A-Brand Shelf Space Under Attack
How CPG companies can defend against private labels and fresh/convenience foods
The rise of private labels and healthy, fresh and convenience foods is changing the consumer packaged goods industry. As these products pilfer shelf space from A-brands, more CPG companies are preparing to defend their territory using four strategies—fighting head-on, dominating a category, moving into fresh/convenience foods or going multi-channel. Winners in this war on shelf space will be those that choose the right mix of these.
The retail game has changed. Private labels, initially at the tail end of food retailers' product range, have gone up the assortment ladder and are now offering exclusive product ranges—sometimes at even higher prices than the original A-brands. The game also changed when ideas of "healthy, fresh and convenient" entered consumers' consciousness. The fact that such products—ready-made combination dishes or fresh, healthy microwave-able meals—were not yet branded caught the eye of retailers and they moved quickly to capitalize on the opportunity.
The impact on consumer packaged goods (CPG) companies has been striking. By all accounts, it has been an attack on their retail shelf space as more space is now devoted to private labels and fresh/convenience products, and less to A-brands. Volumes and margins have been shrinking and in many categories (such as shelf-stable food, milk products, refrigerated food and oil), there is only space for two A-brand products.
Most A-brand CPG companies are not sitting still for the attack. They are developing counter-attack strategies that are similar across geographies, but with different emphasis depending on local circumstances.
Defending Shelf Space
How can CPG companies respond to private labels and the healthy/fresh crowd? We have identified four main strategies:
1. Fight private labels head-to-head. One way to compete with private labels is to demonstrate to consumers the added value of an A-brand product, focusing on relentless innovation and marketing. This has long been the default strategy and is easier in some categories than others (for example, in razor blades versus bottled water).
Clearly, regional differences exist. For example, promotional funding is the biggest weapon CPG companies have used to counter the rise of private label products. In the United States, where private labels own 18 percent of the market, trade promotions still account for 67 percent of the marketing budget.1 In Europe, where private-label shares are 28 to 35 percent, CPGs are not only using promotions but also offering retail-specific product ranges or aggressively boosting umbrella brands. For example, Unilever launched an aggressive marketing campaign to convince customers that its products are high-quality and healthier. The company uses similar advertising formats for each of its consumer brands, with everything falling under the Unilever-brand umbrella, both in print ads and on television. In effect, this creates consumer awareness of the parent company, extols the virtues of quality and value within a given category, and then cross-brands the image across different categories to raise brand awareness.
As private labels and healthy food products make off with highly coveted retail shelf space, CPG companies are using a mix of strategies to defend their A-brand territory.
Another possibility is for CPGs to help retailers secure healthy gross margins while protecting price margins. Adjusting package size and weights so private-label products appear less attractive can boost sales and hence the retailer's gross margins (Lay's potato chips is a good example).
2. Employ a multi-channel strategy. A-brands can put pressure on retailers by expanding beyond the one-channel sales approach and using direct and indirect channels. For example, in 2010, P&G launched an online store (www.pgestore.com) to sell brands such as Gillette, Pampers and Pantene for a $5 flat shipping rate (in the United States only). By doing so, P&G began competing directly with e-commerce sites operated by retailers (such as Wal-Mart) and online-only retailers (such as www.britsuperstore.com in the United Kingdom).
Nestle has effectively eliminated the retailer by selling its Nespresso brand of coffee directly online and through select department stores in which customers can see the product (the machines) and taste the coffee. The company is "selling" its new flavors and the Nespresso experience in stores, which are arguably the only place where a brand can directly gather consumer experiences.
A-brands that decide to compete directly with the fresh/convenience category are in for a complex proposition.
In non-food retail, flagship stores have long been around. The emphasis is not so much on selling additional products as it is on presenting a type of 3D ad to the public, in which people can walk, feel and experience the product. Apple stores are a good example. So are Nokia stores, where customers learn about the vast capabilities of phones and how phones can make their lives easier. In some cases, these stores don't provide sales commissions; instead, sales associates are measured by customer feedback and sales in general, including outside sales.
3. Enter the fresh/convenience category. When PepsiCo recognized the change in demand for healthy products, it hired Derek Yach, a former executive of the World Health Organization, to help boost its healthy portfolio; the goal is to reach $30 billion in sales in the next decade.2 No one said it would be easy, however. PepsiCo, known for its carbonated soft drinks and menu of snack foods, is not readily linked to healthy food or snacks. Changing people's opinions will be as important as developing healthy products. A-labels that decide to compete directly with the fresh/convenience category are in for a complex proposition, because fresh, less processed (FLP) food requirements are vastly different from those of traditional A-brand products. Unlike products manufactured in factories, the clock starts ticking for FLP products as soon as the base components—meat, fruits and vegetables—leave the farm.
