Private label the new normal - why it is here to stay, here to grow, and best practices mc-kinsey

Driving innovationthrough theprivate brandorganizationJuly 2011CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission ofMcKinsey & Company is strictly prohibited

McKinsey & Company | 1

US consumers still feel pressured 38% 42% Are having a hard Are living time making ends paycheck to meet paycheck 45% 57% Are making Are somewhat or significant lifeplan very worried changes because about losing a job of declining asset values McKinsey & Company | 2

Consumer response to the downturn that has created a“new normal”… Changing HABITS Trading Cutting DOWN BACK PENNY Shifting pinching CHANNELS McKinsey & Company | 3

…and consumers say these behaviors will stick Percent changing Percent intending to Behavior behavior keep behavior Purchase high-end 89 45 designer/luxury brands less Shop at club stores more 35 88 Shop at mass merchants 84 50 more Shop at dollar stores more 40 81 Purchase private brand/ 50 80 store brand products more Go out to eat less 60 71 McKinsey & Company | 4

As a result, US private brand share has the High growth assumption 2010 revised basepotential to reach 24 percent 2007 base Projected private brand dollar share Percent Higher growth assumptions 30 ▪ Consumers increasingly embrace PL ▪ Retailers like Walmart, Target, and 25 Costco continue to grow PL 24% ▪ Additional retailers expand PL $40 B offering to differentiate and compete 20 19% ▪ Retailer consolidation continues 15 Flat growth assumptions ▪ Market has reached the equilibrium level of PL share at current levels 10 ▪ Manufacturers provide a stronger value proposition for consumers and 5 retailers that curbs PL attractiveness ▪ Retail economics continue to make 0 PL investment difficult 04 06 08 10E 12E 14E 16E ▪ No external shocks occur McKinsey & Company | 5

Organization is more than just structure – each elementplays an important role in driving innovation Style Strategy Skills Shared values Staff Systems Structure McKinsey & Company | 7

STRATEGYThere is no „one size fits all‟ answer - the right organizationdepends on what you are trying to achieve Differentiate to drive trips, build “The private baskets and brand cement loyalty Sophistication journey” Improve value perception to win the weekly grocery trip Enhance profitability Penetration McKinsey & Company | 8

SKILLSSeveral key capabilities are required - the importance of eaccapability depends on what you are trying to achieve 1 Customer intelligence and trend identification Identify 2 Product innovation 3 Product development 4 Quality assurance Develop 5 Category management 6 Project management 7 Brand management Market 8 Packaging 9 Marketing and merchandising 10 Supplier selection and negotiation 11 Supplier development Source 12 Supply chain optimization 13 Inventory management Measure 14 Performance management McKinsey & Company | 9

SKILLSTesco uses customer intelligence and trend identification totailor ranges and products to different customer segments McKinsey & Company | 10

SKILLSTheir strong category management skills result inthoughtfully designed category architectures Private brand Best Best Tesco Strong Carlsberg Bitter Special Brew £3.98 £4.72 4x440mL 4x450mL Good Good Tesco Hofmeister Value Lager Lager £0.92 £2.24 4x440mL Better 4x450mL Tesco Dutch £1.78 Export Lager 4x500mL McKinsey & Company | 11

SKILLSTo re-launch core-tier, ASDA leveraged existing and builtseveral new capabilities, including product development ▪ 1,000 reformations, and 500 new products, all tested and approved by customers ▪ In-store signage and merchandising reinforce emphasis on customer input, with significant space dedicated to private brand items McKinsey & Company | 12

SKILLSThey also enhanced its customer insightcapabilities to test products with consumers McKinsey & Company | 13

STRUCTUREThe right organization structure evolves as private brandbecomes more sophisticated and developed ILLUSTRATIVE Increasing PB penetration and sophistication Merchan Private -dising Private brands brands team Brand team Design mgmt Private brands team Product Product Brand Technical Product Merchan- Brand Technical Marketing develop- Vendor Marketin develop- Marketing mgmt QA develop- dising mgmt QA ment g ment Technica ment l Current merchandising QA organizationWhen it is appropriate ▪ Focused on building ▪ Cross-category innovation ▪ Organization is fully aligned core range and (e.g., Tesco Finest) on the role of private brand enhancing profitability ▪ Focus on rapidly – part of culture expanding private brand ▪ Private brands at maturity tiers and ranges McKinsey & Company | 14

STRUCTUREThese retailers have evolved their models over time Increasing penetration and sophistication ▪ Large dedicated team of ▪ Integrated into merchant ~350 employees focused on organization rapidly building out tiers and ▪ Small dedicated team for largely new items brand management and innovation ▪ Large dedicated team with ▪ Increased integration and limited integration with collaboration with merchants merchants (though not fully integrated like Tesco) McKinsey & Company | 15

