Brand Giants Weakened as Retailers Get Savvier

As Media Dollars, Talent Shift to Stores, Can CPG Players Preserve Margins?

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BATAVIA, Ohio (AdAge.com) -- The store increasingly is becoming the focus not just of distribution but of marketing for package-goods players. But as attention and dollars shift there, it's raising big questions about the balance of power in the industry -- and whether consumer-package-goods companies can continue to justify or maintain their longstanding edge over retailers in profit margin.

For nearly a decade, retailers have been raiding the marketing talent of the package-goods industry.
Trader Joe's: It and others in private label are leaders in food innovation.
Trader Joe's: It and others in private label are leaders in food innovation.
Most major retailers now have a CPG-trained chief marketing officer and several more CPG-trained managers running their private-label programs. Now retailers are making an increasingly convincing grab for the consumer-media dollars of their branded suppliers.

A recent survey by Deloitte Consulting and the Grocery Manufacturers Association, in fact, gives shopper marketing higher marks for return on investment than most conventional media. It also found that big package-goods marketers are jumping on the shopper-marketing bandwagon fast, and players who had lingered on the sidelines are ramping up quickly. But retailers are ramping up their own shopper-marketing departments even faster, the survey found -- creating a crush for the same relatively small pool of experienced talent.

The disturbing question for package-goods players is: If the marketing talent and media budgets are flowing toward retailers, will the profit margins follow? After all, the brand power and marketing savvy of package goods have long been key justifications for higher prices that result in at least double the margins retailers that sell their goods get.

Knowledge is power
So tools such as Nielsen's Prism for measuring the media and sales impact of in-store programs could become a two-edged sword: They could help manufacturers spend more wisely, but they could also help demonstrate to retailers the power and profitability of using their stores as media to promote their own brands, said Craig Apatov, exec VP-marketing and strategy of MillerZell, a firm that handles store design and planning in-store marketing for retailers and manufacturers.

"Retailers need to grow their own brands, and they're not as willing to turn their stores over to pure supplier-provided messaging," Mr. Apatov said. "You also have this movement of more-sophisticated marketing talent into the retail channel -- people who understand metrics and how to build brands. And one of the biggest ways for retailers to drive profitability is to increase private-label share."

One of those many CPG transplants into retail, who now manages private label for a major retailer, agreed. "There's this gray area that's growing between what a retailer used to be and what a retailer will be in the future," he said. "A big component of that is retailers investing in their brands. ... How we talk about it internally is that there are always going to be categories where we will have a continued and valuable relationship with national brands. ... On the flip side, there are places where customers are giving us more and more permission and the national brands no longer have a significant edge anymore."

Health care is one area, he said, where retailers likely will never invest the sort of research and development to lead innovation. On the other hand, food is an area where big and/or fast-growing retailers such as Kroger, Publix, Target, Trader Joe's, Costco and more are, in many cases, leading innovation.
Best ROI
They can offer quality superior to that of national brands and are able to move faster than branded players because they use contract manufacturers and aren't locked into existing capital investments. They also can test quickly and cheaply and then market effectively for free using their own stores, he said. Having worked both at a consumer-package-goods marketer and a retailer, he said the barriers to getting a product out to test in a store are considerably lower for a retailer.

The talent migration in recent years toward one grocery chain, Safeway, alone is fairly astounding. In June, Safeway named as its new CMO Diane Dietz, a former VP-North American oral care at Procter & Gamble Co. who helped turn around a declining Crest brand in recent years. Heading Safeway's private-label program is James White, credited by industry executives with leading reinvention of trade-marketing practices at Energizer Holdings, then Gillette Co., and helping lay the groundwork for P&G's new system.

But there are those who question the degree to which more-sophisticated marketing and the growing importance of the store as a marketing vehicle can shift the balance of margin toward retailers.

Dangers
Jon Kramer, chief marketing officer of Alliance, a division of in-store-marketing vendor Rock-Tenn Co., said the extreme private-label players in the U.S., including Trader Joe's, Costco, Tesco's recently launched Fresh & Easy stores in California, and Wal-Mart's competitive response to them, Marketplace, are all largely going after the same urban, upscale base, which could soon be saturated. European players such as Tesco, he said, have acknowledged going too far with private label and are now pulling back some in favor of national brands.

Mr. Kramer said the biggest trend he sees in shopper marketing is "solution selling," or bundling of offers and displays to create meals or solve home-cleaning problems. Those aren't necessarily owned by national brands, but they don't exclude those brands either.

One veteran package-goods marketer said the day he arrived on a customer team, one of the retailer's executives told him they already had as many package-goods marketers as his company and didn't particularly need his help. But marketing savvy or attitude won't change other fundamentals, he said. In particular, as retailers invest more in R&D, design and marketing behind their own labels, that will also diminish the margin edge private label has for them compared with supplier brands.

He said the influx of marketing savvy and media dollars from package goods to retailers almost inevitably will erode the margin differential between the two. But the shopper-marketing piece, at least, has the potential to be a "win-win," he said, at least for retailers and manufacturers, given that it largely represents a transfer of spending -- and margin -- from media companies to retailers.

Well, make that win-win-lose -- unless media companies such as News Corp., CBS, NBC and ABC, which now have relatively small in-store-media stakes, can capture a much bigger piece of the action.
Source: Company financial filings, Yahoo Finance

P&G's Lafley: There's nothing we can do about it

You might expect Procter & Gamble Chairman-CEO A.G. Lafley to disagree with the retailer-ascendancy theory. But he doesn't. Instead, interviewed briefly following a P&G press conference at Cannes in June, he outlined an "If you can't beat 'em, join 'em" philosophy.
Procter & Gamble Chairman-CEO A.G. Lafley
Procter & Gamble Chairman-CEO A.G. Lafley

"It's happening anyway," he said. "Some of the big retailers, to run their programs, they're looking at P&G or Unilever or Nestlé people. We're not going to stop that. They can work with the same agencies. ... So our point of view is at least if we're in there co-creating the in-store marketing-communication programs, we have some influence over the destiny in our categories and with our brands."

P&G, he said, isn't as susceptible to private-label encroachment as some marketers. And the numbers appear to bear his sentiment out: An analysis of ACNielsen data by Sanford C. Bernstein showed a 0.4-point spike in private-label shares in mainly P&G categories for the four weeks ended Sept. 6. But P&G's share slipped less than a 10th of a point.

Those numbers don't include Wal-Mart Stores, where P&G has long been disproportionately strong and which several industry executives said has been de-emphasizing private-label.

Less private-label emphasis
In fact, Wal-Mart, which has been benefiting from increased traffic thanks to an economic downturn, is putting less clout behind much of its package-goods private-label business in response to 2006 customer-segmentation research that showed national brands are crucial to its core consumer base.

Even so, according to Craig Apatov, exec VP-marketing and strategy of MillerZell, Wal-Mart's global private-label business is bigger than Unilever, Coca-Cola Co. and PepsiCo combined.

Of course, much of Wal-Mart's emphasis on private-label has been in other areas, such as music or housewares, where exclusive deals with such bands as the Eagles has come close to making them a Wal-Mart house brand.

A worsening economy and growing private-label shares elsewhere, however, could tempt Wal-Mart to re-emphasize that area, too, in order to chase margin, some industry executives noted.
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