MKTG 450 Selected Topic in Marketing: Distribution Management Spring 2009, Dr. Stefan Wuyts Private labels

Structure: Channel functions 1. Channel Management Channel design Vertical integration Contracts Partnerships Dark sides Power Connectivity and control 1. Channel Management Retailing Private labels Retail assortments Cooperation in retail Pricing Price promotions 2. Retail Management New trends Collaboration and competition in retail 3. New insights

Cfr: The circle of PL success Package similarity Low innovation & advertising by brands Increased PL share Low brand trust advantage Growth of (hard) discounters Low willing- ness to pay price premium for brands

Countering PL success Marketing strategy Countries Customers Consumers Customers Categories Marketing strategy

Co-opetition to arrest PL growth Competition “It is not enough to succeed. Others must fail” Cooperation “You succeed only if others also succeed.” You have to compete and to cooperate at the same time Co-opetition

Co-opetition Competition Strengthen your own brand equity Cooperation Develop partnerships with specific retailers

Building brand equity through innovation and functional advertising

Building brand equity through image advertising (1) Associating your brand with symbols from the local consumer culture

Building brand equity through image advertising (2) Associating your brand with symbols and icons from a global consumer culture

Building brand equity through advertising against copy-catting

Co-opetition Competition Cooperation Strengthen your own brand equity Develop partnerships with specific retailers

Cooperation: develop partnerships with specific retailers Area What can be done? Retailers need high-quality PLs Engage in PL production In many categories, PLs produce less profit Inform retailer; (taking everything into account) per square foot category management than brand leaders Discounters can profit from manufacturer brands Create win-win strategies ________________________________________________________________

Engage in PL production? YES NO Fill spare capacity Conflicts with own production needs if demand picks up Increases profitability Often illusionary as full costs are not calculated - fixed costs - inventory costs - packaging cost - negotiation costs

Engage in PL production? YES NO Increases power over retailers Brand power = market power and you build PL power Allows to manage PL quality Retailer sets criteria and puts pressure on you to share latest technology PLs hurt your competitors PLs hurt your own brands

Cooperation: develop partnerships with specific retailers Area What can be done? Retailers need high-quality PLs Engage in PL production In many categories, PLs produce less profit Inform retailer; (taking everything into account) per square foot category management than brand leaders Discounters can profit from manufacturer brands Create win-win strategies ________________________________________________________________

Profit implications of PL Are PL buyers more profitable? Can retailers squeeze margin out of brands? Do retailers earn more money on PLs?

Does a retailer earn more money on its private label? In the U.S., brands in FMCGs are on average 49% more expensive than PLs (in the Netherlands: 43% more expensive). Shelf turnover is 10% higher for brands than for private labels. $0,24 $0,23 Dollar contribution (assume: PPL = $1) 115 100 Direct product profitability: index 21,7% 30,1% Gross margin Brand Private label Analysis of the U.S. FMCG market (Based on Ailawadi and Harlam 2004)

Are PL buyers more profitable? Mean value over 6-month period for consumers whose PL share 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)

Squeeze margin out of brands? (1) FMCG retailer gross margin on brands 23,7% 19,8% Low High PL share in the category Source: Ailawadi & Harlam (2004)

Squeeze margin out of brands? (2) FMCG retailer gross margin on brands 23,5% 20% Low High Advertising for brands in the category Source: Ailawadi en Harlam (2004)

Profit implications of PL Are PL buyers more profitable? Can retailers squeeze margin out of brands? Do retailers earn more money on PLs? Often not Often not Yes, but advertise!

Cooperation: develop partnerships with specific retailers Area What can be done? Retailers need high-quality PLs Engage in PL production In many categories, PLs produce less profit Inform retailer; (taking everything into account) per square foot category management than brand leaders Discounters can profit from manufacturer brands Create win-win strategies ________________________________________________________________

Discounters can profit from brands: Lidl in Germany In the following categories has grown in 2002 disproportionally with a simultaneous increase of brand share within Lidl baby diapers beer grounded coffee sweets cola bath and shower products vinegar mixed pickles instant coffee detergent spices crispbread machine dishwas chocolate spread salad dressing sparkling wine/champagne ice cream bars of chocolate water

How to create win-win strategies with discounters? Here are some key factors …. Add innovative brands Invest in the “outer case” of your brand Maximize the in-store price gap Ensure a reasonable between-store price gap  

Outer case works does not work

Readings private labels Compulsory Ailawadi & Harlam (2004), “An empirical analysis of the determinants of retail margins: the role of store-brand share,” Journal of Marketing, 68(1), 147-165. Deleersnyder, Dekimpe, Steenkamp, and Koll (2007), ‘Win-win strategies at discount stores,” Journal of Retailing and Consumer Services.

What about Turkey? Between 2004 and 2005: PL represent 8,6% of FMCG, but growth percentage is 14,4% (AC Nielsen 2004) PL on average 33% cheaper (AC Nielsen 2004) Price differences are highest in soft drinks and cleaning products Private label spending highest in discount stores (71%) Retail Institute: 73.8% of households at least once bought a PL Highest PL sales value in paper tissues, liquid oil, milk, specialty cheese, processed meat, yoghurt, tea, household cleaners, dishwash detergents, fruit juice. When looking at PL unit sales, also other categories such as biscuits & cakes and pasta score high.