however, mask big ranges in both price differences and market share of unit sales for private labels. “CopyCat” PLPs in the "personal products" category average 45% less than name brands and have only 4% of the unit share.

At the other extreme, refrigerated food PLPs sell for 16% less and have a 32% category share. Categories with the strongest brand power force PLPs to be discounted the most and still get the lowest share.

Lack of Concentration on Profit Dollars

Research on “price gap management” involves pricing for both the competing brand name and store brand items as they sit side by side on a shelf. We find that many retailers put too much emphasis on the better margin percentages that they get on store brands instead of focusing on: “the profit dollars generated per square foot of space and duplicate inventory investment costs”.

Different studies conclude that 50% of private brands are net losers from a profitability perspective even though the store brands have higher margin percents built into their lower price.

How so? If, for example, a store brand is sold for a price that is 30% less than the name brand while getting a 25% margin on the store brand versus a 20% margin on the name one, then the net margin dollars are less on the store brand per square foot... and, the store now has at least twice the SKU/inventory costs.

Causes for Disappearing Profitability of Private Label

Perhaps not wanting to admit that 50% of store brands are unprofitable, many executives reason that other factors more than offset the margin dollar problem. The most common rationalizations for too many store brands and SKUs are:

  • Private brands give the group or store chain buying leverage with brand manufacturers that will deal in order to minimize the loss of both shelf space and volume to the competitive store brands;

  • PLPs give stores unique value offerings, especially the better-quality-for-lower-price labels, which grow customer loyalty for the store; and,

  • If more loyal customers buy more store brands over time, then those customers will become more profitable and loyal.

The authors cite studies that prove that the first two factors do have modest value, but that the third hope thus far is just that.

Besides the 50% un-profitable, store-brand-item issue, the authors cover other pitfalls for private brands. The retailers that have gone beyond simple Copy Cat product creation have backed into all of the marketing activities that the brand manufacturers have always done, such as: end user research; product development; (sourcing/contracting) manufacturing, quality-control and logistics; cataloging, training and advertising.

Many retailers don’t do all of these activities as well as they need to, nor do the smaller chains have the economies of scale that name brand manufacturers do with universal distribution volume which in turn supports the cost of advertising to build “imagery” value. All of a sudden, the costs that are typically hidden in national brand purchases (training, cataloging and literature) come out and bite into planned profit margins.

What Should Manufacturers Do to Counter the Private Label Growth Trend?

The second half of the book is dedicated to answering this question. The chapter headings:

  • Produce Private Labels for Greater Profits
  • Partner (the PLP retailers) Effectively to Craft Win-Win Relationships
  • Innovate Brilliantly to Beat Private Labels
  • Fight Selectively to Marshall Resources Against Private Labels
  • Creating Winning Value Propositions for Manufactured Brands
  • Are Brands Dead?

To unfairly summarize all of these chapters: none of these “strategies” are easy; and, private label clones will continue to cherry-pick away at mature, unchanging branded items. Aftermarket suppliers will benefit from giving these chapters a careful read.

Closing Observations and Questions from Merrifield and Wade

Many distributors and retailers of all sizes have sourced private label clones from Asian producers. Offering copy-cat products of the most popular, simple commodities at lower prices with fatter margin percents has usually resulted in quick “new” sales, but:

  • What percent of these sales are to new customers as opposed to cannibalizing sales to old customers that were already buying the branded products that yielded almost the same total margin dollars (albeit at a lower margin percent times a higher price)?

  • With long supply lines from Asia, plus container quantity shipments, are the clones really turning-and-earning as well as we might think with equal or better fill-rate satisfaction for customers that have switched from standard brands?

  • Even if the first wave of copy-cat products proves to be a winner (using the more thorough total economic analysis from this this book), when will we cross the line into the 50% of PLB items that aren’t profitable? Could we develop a total math model to help us better define that breakeven zone.

  • What are the criteria for ranking which items should be cloned first to last? Should the criteria be modified and re-weighted for each new category of items and for each different segment of customers that a category might be sold to?

  • As we source more items and do more repeat buys from Asian sources, how do we stay on top of those producers’ all-around reliability and economic efficiency? Should we consider outsourcing all of these problems to a firm like Li and Fung that has grown into a giant, supply-chain, process manager for store brands at huge apparel chains and now has an “industrial division”?

  • Could mimicking the private brand strategies from the world of retailers be less successful in a commercial/industrial distribution channel? Which ones and why?

In the automotive and heavy duty aftermarket, the buyer of goods is usually different than the eventual installer of the parts. As cost-controllers at headquarters ... especially municipal and large fleet operators... declare new cost-cutting mandates on purchasing departments, the company’s internal users, who may be loyal to traditional brands, may be disappointed with private label alternatives.

Therefore, won’t the decision of whether to develop generic, copy cat or premium private labels be potentially very context and customer-type specific?

Remember, aftermarket distributors often sell products across a number of segments which may have different buying, brand-reaction patterns.

Because wholesalers, unlike retailers, can’t control retail-traffic, shelf-space, in-store advertising and product demonstrations, how should private labels be sold to both purchasing people and professionally installing end-users to make up for the merchandising advantages that retailers have.

A Personal Invitation

The importance of making the right private label decisions for all manufacturers, distributors and retailers will continue to grow. Our understanding of what has already happened in this topic needs to catch up and stay on the leading edge.

Thoroughly digesting and discussing the book “Private Label Strategy” is a first, easy step.

Meeting with the authors, Bruce Merrifield, Bill Wade, marketers, academics and the private brand teams from other suppliers, groups, distributors and retailers might be a good second step for what could be an important journey over the next five years.

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