Wal-Mart stores go private (label)

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As Sears, Roebuck & Co. built such store brands as Kenmore, Craftsman and DieHard, a little-known Arkansas retailer pursued a different idea.

Sam Walton was creating a discount powerhouse out of cheap small-town real estate, ruthless efficiency and low prices on brand-name goods. Today, with Wal-Mart's sales quadruple those of Sears, Mr. Walton's way has proved superior.

Even so, the victor is borrowing a tactic from its long-vanquished foe in creating its own brands. In the past year, Wal-Mart has rolled out such brands as White Cloud paper products, Spring Valley nutritional supplements, Sam's American Choice detergent and, just last month, EverActive alkaline batteries.

Ol' Roy, named after Mr. Walton's Irish setter, has become the best-selling dog food brand in America. And although those are unadvertised, Wal-Mart's EverStart car batteries have become as ubiquitous on TV sports programming as Sears' DieHard ads once were.

Unfortunately for brand marketers, Wal-Mart's newfound devotion to store brands is where it's resemblance to the darker side of Sears' past ends. Wal-Mart's private-label push is steadily stoking up-creating a fearsome rival-even as the chain's overall sales growth remains on fire. Long the nation's biggest mass-merchandiser, Wal-Mart is on pace to become the biggest food-store chain this year.

Brand marketers should be afraid, says consultant Christopher Hoyt, as Wal-Mart transforms itself from their biggest customer to their biggest competitor. The retailer will become even more of a threat as Wal-Mart nears 60% household penetration, making network TV advertising cost-effective, Mr. Holt says.

"They're going to become the marketers of their own brands," he notes. "In five years, the consumer isn't going to be able to tell the difference between a Wal-Mart brand and a national brand."

In some cases, they already can't. Besides Ol' Roy, Wal-Mart's garden fertilizer also has become the best-selling brand in the U.S. in its category. In vitamins, Wal-Mart's Spring Valley line, launched earlier this year, may soon reach best-seller standing, too, maintains Burt Flickinger, a consultant with Reach Marketing.

PRIVATE LABEL'S PROMISE

Of course, private label is nothing new to Wal-Mart-or to retailing. Neither are dire predictions of its ascendance.

During the recession of the early 1990s, some pundits predicted private-label shares in the U.S. would reach 35% to 50% by 2000, pushing the country down the European path to private-label hell for brand manufacturers. Nothing of the kind happened. In the second quarter of 1999, private-label dollar shares in package-goods categories of food, drug and mass merchandise reached 14.3%, up only marginally from 13% in 1994.

One reason private-label brands didn't grow faster is that the 1990s saw the explosive growth of Wal-Mart, which emphasized private labels far less than its supermarket rivals. While roughly 25% of Kroger Co.'s sales come from store labels, Wal-Mart's private-label sales in package goods are believed to be more in the range of 10%; they are relatively understated because of Sam Walton's commitment to branded products, which has been carried on by current management, Mr. Flickinger says.

So why is Wal-Mart suddenly turning to a bigger, better private-label program?

Besides the obvious lure of better profits, Wal-Mart's private-label push is linked to a number of marketing and strategic forces at play in its plans to expand nationally and globally. Wal-Mart's focus on rolling back prices, which puts the retailer at odds with manufacturers, is one factor.

Record economic expansion or no, Wal-Mart's customer base remains the 60% of consumers in this country who still have not realized any real dollar gain in income since 1970, Mr. Hoyt says. To serve those consumers, Wal-Mart claims to have rolled back 25,000 prices in the second half of 1999 alone, saving them $8 billion, Mr. Flickinger says. In the past three years, the price rollback program has helped increase weekly customer counts from 80 million to a brisk 100 million, he adds.

HAGGLING

But the whistling, happy-face price rollback character that has become Wal-Mart's icon has a more sinister countenance for product marketers.

Manufacturers always had incentives to give Wal-Mart the best price to get merchandising support and shelf space, says Paul Kelly, president of Silvermine Consulting. Now, however, Wal-Mart is increasingly haggling even beyond the best offer.

"They've been turning more to manufacturers than in the past for margin growth," he says.

Manufacturers, meanwhile, have generally gotten more aggressive on pricing in the past year to fatten sales amid years of sluggish growth, Mr. Flickinger notes.

Enter private labels, particularly premium-price private labels, which are slightly less expensive than premium brands but look like the exclusive premium products.

"I think the key is that it is premium," says Andrew Shore, analyst with PaineWebber. "I think premium is there to almost forever limit the ability of manufacturers to raise prices. It's really a price cap."

Most consultants see building store brands as a fairly expensive means for Wal-Mart to control prices, even though growing excess capacity is putting more manufacturers into the private-label business. Store brands also play into other Wal-Mart strategies.

"They're going global," says Ken Harris, a partner with Cannondale Associates. "They believe the brands they sell can mean more to international consumers than national brands in the U.S., and they're probably right."

The higher private-label shares and lower disposable incomes in many overseas markets also are likely influencing Wal-Mart's growing interest in private label as it, like many of its suppliers, looks to manage its brand globally.

"Even if [Wal-Mart store] brands weren't successful in the U.S., the potential for them being successful overseas is much greater," Mr. Harris says.

Store brands also provide Wal-Mart with a point of difference that the growing ranks of dot-coms can't match, as it prepares a stronger entry into e-commerce next year, Mr. Flickinger says. They could even figure into Wal-Mart's efforts to expand its presence in the Northeast U.S-which, like Europe, presents such obstacles as high real-estate costs and entrenched opposition from local governments.