4. Dominate through cost leadership. In a cost leadership strategy, CPG companies take on both private label and other branded labels (A, B and C) simultaneously in order to dominate a chosen category. Maintaining a top position across an entire category requires blanketing it with multiple offerings—including private label—so consumers are choosing your product no matter which brand they purchase. This should come with significant entry barriers (for instance, huge-scale effects) to prevent others from breaking in. Campofrio Food Group, a European provider of meat-based products, does this by offering branded products and a significant private-label range. Dutch company FrieslandCampina does the same with its fresh dairy production. Both companies dominate categories in specific geographic locations.
What Is the Appropriate Strategy Mix?
Of these four strategic options, some are being used more than others. Fighting head-to-head via heavy negotiations and ongoing innovation is the most natural reaction and the de facto default strategy. We are seeing more CPGs under enormous pressure that will do anything to dominate their categories and leverage other (online) channels. However, the shift toward fresh/convenience products is less prevalent, as it is considered a radical change that often involves moving into entirely new territory.
Which strategy, or mix of these four strategies, makes the most sense for today's consumer packaged goods companies? We believe three elements should be looked at. First, the relative position of the CPG versus its competitors and the retailer. Second, the gross margin potential of the category. These two elements typically set the strategic direction (see figure 1). But this should be tested against a third element, the performance level of the available capabilities. Let's look at all three in more detail:
Understand your relative position. Your position in relation to your competitors and the retailer determines if a head-to-head fight makes sense. Naturally, CPGs in a power position—those that yield significant revenue from combined categories for the retailer—can more easily discuss preferred category tactics, while having sizable competitors in the same space weakens a negotiating position.
Estimate the category potential. The category's relative position as viewed by the retailer—for example, by adjusted gross margin (AGM)—allows for another stance: If you deliver "top value" to the retailer, you could compete head-to-head, but if you are the third brand, you'd be wise to dominate the category, move into new areas such as fresh/convenience or think about an exit strategy.3 Needless to say, the choice of strategy depends on the category. Commodities such as paper, meat and cookies need scale to optimize manufacturing throughput, while premium brands yield better margins and have different options to choose from once volumes change.
Recognize crucial capabilities. Implementing chosen strategies requires understanding the strengths and weaknesses of each category, as each one requires certain crucial capabilities. If you determine that one of your required category capabilities scores high in perceived value contribution to the business, but only moderately in terms of performance, you need to upgrade it as soon as possible. On the other hand, if you have a solidly performing capability that actually doesn't play a crucial role, are you sure you want to go after a given category just because you can? Perhaps it would be better to divest non-profitable parts of the business and focus on improving capabilities where they really matter. Now or in the near future.
For example, moving into fresh/ convenience requires supply chain, quality control and packaging capabilities. Misjudging the demands of distribution and storage in this category can be disastrous.
Similarly, dominating a category requires mixing two different archetypes: the traditional CPG strategy built on experience, innovation and convincing marketing, with branding strategies that persuade consumers to buy your product. It also requires strategies more typically associated with private labels, such as minimizing costs, using a copycat approach where required, and employing different packaging for different regions and retailers (see figure 2).
Fighting Back
The rise of private labels and fresh/ convenience products has changed the retail food business. While keeping in mind that retailers are not necessarily the enemy—from their perspective, an optimal mix of private-label and A-brands is the best way to maximize profits—CPGs should be prepared to fight back. Whether you decide to fight a private label head-on, dominate a chosen category or enter a new one such as fresh/convenience, expand into multi-channel distribution or decide on a mix of strategies, success will depend on developing the right strategy today and making sure you have the flexibility to adjust it as necessary tomorrow.
Authors
Bart van Dijk is a partner in the retail and consumer industries practice. He is based in the Amsterdam office.
Remko de Bruijn is a consultant in the Amsterdam office.
1 Any investment made by a CPG with an individual retailer, wholesaler or distributor to drive price points or promotional activity (such as list-price discounts, promotional allowances, in-store marketing investments or deductions).
2 http://www.businessweek.com/magazine/content/10_04/b4164050511214.htm
3 The relative position of the category can be determined by ranking the category's AGM and size compared to competitors. AGM can include invoice discounts, assortment category bonuses, year-end rebates, vendor allowances and promotional bonuses.
Copyright 2011, A.T. Kearney, Inc. All rights reserved.
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