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How to make store brand economics work in your favor
- 1. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Jan-Benedict E.M. Steenkamp C. Knox Massey Distinguished Professor of Marketing & Marketing Area Chairman Presentation at the conference “Everything Affects Everything: Getting Results Through Strategic Brand Positioning and Portfolio Management of Your Store Brands” Chicago, February 26, 2014 Taking Apart the Machine: How to Make Store Brand Economics Work in Your Favor
- 2. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Agenda • A look inside the machine • Store brand proliferation – how much is enough? • The economics of store brands • Challenges to overcome to fully unleash the potential of store brands
- 3. 13.3% 15.6% 34.0% 39.0% 3.7% 6.9% 0% 5% 10% 15% 20% 25% 30% 35% 40% 2007 2008 2009 2010 2011 2012 2013 Global W Europe E Europe SB Share in Europe, Global Source: Europanel © Prof. J-B.E.M. Steenkamp Not to be used or reproduced without permission
- 4. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Evolution in four European countries UK Spain Poland RussiaSource: Europanel
- 5. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission What about the US? Source: Europanel
- 6. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission What makes store brands a success? A look inside the machine PRICING BRAND STRATEGY PACKAGING DATA ASSET MANAGEMENT PORTFOLIO MANAGEMENT PROFITABILITY
- 7. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Agenda • A look inside the machine • Store brand proliferation – how much is far enough? • The economics of store brands • Challenges to overcome to fully unleash the potential of store brands
- 8. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission The three dimensions of store brand proliferation # tiers # SKUs per tier # categories
- 9. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission SB proliferation – from 2 to 3 tiersPRICE QUALITY Standard SB Economy PL Premium SB Value 2.0 PL
- 10. Tesco – Standard Tesco’s three-tiers (Global sales: $110 bn.; SB share: 48.1%) Source: Group 360 Worldwide
- 11. Re-launch of look in 2012 by Rocket Design Tesco Everyday Value Source: Group 360 Worldwide
- 12. Tesco Finest - Sept 2013 re-launched design, by Parker Williams Source: Group 360 Worldwide
- 13. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission SB proliferation – Beyond the three-tiers PRICE QUALITY Standard SB Economy PL Premium SB Value 2.0 SB Specialty SB Super premium SB
- 14. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Specialty SBs Healthy Eating Regional Special Diet Kids Ethical Age Segmentation Organic Eco-Friendly Ethnic Source: PlanetRetail 2012
- 15. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Source: IGD Value 2.0 – Discount brand products at Tesco Using fancy labels (copying Aldi). Priced below Tesco Standard. Priced on average 50% above Tesco Value.
- 16. Source: PlanetRetail; own research Value £0.27 Standard £0.56 Finest £1.01 Brand Leader £0.67 Discount Brand £0.46 Lindt Excellence £1.49 Tesco’s SB portfolio in practice: Chocolate (100g) Milka £0.97 Finest Fair Trade Organic £2.04 © Prof. J-B.E.M. Steenkamp Not to be used or reproduced without permission
- 17. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission However…. Tesco Year 2009 2010 2011 2012 2013 SB market share 48.1% 47.7% 48.0% 48.1% 48.1% Operating margin (%) 6 6 6 7 3 Operating profit (£ mn.) 3169 3457 3917 4182 2188 • In 2014, the standard SB continues to be the “workhorse” – at Tesco and at other U.K. retailers • Discount brands at Tesco have been discontinued • (Super)premium and specialty SBs drive complexity and require substantial advertising • SB proliferation has not increased SB share at Tesco • Effect on profitability unknown Source: Europanel; http://www.redmayne.co.uk/research/securitydetails/financials.htm?tkr=TSCO
- 18. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Agenda • A look inside the machine • Store brand proliferation – how much is far enough? • The economics of store brands • Challenges to overcome to fully unleash the potential of store brands
- 19. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Earn more money on SB sales The economics of store brands - Pathways through which store brands increase retailer profitability
- 20. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Key drivers of SB profitability % Gross margin + Additional allowances/ manufacturer services - Selling costs Sales price X % Net margin X Velocity (Shelf space turnover) $ Profit Per Square Foot
- 21. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Diapers Brand A Store Brand Gross margin (%) 3 17 Retail sales price($) 14.40 8.77 Profit ($) 0.43 1.49 Velocity per square foot (index) 100 66 $ profit per square foot (index) 43 98 RTE Cereals Brand A Store Brand Gross margin (%) 11 14 Retail sales price($) 2.79 2.19 Profit ($) 0.31 0.31 Velocity per square foot (index) 100 70 $ profit per square foot (index) 31 22 Store brands don’t always generate more profit Contrasting Diapers versus RTE Cereals Source: The Boston Consulting Group, 2005
- 22. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Higher gross margin (%) Increase velocity Reduce price gap with NBs How to improve SB profitability?