STRUCTURE:Although Tesco has integrated private brand into itsmerchandising organization, a central team stilldrives cross-category innovation Commercial and Trading Director International Brand Category Buying Office; Category Management Director sourcing hubs, Director (s) sourcing support Business/ Product Buying Technical Customer Development Planning McKinsey & Company | 16

STRUCTURECo-locating the Own Brand team with Merchantsensures alignmentMerchant-led category team structure Space Examples Category Planning/Analyst Manager (shared) Merch Planning Own Brand Analyst Analyst (dedicated) (shared) Pricing and Supply Promotions Chain Analyst Analyst (shared) Marketing (shared) Analyst (shared) McKinsey & Company | 17

SYSTEMS – PROCESSESA „national brand-like‟ top-to-top process could help setprivate brand strategies and drive innovation Types of collaboration efforts Winners Percentage of respondents Others 100 Expanded Assortment 38 Differentiators New merchandising 100 strategy 74 88 New promotional strategy 56 75 New pricing strategy 44 50 Exclusive products 15 New shopper marketing 63 programs 56 Good hygiene 50 Availability improvements 38 Supply chain 38 improvements 35 38 Exclusive packaging 21 38 CRM-based tactics 15 McKinsey & Company | 18

SYSTEMS – PROCESSESA competitor formulation breakdown process often createunprecedented transparency and identifies cost savings DISGUISED PRODUCT EXAMPLE Fruit juice example Country origin 1 Base 100 Country origin 2 Country origin 3 100 90 80 75 Client product Product A Product B Product CNOTE: Pictures are illustrative and not representative of actual products McKinsey & Company | 19

SYSTEMS - PROCESSESFast follower apparel retailers clearly identify who they arefollowing and have processes to track trends McKinsey & Company | 20

SYSTEMS - PROCESSESThe same systematic approach can be applied in foodExample: Indian food in the mass market Niche Restaurants Private UK restaurants UK C/L products in in urban brand North America markets development McKinsey & Company | 21

SYSTEMS - MEASUREMENT NOT EXHAUSTIVEKPIs need to be tailored to the organization andwhere it is in the private brand journeyFoundational ▪ Overall category profitability (rate and $)metrics ▪ Private brand profitability – overall and penny profit relative to national brand ▪ Private brand SKU efficiency (i.e., sales per PL SKU) ▪ Private brand penetration by categoryGrowth and ▪ Growth in private brand penetration, with targetsinnovation assigned to category and private brand teamsmetrics ▪ Private brand market share and share of growth ▪ Percentage of sales from new private brand items ▪ Private brand brand value perception (from customer) ▪ Number of private brand SKUs vs. competitors ▪ Number of new items launched ▪ Private brand health (quality, value, and innovation) McKinsey & Company | 22

SHARED VALUESFinally, highly visible, senior-level commitment to privatebrand is required to deliver a differentiated program Private brand penetration grew over 15 points during Leahy’s term as CEO Private brand is embedded in several areas of the “steering wheel” that is used to measure performance and guide decision making McKinsey & Company | 23

SHARED VALUESAt Loblaw, both Dave Nichol and more recently GalenWeston have successfully championed private brand Dave Nichol created a “control brand culture” when he launched and built out the PC and No Name brand. In more recent years, Chairman Galen Weston has championed private brand and commitment remains strong McKinsey & Company | 24

Key questions to help you get started ▪ How well has the organization defined its aspirations for private brand and is Strategy there alignment on these aspirations? ▪ What skills does your organization excel at today and how can you better leverage Skills these to drive innovation and growth? ▪ What are the key areas that you need to shore up to achieve your aspirations? McKinsey & Company | 26

Key questions to help you get started ▪ How well have you defined your sources Systems/ of innovation? How systematic are your Processes scans of these sources and how do these scans feed the pipeline? Retailers: ▪ What national brand processes could be effectively applied to private brand to drive innovation and growth? Suppliers: ▪ How could you change your interactions with your customers to drive growth? McKinsey & Company | 27

Key questions to help you get started ▪ How do you define success today? Systems/ ▪ Are there simple changes to KPIs that Measure- could quickly create better alignment ments and focus on aspirations? ▪ How integral is private brand to your Shared corporate strategy? values ▪ Do Senior leaders champion private brand? If not, what are the barriers? McKinsey & Company | 28

Private label the new normal - why it is here to stay, here to grow, and best practices mc-kinsey

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