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

2. 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

3. 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

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

5. 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

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

7. Building brand equity through innovation and functional advertising

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

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

10. Building brand equity through
advertising against copy-catting

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

12. 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
________________________________________________________________

13. 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

14. 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

15. 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
________________________________________________________________

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

17. 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)

18. 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)

19. 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)

20. 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)

21. 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!

22. 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
________________________________________________________________

23. 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

24. 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

25. Outer case
works
does not work

26. 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),
Deleersnyder, Dekimpe, Steenkamp, and Koll (2007), ‘Win-win strategies at discount stores,” Journal of Retailing and Consumer Services.

27. 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.