The Right Way to Fight for Shelf Domination

Manufacturer Brands Can Hold Their Own Against Retailer Brands

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The past two decades have seen a rapid increase in the share of private labels, also referred to as store brands or retailer brands. Private labels have outperformed manufacturer brands in all but one of the past 10 years. They now account for 20%, 34% and 45% of sales in the U.S., Germany and the U.K., respectively. If the U.S. closes the private-label development gap with the U.K. by half, manufacturers will lose tens of billions of dollars in annual sales. This will put tremendous pressure on brand manufacturers.

Illustration: Dan Page
The single best approach to combating private labels is offering innovative new products. In fact, private-label share is 56% higher in categories with low innovation activity compared to categories with high innovation activity.

To visualize the power of retailers, consider that Wal-Mart accounts for more than $10 billion of Procter & Gamble's annual sales -- exceeding the GDP of Jamaica. How should manufacturers respond when their largest customers are also their fiercest competitors?

First, the bad news: There is no single answer. Whatever consultants or marketing gurus may claim, no magic potion exists. But through hard work and consistent effort, brand manufacturers can address the private-label threat in three ways: by partnering effectively, innovating brilliantly and fighting selectively.

Effective partnerships
Manufacturers often view fast-growing retailers such as Amazon, Best Buy, Costco, Save-A-Lot and Wal-Mart as destroying value because they sell manufacturer-branded products at very low prices. This generates conflict for manufacturers vis-a-vis their traditional, and often inefficient, channels. But those retailers are growing precisely because they are extremely efficient in getting branded products from manufacturers to consumers. Lower distribution costs mean they are taking branded products to customers at lower prices, thereby expanding the market. Brand manufacturers have to follow and distribute their products where consumers want to shop or they will be stuck in dying channels. As Brenda Barnes, CEO of Sara Lee, put it: "Where the customer buys our type of product, we should be there." Sara Lee now sells pies at Save-A-Lot. Efficient retailers are not the enemy.

Retailers want brand manufacturers to help them differentiate through exclusive brands and products. Brand manufacturers can cater to retailers' need for differentiation by developing exclusive brands and SKUs. Estee Lauder recently created four brands (American Beauty, Flirt, Good Skin and Grassroots) that are, for now, at least, available exclusively at the mid-priced department-store chain Kohl's. Kohl's cannot compete against Wal-Mart and Target on the mass-market brands available from companies such as Procter & Gamble and Unilever. And it makes no sense for Estee Lauder to move prestigious brands such as Lauder and Clinique from traditional department stores to Kohl's. The exclusive brands may allow a mutually successful partnership if Kohl's is able to deliver the volume and Estee Lauder is able to keep its costs for the new brands under control.

In their new book, due on shelves Feb. 13, authors Nirmalya Kumar and Jan-Benedict E.M. Steenkamp argue that brand manufacturers aren't using the right strategies to counter retailers and private labels. Want to read more?
Buy it here.

Manufacturers may also consider offering a dedicated SKU consistent with the individual retailer's strategy. Macy's is an example of a department store that is increasingly relying on exclusive merchandise to differentiate itself from competitors. Collaborating with brand manufacturers such as Tommy Hilfiger, it now sells $2 billion in SKUs in Macy's stores alone.

Brilliant innovation
The single best approach to combating private labels is offering innovative new products. With new products, Wal-Mart does not have the benchmarks or the historical data to drive down the price. The supplier does not have competitors, and the products have not been bid out to private-label makers. That is how suppliers can obtain higher prices and margins.

Our research across scores of categories in more than 20 countries around the world underlines the importance of innovation: Private-label share is 56% higher in categories with low innovation activity compared to categories with high innovation activity. Once innovation activity in a market declines, brand manufacturers allow private labels to catch up. Brilliant innovation requires changes in three key processes: new-product development, new-product launch and intellectual-property protection.