- 23. Low (<30%) Price gap with manufacturer brands High (≥30%) • Home care • Snacks & Confectionery • Cosmetics • Baby food • Paper, plastic & wraps • Refrigerated food • Frozen food • Alcoholic beverages • Non-alcoholic beverages • Personal care • Shelf-stable food • Pet food • Health care • Diapers & feminine hygiene Source: Data from AC Nielsen Store brand share Low (< 12%) High (≥ 12%) Is a large price gap with NBs really required? © Prof. J-B.E.M. Steenkamp Not to be used or reproduced without permission
- 24. Explaining the anomaly: Price gap, perceived quality, and market share of AH Store brand for 19 CPG categories “Top” Categories (National market share = 15%) Other Categories (National market share = 7%) Price discount for AH brand vs. NBs “Top” Categories Other Categories (National market share = 15%) (National market share = 7%) Perceived Quality of AH Brand1) -12% -21% 5.3 4.6 1) Perceived quality measured on 7-point scale © Prof. J-B.E.M. Steenkamp Not to be used or reproduced without permission
- 25. Understanding the price-quality competition between national brands and store brands Random Buyers Brand Buyers Store Brand Buyers Toss Ups Small Large Low High Consumer’s price sensitivity Perceived quality gap with national brands Store Brand Strategy National Brand Strategy © Prof. J-B.E.M. Steenkamp Not to be used or reproduced without permission
- 26. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Store Brands Try to Attract Toss-Ups: Meijer Emphasizes the Absence of a Quality Gap https://www.youtube.com/watch?v=ZQSa2bRYxFc
- 27. Increasing SB velocity: Advertising © Prof. J-B.E.M. Steenkamp Not to be used or reproduced without permission
- 28. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission • Initially, dm’s Balea beauty care PL copied Beiersdorf’s Nivea. • Over the past decade, the brand has come into its own through permanent design relaunches, sub-brands, line extensions and innovations. • In 2012, dm launched Balea Nature. Old versus new packaging of dm’s Balea logo Increasing SB pricing power and velocity: Brand building by German drugstore chain dm drogerie markt (US$10 bn.) Source: adapted from Planet Retail
- 29. Brands are about emotions! This baby loves Costco’s brand! © Prof. J-B.E.M. Steenkamp Not to be used or reproduced without permission
- 30. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Earn more money on SB sales SB buyers spend more in my store Critically depends on 3 factors! • Reduce price gap with NBs • Increase gross margin • Increase velocity Pathways through which store brands increase retailer profitability
- 31. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission SB buyers do indeed spend more of their budget in my store… up to a point - Evidence from Tesco 14.8 34.0 39.2 42.1 39.4 39.2 26.4 0 5 10 15 20 25 30 35 40 45 0-10% 10-20% 20-30% 30-40% 40-50% 50-60% 60%+ Tesco’s SOW (%) Store brand buying as % of shoppers’ total expenditure at Tesco Source: adapted from Europanel
- 32. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission ...... and CVS Mean value over 6-month period for consumers whose store brand share in total purchases at CVS is: 0-10% 10-20% 20-35% > 35% Total sales $ 251 $ 263 $ 216 $ 129 Gross margin 30.3% 32.1% 34.7% 36.8% Total gross margin dollars $ 77 $ 85 $70 $ 48 Source: Ailawadi and Harlam (2004)
- 33. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Earn more money on SB sales SB buyers spend more in my store Squeeze more margin out of NBs Pathways through which store brands increase retailer profitability Critically depends on 3 factors! • Reduce cost • Reduce price gap with NBs • Increase velocity Up to a point! • In Europe, optimum is 40-50% • U.S. will be lower; but we are not there yet.
