The Fragile Consumer Packaged Goods Market and Private Label Products
Written By: Olin Thompson
Published On: January 4 2006
On average, 45 percent of products sold in Europe are private label products; this compares with 25 percent in the US. Store brands now account for one of every five items sold in US supermarkets, drug chains, and mass merchandisers. A study by the Gallup Organization found that 75 percent of consumers see private label brands as having the same quality, guarantee of satisfaction, packaging, taste, value, and performance as national brands. As the share of private label products grows, what will it mean for the small to medium consumer packaged goods (CPG) manufacturer?
In a recent TEC article, Technology Hurdles plus Retailer Consolidation Yield a Fragile Market for Consumer Packaged Goods Manufacturers,
I identified several trends in the CPG market that threaten both small to medium CPG manufacturers and some large ones. Private label or store brands are yet another trend that is threatening the small to medium CPG manufacturer.
The Private Label Manufacturers Association tells us that more than 90 percent of all consumers are familiar with store brands, with 85 percent of consumers purchasing them frequently. Larger retailers have embraced store brands to increase their margins. For example, IRI reports that 50 percent of all grocery sales at Wal-Mart are of store brand products, and that Wal-Mart's Old Roy dog food is the nation's top-selling dog food. In addition, 24 percent of sales at Kroger and 23 percent at Safeway are from store brands.
The Private Label Challenge
The drive to private labels has many impacts on the industry. One key impact is on the market for branded products. With 50 percent of Wal-Mart's grocery sales coming from private label products, even those manufacturers who are selling branded products through Wal-Mart cannot participate in 50 percent of Wal-Mart's volume. With both large and other-sized retailers growing their private label businesses, the competition for the remaining branded business becomes even more heated.
Retailers tend to limit the number of brands within a category, with three or four being the most common numbers. One of those brands is often the store brand. Therefore, if a manufacturer does not have one of the top few brands in a category, getting on the shelf is a major challenge. As store brands take more shelf space, even those brands that make it to the shelf may lose facings.
The questions for all but the top few brands in a category are clear. Can you compete for shelf space? Can you live on the volume get from the second or third tier retailers, while being shut out from the tier one retailers? Should you invest in building your brand in an effort to get into the top two or three brands in the category?
The Private Label Opportunity
However, for some manufacturers, providing private label products represents a major opportunity. The competition to provide these private label products is primarily driven by price and customer service.
The Grocery Manufacturers Association (GMA) tells us that, at the retail level, the average CPG private label products are priced 27 percent lower than the average branded products. Retailers also experience higher margins on store brands. With a lower shelf price and the expectation of higher margins, retailers are looking for low cost producers. To compete for the private label business, a manufacturer needs to master cost control and cost reduction.
However, retailers are looking for more than just a low price from manufacturers. They are looking for the lowest total cost. That means the manufacturer must be easy to do business with. It means the retailer must feel comfortable that stock-outs will not be a problem. Manufacturers must invest in the areas that the retailers consider important to the overall relationship. Customer service systems must be responsive to the needs of the retailer. Moreover, since most manufacturers deal with multiple retailers, the need to satisfy them all adds to the technological hurdles and the cost of doing business.
While a private label contract may drive volume and revenue up, what does it do to margins? Lower prices and increased demands for service result in pressures on the manufacturer's margins. If it is not careful, the manufacturer can end up with a "losing on every case, but making it up in volume" situation. A successful private label manufacturer will excel at understanding cost. Financial costing, that is standard costing with a monthly variance, will not serve its needs. Operational costing, that is knowing what each run costs with its specific ingredients, crewing, and production facilities while the run is still fresh in everyone's mind, becomes a requirement to control and cut cost.
Can a manufacturer create a competitive advantage beyond costs and customer service? A manufacturer can compete with their product development expertise. Companies with superior product development capabilities are often seen as "go to" producers, because they have the ability to quickly respond to consumer trends. Companies who have developed proprietary capabilities, packaging, or recipes, for example, can dominate a category.
Private label products are a fact. The outlook calls for even greater growth for private label products. A manufacturer's business strategy must recognize the impact of this and deal with the opportunities and threats it creates.
As with any business, the CPG manufacturer looking to compete in the private label business must think about what is important to the customer.
Product costs are key to dealing with private label opportunities, with the low cost competitor enjoying significant advantages. Customer service becomes a major component of satisfying retailers, with flexibility helping to deal with multiple customers and their evolving needs. Other competitive tools are also available, and focus again on what the retailer considers important, such as product development and proprietary capabilities.
Manufacturers need to evaluate where they stand versus the demands of retailers and their competition on these fronts.
About the Author
Olin Thompson is a principal of Process ERP Partners. He has over twenty-five years experience as an executive in the software industry. Thompson has been called "the Father of
Process ERP." He is a frequent author and an award-winning speaker on the topics of gaining value from enterprise resource planning (ERP), supply chain partnership (SCP), and e-commerce, and of the impact of technology on industry. He can be reached at Olin@ProcessERP.com.