Not only could store brands help offset higher costs for Wal-Mart in potential new markets, but they also could help Wal-Mart compete more like a supermarket as it experiments with its smaller, lower-volume neighborhood market format.

That format could expand in a hurry if-as Mr. Hoyt believes it will-Wal-Mart buys the Food Lion grocery chain, which in turn will give it control over retail chain Hannaford Brothers and an overnight presence in New England without having to struggle with town councils over zoning and permit issues.

Regardless of the motivation, Wal-Mart store brands create major challenges for package-goods marketers.

"They've definitely served notice on the brand manufacturers that if you want to survive, you'd better have a reason to exist," says William Steele, analyst with Bank of America Securities. "Second- and third- and fourth-tier brands that don't bring consumers to the shelves are going to have a very hard time."

Mr. Hoyt, in fact, believes phase two of Wal-Mart's program will be ridding shelves of brands that no longer make sense after Wal-Mart has built successful store brands.

BRANDS' RAISON D'ETRE

In the past, manufacturers' brands could stay in Wal-Mart even if they didn't have a strong consumer following, as long as they delivered a price low enough to let Wal-Mart make a margin. But if Wal-Mart can build store brands that generate better margins than category also-rans with little consumer loyalty, Mr. Hoyt says, it will jettison those brands.

By eliminating some of the other competition, Wal-Mart store brands could even be allies of category leaders such as Procter & Gamble Co. or Kimberly-Clark Corp., says Gary Stibel, a consultant with New England Consulting.

K-C has been monitoring the impact of White Cloud diapers in weekly sales and share data, and has seen no impact on its category-leading Huggies diaper brand, says Kathi Seifert, exec VP at the company.

"Our belief is that [White Cloud] will take share from brands that are less premium, like Luvs and Drypers," she says.

Even major marketers, however, have second-tier brands in some cases. And the success of White Cloud could ultimately push P&G's Luvs off store shelves, Mr. Harris says.

The jury is still out, however, on whether Wal-Mart can move beyond building the brand on its storefronts to building brands on its shelves.

LACK OF `MARKETING MINDS'

In the U.S., neither Sears nor supermarket chains have seen store-brand programs deliver strong same-store sales growth. One reason, Mr. Harris says, is that retailers "don't have enough marketing minds in their building to pull it off, or they miss trends. They're suddenly relying on themselves to figure out the next big thing, and they can't."

An exception is Target Stores, which has made its private-label merchandise into fashion leaders, Mr. Harris says.

But given its more downscale clientele and down-home image, Wal-Mart doesn't have to be a fashion leader. It could succeed by being a fast follower, Mr. Harris says.

While Ol' Roy has flourished without advertising and EverStart batteries have flourished with it, Wal-Mart still hasn't shown it can build its own brands consistently. The chain abandoned its Sahara Supreme line of towels earlier this year, and its apparel and housewares labels have lagged Kmart's Martha Stewart or Target's Cherokee lines.

Moreover, in other cases such as White Cloud paper products or Faded Glory and Earth Shoe apparel, Wal-Mart has moved to mine residual equity of old brands, but hasn't proved it can build equity on its own.

ASKING FOR HELP

"[Wal-Mart is] a threat, no doubt about it," says one consultant. "But they require a lot of help in developing these brands. They aren't geared to do it. They aren't qualified to do it."

Whether the company is willing to go out and get that help remains to be seen. Though Wal-Mart solicited suggestions from its agencies for a brand name for its new detergent, it ultimately settled on extending its existing Sam's brand, using what several industry observers label as uninspired packaging.

Though he believes Sam's American Choice detergent could rack up $100 million to $150 million in sales and take share from second-tier players, Mr. Shore calls the branding effort behind it "a joke"-one that overseas consumers won't get.

Besides simply not catching on with consumers, Wal-Mart also risks damaging its highly cultivated image if something goes wrong with its private labels.

SPREADING DISTRUST

"The fire can either warm the house or burn it down," says Gordon Wade, a Cincinnati consultant and former P&G executive. "Companies like Wal-Mart don't have their own quality-control labs. They don't have their own manufacturing. And if you have a problem, one category can spread distrust within the Wal-Mart base for various Wal-Mart products."

One scare for Wal-Mart came a year ago, when the chain recalled packages of its Ol' Roy dog food in Dallas after 25 dogs died of liver damage caused by fungal toxins in food made by its supplier. Separately, Wal-Mart wrestled for years over publicity connected to charges its Kathy Lee clothing line was made by child labor overseas. Wal-Mart ended that exclusive relationship last year.

RIVALS BOOST ADS

But brand marketers aren't waiting for Wal-Mart to stumble. The company's embrace of its own premium brands has been one factor that has led some players to boost advertising in hopes of surviving the onslaught.

Such vitamin brands as Rexall Sundown and Nature Made began to get their first major media advertising in the past year, in part to stem the Wal-Mart threat, Bank of America Securities' Mr. Steele says. Likewise, K-C and Georgia-Pacific have begun advertising their Scott, Angel Soft and Sparkle brands this year as Wal-Mart prepared to roll White Cloud.

Even mid-tier brands can survive at Wal-Mart if they can develop a niche or a consumer following that Wal-Mart's own brands don't serve, says John Bess, consultant with Price Waterhouse Coopers.

"Wal-Mart people are business people first," Mr. Harris says. "They are not going to do something just to cling to the precept that ours is better. If a company is doing it better than they are, they will stay with it."

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