- 34. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Squeeze margin out of national brands? Grocery Retailer Gross Margin on NBs Low High SB share in the category “[The relaunch of Great Value] was a way to keep some of our supplier partners right there where we need them.” Bill Simon, COO - Walmart US 19.8% 23.7% Source: Ailawadi and Harlam (2004)
- 35. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Earn more money on SB sales SB buyers spend more in my store Squeeze more margin out of MBs YES! Pathways through which store brands increase retailer profitability Critically depends on 3 factors! • Reduce cost • Reduce price gap with NBs • Increase velocity Up to a point! • In Europe, optimum is 40-50% • U.S. will be lower; but we are not there yet.
- 36. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Agenda • A look inside the machine • Store brand proliferation – how much is far enough? • The economics of store brands • Challenges to overcome to fully unleash the potential of store brands
- 37. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Challenges to be overcome • Uneven quality delivery across categories
- 38. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Mind the gap! 0% 20% 40% 60% 80% 100% Costco Target Walmart Walgreens Whole Foods Source: Consumer Reports (2013, 2014) qualityvs.bestincategory
- 39. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Variability in store brand quality across foods1) Store brand of: Compared to leading national brand # better # just as good # worse Costco 25% 25% 50% Sam’s Club 14% 58% 28% Target 22% 67% 11% Walmart 10% 50% 40% Trader Joe’s 30% 10% 60% Whole Foods 33% 11% 56% 1) Trail mix, maple syrup, shredded mozzarella, vanilla ice cream, cranberry juice cocktail, mayonnaise, frozen shrimp, ketchup, cashews, frozen mixed vegetables Source: Consumer Reports (October 2013)
- 40. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission An autobiographical story
- 41. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Challenges to be overcome • Uneven quality delivery across categories • SB portfolio proliferation
- 42. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission SB proliferation – Beyond the three-tiers PRICE QUALITY Standard SB Economy PL Premium SB Value 2.0 PL Specialty SB Super premium SB
- 43. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Challenges to be overcome • Uneven quality delivery across categories • SB portfolio proliferation • Gross margin thinking vs. careful study of SB economics • Short-term thinking • Retailer’s view of store brands as private labels
- 44. © Prof. J-B.E.M. Steenkamp Not to be reproduced without permission Further reading • Steenkamp, Jan-Benedict E.M. and Inge Geyskens (2014), “Manufacturer and Retailer Strategies to Impact Store Brand Share: Global Integration, Local Adaptation, and Worldwide Learning,” Marketing Science 33 (January-February), 6-26. [Lead article.] • Lamey, Lien, Barbara Deleersnyder, Jan-Benedict E.M. Steenkamp, and Marnik G. Dekimpe (2012), “The Effect of Business Cycle Fluctuations on Private-Label Share: What Has Marketing Conduct Got to Do with It?” Journal of Marketing, 76 (January), 1- 19. [Lead article.] • Steenkamp, Jan-Benedict E.M. and Inge Geyskens (2014), “Manufacturer and Retailer Strategies to Impact Store Brand Share: Global Integration, Local Adaptation, and Worldwide Learning,” Marketing Science 33 (January-February), 6-26. [Lead article.] • Steenkamp, Jan-Benedict E.M. and Nirmalya Kumar (2009), “Don’t Be Undersold!,” Harvard Business Review, 87 (December), 90-95. • Ailawadi, Kusum, Koen Pauwels, and Jan-Benedict E.M. Steenkamp (2008), “Private Label Use and Store Loyalty,” Journal of Marketing, 72 (November), 19-30. [Winner of the Emerald Management Reviews Citation of Excellence Award.] • Lamey, Lien, Barbara Deleersnyder, Marnik G. Dekimpe, and Jan-Benedict E.M. Steenkamp (2007), “How Business Cycles Contribute to Private Label Success: Evidence from the United States and Europe,” Journal of Marketing 71 (January), 1-15 [Lead article; finalist for the Marketing Science Institute/H. Paul Root Best Article Award.] • Steenkamp, Jan-Benedict E.M. and Marnik G. Dekimpe (1997), “The Increasing Power of Store Brands: Building Loyalty and Market Share,” Long Range Planning, 30 (6), 917-930. [Reprinted in Strategic Corporate Communication, Cees B.M. van Riel (ed.), Alphen a/d Rijn: Samson, 107-128.]