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We were at Staples the other day, and noticed that an enormous number of products there seemed to be private label. Then, we went to Costco, and saw that its private label tuna fish was actually more expensive than the national brand positioned next to it. Later that day, we shopped at both Trader Joe’s and Stew Leonard’s, two retailers that do an extraordinary business in packaged and fresh private label products, respectively.

Coincidence? We think not.

The simple fact is that private label is one of the chief weapons in a retailer’s ability to differentiate itself. And so it was timely when we received “over the transom” (a phrase, we should note, that is so completely out of date that it clearly defines us as an old guy simply for using it) a report from management consultant W. Frank Dell on private label strategies. Dell’s premise is that the most common approaches to private label lack any foundation in economic theory, which results in millions of sales and profit dollars being lost each year.

With this in mind, we decided to engage Dell in this exclusive e-interview:

MNB: Traditionally, Private Label has been priced attractively compared to National Brands…and yet Costco seems to always have its Private Label tuna priced higher than the comparable National Brand, What does this tell us about Costco both strategically and economically?

Frank Dell: To start with you have picked one of the few retailers that actually has a Private Label Strategy. Costco started their Private Label program by co-branding with National Brands, which established their quality quotient in the consumer’s mind. They were then able to expand their Private Label line as a truly National Brand equivalent and therefore did not require the large price discounts you have traditionally observed.

Recently, Costco was selling Kirkland Albacore tuna (8 pk, 6 oz) for $8.99, Bumble Bee Albacore tuna (10 pk, 6 oz) for $10.99 and Chicken of the Sea chunky light (16 pk, 6 oz) for $8.99. On a per unit measure Kirkland is the highest, yet on a transaction measure they are $2.00 less than Bumble Bee and equal in price to Chicken of the Sea. This illustrates two points we make in our most recent edition of Dellmart Perspective. First, retail pricing tactics are different by consumer shopping trip. Pantry loading (club) is a different shop than fill-in or immediate consumption (supermarket). Second, competitive type Private Label products should be priced based on true quality and strategic achievement. Excessive price discounts equate to lost sales and profits.

MNB: Is it your sense that when Tesco starts opening stores in the US, it will use Private Label – especially in the prepared food arena – the same way as it has in the UK? How do you think Tesco will differentiate itself both in terms of Private Label and Prepared meals? And how should competitors in California, Arizona and Nevada respond?

Frank Dell: Prepared food, fresh meat and produce are all store branded by the consumer, yet typically are not Private Label. This is a missed opportunity and an indication of not having a Private Label strategy. Private Label prepared food was started by UK retailer Marks & Spenser, followed by Tesco and Sainsbury.

American retailers are facing a very real competitor in Tesco, as they are one of the world’s best merchants. They were early to learn and now excel at target consumer marketing. Further, Tesco has correctly identified that the American shopper is trending towards the European pattern. Meaning weekend shopping is for pantry loading and daily is for immediate consumption.

I anticipate Tesco will open these stores with 30% to 35% Private Label including prepared food. Over time Private Label will increase to over 50 percent. Just like with Wal-Mart, local retailers will require a plan to effectively compete. It starts with target consumers. When a retailer’s target consumer shops Tesco, it loses sales. One hint: the Tesco shop will be a fast one, thus consumer time from entering the store to leaving will be a factor.

MNB: Something we noticed recently while in a Staples was how much product it has converted to Private Label…the numbers seem to grow with every visit. From a pricing perspective, what are the advantages of Staples making such a move? And what is the “below the surface” strategic point that most people may not be seeing?

Frank Dell: Non-food retailers are classified as good, better or best based on their merchandise quality. Staples would be classified as “good” since they sell lower quality merchandise. This achieves a low price image for Staples, which helps capture the sales of traditional stationery stores. Staples’ founders were from the grocery industry and their Private Label program reflects this. Initial Private Label items were basic or core items of lower quality or second tier aggressive priced. This re-enforced their low price image.

As we point out in our Dellmart Perspective, consumers purchase based on value, which is the ratio of quality and price. Quality is defined as how a consumer expects the product to perform. Low quality and low price do not always equate to high value. Too low a price can be detrimental to sales.

I have observed the same increase in Staples’ Private Label items and space allocation for them. It is now to the point where a consumer must hunt for a name brand item. Staples appears to be following the Ann Page plan so named for A & P’s failed Private Label program. Their Buyer/Merchants appear to have a case of Gross Margin infatuation. They are so thrilled with the Private Label Gross Margin percent they just keep adding items and space. This lacks a true customer focus and a real Private Label strategy.

Activity Based Costing studies have shown excess space allocation turns even high gross margin items into negative profit contributors. Slow selling Private Label items are rarely profitable. All too often, Gross Margin infatuation leads to low volume Private Label items. Over loading Private Label works when you are the only store in town, but long-term consumers will seek alternative sources.

MNB: What do you think is the biggest missed opportunity today for mainstream retailers that may have Private Label products, but aren’t using them effectively?

Frank Dell: The single biggest missed opportunity is not having a comprehensive Private Label strategy making the store a customer destination and achieving a significant competitive point of difference. Most retailers’ rationale for Private Label is as a profit improver. Meaning their objective is to increase their gross margin percent. New traditional retailers pull customers into their store with their Private Label. In the real world most retailers have outsourced their Private Label program to a broker and use rebates as a profit center. Dellmart’s Private Label Buyer Survey tells us retailers stock on average 2,300 Private Label items. The vast majority of these items are National Brand equivalents. They are rarely, if ever, aggressively promoted or featured. If Trader Joe’s can utilize Private Label to make their store a true destination, why can’t mainstream retailers achieve more from their Private Label program?

MNB: What advice would you give to retailers that have a Private Label but are looking for a way to use it better both strategically and from a price point perspective?

Frank Dell: There are a number of steps retailers should be taking. Retailers should start taking control and committing the resources for a Private Label strategy that is fully integrated with the company, its format and target customers. They need to rationalize the number of store brands. Too many store brands is as bad as too few. Next, utilize their strategy to rationalize the Private Label items. Discontinue the dogs and items that don’t support the strategy. Now it is time to rebuild by creating labels that are current and convey the desired image. Retailers should not cheapen on quality as their name is on the product. High quality is always is good decision. Create and execute a promotional program that achieves their strategic objectives. Monitor progress and adjust the plan as results dictate. Retail space should be allocated based on the items’ volume with minor adjustment for the sections visual presentation. Continue to re-price Private Label items as they progress in achieving their strategic objectives. Always keep an eye on what is happening outside the company for trends and ideas. The fastest way to obsolescence is an internal only perspective.

MNB: Finally, what companies do you think do the best job with Private Label, and why?

Frank Dell: There are many great examples of what can be accomplished with Private Label. The top of the list must be Trader Joe’s. They have created unique products that consumers want and have made their store a destination trip. Duplicating their strategy is not the answer for most retailers, but it does set the bar as to what can be accomplished with Private Label. Wild Oats developed such a good Private Label program that some traditional retailers are stocking the line. This is not unlike what Loblaw’s achieved with its President Choice line. Safeway’s “O” Private Label line is an excellent tactic to reduce target customers shopping at the natural/organic formats. Ukrop’s store branding of their prepared food was way ahead of its time. Publix’s “buy a National Brand and get their Private Label for free” promotion shows commitment and faith in their Private Label. This creates trial with side-by-side comparison, what more can one ask for. Meijer’s Food Club promotions are legendary. I have watched consumer not buy just a few cans, but case after case of their Private Label.

NOTE: To get a copy of Frank Dell’s report on Private Label, just shoot him an email:
frank@dellmart.com

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