In new-product development, a key parameter of the new product's attractiveness is its degree of novelty. Our research, involving hundreds of new-product introductions in various countries, consistently reveals that a U-shaped relationship exists between newness and market success. Products of incremental innovation or radical novelty are more successful than products of intermediate newness. Products of intermediate newness appear to be stuck in the middle: too high in complexity compared with products of incremental newness, and too low in relative advantage compared with radical new products. Within this general rule, in the long run, radically new products offer the best platform for growth.

New products are increasingly being introduced in multiple countries. The manufacturer can follow a so-called waterfall strategy, in which the product is sequentially introduced in one country after another, or a so-called sprinkler strategy, by introducing the new product in multiple markets simultaneously. A waterfall rollout is most effective for radical new products, while the sprinkler strategy is most effective for incremental new products. For radical new products, getting the marketing strategy right is more difficult, and the brand manufacturer learns from failures in the initial country in order to get it right in subsequent countries. On the other hand, it is much less challenging to develop a marketing strategy for an incremental innovation, and there is a greater danger that success in other countries will be pre-empted by fast imitation by other manufacturers or retailers.

In terms of intellectual-property protection, brilliant innovation is wasted if retailers constantly copy successful products. Manufacturers have been reluctant to sue retailers for fear they will be thrown off the shelves, but this situation is untenable. Brand manufacturers need to develop a reputation for aggressively pursuing retail copycats. A tough enforcement reputation makes it more likely the retailer will copy other manufacturers who do not have such aggressive patent-protection histories. No wonder Kraft has recently doubled its number of patent lawyers to ensure its innovations are adequately protected.
Nirmalya Kumar is professor of marketing, director of the Centre for Marketing and co-director of the Aditya V. Birla India Centre at London Business School. He is also a consultant to more than 50 Fortune 500 companies.
Nirmalya Kumar is professor of marketing, director of the Centre for Marketing and co-director of the Aditya V. Birla India Centre at London Business School. He is also a consultant to more than 50 Fortune 500 companies. Credit: Keith Waller

Selective fighting
The rise of private labels has put a squeeze on manufacturer brands. But the impact has been asymmetric. It is the weaker manufacturer brands-those that do not occupy the No. 1 or No. 2 market position-that have borne the brunt of the negative impact. Given the amount of innovation and advertising required to keep a brand alive and fit to fight against private labels, a manufacturer can support only a limited number of brands. Each company must have a clear vision with respect to the categories in which it desires to compete and with which brands. The answer is to fight selectively rather than on all fronts.

Procter & Gamble has done a remarkable job rationalizing and turning around its brand and product portfolio. Under CEO A.G. Lafley, P&G has shed the Punica and Sunny Delight juice brands, Jif peanut butter, and Crisco pastry shortening, among others. In turn, P&G has acquired Wella, a German beauty company; Clairol; and Gillette. The result has been a lower exposure to foods, where sustainable innovation against private labels is more difficult. Instead, the portfolio has a much sharper focus on health, beauty and personal-care products, which tend to have higher margins and lower private-label competition. Health and beauty now account for more than half of P&G's portfolio. In general, relative to food categories, consumers are more easily persuaded of the emotional benefits of health and beauty products.

In 2000, P&G owned 10 brands with annual sales of more than $1 billion. Today P&G has 22 billion-dollar brands. By shedding product categories and brands, P&G is able to reinvest sales proceeds into brands, such as Pantene, Pampers, Crest and Tide, where the firm has the best chance of winning. Rather than having innovation efforts spread over many small brands, R&D can work on the most promising brands and products, while marketing can concentrate on exploiting their maximum potential. The only exceptions to the rule of focusing on the No. 1 or No. 2 brands in the category are premium niche brands.

It is not that brands are dead. As Colgate-Palmolive, P&G and Unilever are discovering, they are alive and kicking. But some of them are now owned by retailers. Consider this: What single name do homeowners think of when they want to replace a leaky faucet-Delta, Kohler or Home Depot? Retailers have succeeded in building themselves up as trusted brands in customers' minds. Overall, manufacturer brands still have an edge on this, but the gap has substantially closed over the years.

Manufacturer brands will always be there, but they have already lost some of their importance. Only when they respond aggressively to the threat from store brands will manufacturer brands be able to recapture their luster.
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