Sunday, 23 September 2012

The Changing Face of Private Label

Ever since the 1980’s when Loblaws Canada introduced a premium private label “Decadent” chocolate chip cookie which tasted miles better than any branded equivalent, private label has ceased to be a poor relation and became a potent weapon in the retailers armoury.

Once an inferior substitute for brands, private label marketing  evolved into the well known tiering strategy of “good, better, best” with most attention paid to “best” because those were days of affluence when consumers shelled out vast sums regardless of whether the quality justified the price, and were happy to pay for the premium label.

Now, in a very different economic  climate retailers are once again rethinking their strategies.
They face multiple challenges to keep customers, and grow sales and profits.

Shopping behaviour is well documented, and few who are interested in the food industry will be unaware of the consumer search for value, and the increasingly creative ways that retailers are responding, like cheaper petrol,  money off in store, bogofs (buy one get one free) or “threefers”, (three for the price of two).

The biggest battle ground has been branded goods. Whether it is Sainsbury’s promise to refund if a branded shop on a given day could be bought cheaper at Tesco or ADSA, ASDA’s promise to be 10% cheaper, Waitrose’s promise to match Tesco on branded goods ( promotional activity excepted), orTesco’s penchant for price promoting, branded goods have become the punchbag of shopping. As a result, depite the pressure put on branded manufactures to fund promotions, retailers are struggling to make profit from branded goods.  
The question facing retailers is how to keep sales and profits rolling, and the answer is through private label.
Private label offers flexibility to address the needs of most shoppers from affluent to cash strapped.  If it gets the quality/price/taste equation right it can be a tremendous tool for generating loyalty. And it does this in an environment where price comparisons between stores are difficult, bordering on  impossible.

So we see £millions being poured into private label development, at the value end of the spectrum where, according to Kantar Worldpanel sales of value lines are rocketing, up 13% in May 2012 compared just 1% last year, and at the premium end which has traditionally been a source of substantial profit but has seen sales performance swing from +10% last year to minus 1% in June of this.

The range of value products is growing as are retailers efforts to explain to customers why they represent a good buy. Tesco say they “are proud to bring you Everyday Value – quality and value for everday eating, cooking and living”. Morrisons M Savers go flat out on communicating price, and visitors to their website are guided by price bands – under 30p, under 50p, and under £1.

At the other end, retailers are busy developing premium ranges that rely on provenance and quality of ingredients, like Sainsbury pasta which comes from a family firm in Puglia, Italy. Morrisons M Kitchen ready meal range has been developed by celebrity chefs.

Private label is also good for retailers in that, with the exception of Morrisons they own few production assets relying instead on suppliers to make the products. So if an idea does not work they do not bear the burden of factories lying idle, or workers laid off because demand was less than hoped.

Expect to see the private label battle intensify over the coming months, and branded suppliers to do much head scratching about how to fund both advertising to keep their brands front of mind with consumers, and cut price promotions demanded by retailers.

Friday, 14 September 2012

Multi Channel Retailing - Is It a "Must" For Success?

Multi channel retailing is business speak for offering customers more than one way to buy something be it a shop, mail order, online, or through a mobile phone. The concept is further confused by defining different types of shops as channels, so we have the convenience channel, the discount channel, and the standard mainstream grocery shop.

The words multi channel strategy appear in most major company reports and those not seen to be participating get criticised.

Morrisons supermarket has been lambasted because it is not represented in the fast growing channels of on line retailing and convenience stores, and this has led to a drop in sales and market share. On the other hand, Ocado which is solely available on line has been criticised for missing out on sales at peak periods because there are not enough hours in the day or vans available to deliver the increased amounts people have ordered.

Large retailers are investing £millions into multi channel development.  Although trialling food sale on line, and offering customers the opportunity to order online and collect in store, Walmart is putting most of its emphasis on opening stores – small ones in urban areas, medium sized stores for towns and more of the huge supercentres for which they are famous. Marks and Spencer has said that whilst web based channels are important they feel that stores will remain the core of their business.

New and eye catching digital developments are announced daily.  At Gatwick airport Tesco has built huge screens that look like a fridge and the idea is that holidaymakers waiting for their flight can scan products from the screens on to their phone, ping to Tesco, and have their groceries delivered immediately they arrive home again, cutting out the need to make a stop at the shops after a long tiring journey.

Certainly in today’s fast paced society there is something compelling about the notion that consumers must have a quick and easy way to purchase whatever time of day or night the urge strikes. The rapid growth of food shopping online, said by the Office of National Statistics to be 14-15% per annum compared with 3% for the market as a whole, and the explosion in ways to access the net whether through smart phones or tablets or the standard computer, seem to suggest that food retailers large and small should be seriously examining online retailing, or risk getting left behind.

Nevertheless, there are question marks over all this multi channel effort.  It is noticeable that whilst all retailers are keen to talk about sales growth, few mention profits, and indeed there is recognition among most retailers that online will never be as profitable as shops. There is little discussion of the different skills required to run different channels. And despite all the effort, the proportion of food retailing done through the internet remains small – around 2 or 3% according to Mark Price of Waitrose. Even mighty Tesco is estimated to have just 6% of sales made on line, and Sainsbury 4%. The fastest growing retailer of them all, Aldi, avoids online shopping possibly because the costs involved might mean they cannot continue offering the very low prices which makes them the success they are.

Anyone deciding to experiment with a new channel may first want to ensure that they are operating a secure, cash generative core business. It will be important to have the requisite skills in place, to capture all the costs associated with the new venture, to ring fence the investment and returns, and to accept that it will take time to achieve success.

Monday, 3 September 2012

The Co-op - Not Good With Food

If ever there was a company which should be flourishing in today’s economic climate it is the Co-op, yet last week it posted a 16% drop in its food business profits for the last 6 months. Like for like sales are down 1.2%, and market share is sliding.

The Coop should have much going for it. It operates in the convenience sector which is growing fast and is now worth nearly £34 billion or 21% of the UK food and grocery market, driven by factors such as consumers shopping locally to save on petrol costs, and the benefit of longer opening hours. With nearly three thousand stores it has a scale advantage that smaller shops envy, and it is Britain’s biggest farmer which should give it access to high quality food at reasonable prices. It also claims to be ethical in its sourcing policy.

Peter Marks, the Co-op’s chief executive, attributed the drop in profits to budget conscious consumers and a particularly competitive grocery trade, where over 40% of goods are sold on promotion. Well yes, but none of this is new news, and the Co-op has failed to deal with market place reality.

Price is not everything. If the Co-op offered something different and special then the fact that it is a bit more expensive would not be a stumbling block. A trip to several Co-op stores seems to indicate that what can be bought is anything but special. Despite the claim to be “Good with food”, there is a minimal amount of space dedicated to food, and what is available often looked tired and unappetising.
Add to this a sense that nothing new or exciting has happened to the Co-op food offering in years, and it is possible to see why shoppers might be tempted to pop down the road to a Tesco or Sainsbury or even Marks and Spencer and Waitrose who are all now operating in the convenience sector, and upping their game with a focus on value, innovation and good if not superb quality.

It is difficult to avoid the conclusion that the Co-op has been badly managed, and it is perhaps here that we see the downsides of the cooperative model where operators are insulated from shareholder pressure to improve performance. Indeed if the Coop were publicly quoted it would have faced demands for management changes and a strategy rethink. Instead, the chief executive has decided to retire at a time of his own choosing leaving a mess at the food business as well as a huge challenge on the banking side which also saw a big drop in profits and must now set about the huge task of integrating the Lloyds TSB branches it recently acquired.