Kraft's Private Label Lesson

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=2 height=110 BGCOLOR="#666699" TEXT="#080000" bgproperties="fixed" background="04900840erlcjm.png"> <div> <B> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="1" WIDTH="600" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="LEFT" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 103 ><NOBR><div> <A HREF="index.htm" TARGET="_top" TITLE="Hoytnet Home"><U><B><IMG SRC="063775a0.jpg" border=0 width="119" height="90" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></B></U></A></div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> <B>Hoyt & Company</B></div> <div> <A HREF="services.htm" TARGET="_top" TITLE="What We Do"><U>What We Do</U></A> | <A HREF="who.htm" TARGET="_top" TITLE="Who We Are"><U>Who We Are</U></A> | <A HREF="articles.htm" TARGET="_top" TITLE="How We Think"><U>How We Think</U></A> |<A HREF="contact.htm" TARGET="_top" TITLE="Contact Us"><U> Contact Us</U></A></div> </NOBR></tD> </tR> </TABLE></B></div> <bR> <div> </div> </td> </tr><tr> <td valign="top" width=165 BGCOLOR="#CCCCFF" TEXT="#080000" background="04311c00egdysm.png"> <div> <A HREF="articles69.htm" TARGET="_top" TITLE="Chris Hoyt Articles"><U><B>Back to Articles:</B></U></A></div> </td> <td valign="top" height=370 BGCOLOR="#FFFFFF" TEXT="#080000"> <div> <B>Reveries.com - February, 2004</B></div> <bR> <div> <I><B>Kraft's Private Label Lesson</B></I></div> <bR> <div> BY<B>: Chris Hoyt</B></div> <bR> <div> <B>One of the key object lessons coming out of Kraft Foods' experience in 2003 is that Private Labels are now strong enough to affect the financial health and well being of even the most powerful of brand franchises</B></div> <bR> <bR> <div> In fact, it is our belief that one of the biggest threats to national brands over the next five years is not the highly visible and therefore obvious competition from other national brands but strong retailer determination to grow private-labels, coupled with the fact that retailers are rapidly becoming marketers in their own right.</div> <bR> <div> If this sounds like "old news," know that over the past five years, new trends have emerged within the private-label segment to elevate the private-label threat to an entirely different plateau than it was on in 1995.</div> <bR> <div> Specifically, every year since 1999, supermarket retailers have ranked "Stress Private-label" as the #1 "Likely Action" out of 26 priorities that <I>Progressive Grocer</I> lists each year as most important to Supermarket executives.</div> <bR> <div> Underpinning this determination is the fact that private-label dollar sales in U.S. supermarkets have outpaced national brand sales on a year-ago basis every year but one between 1990 and 2003. In fact, between 1991 and 2001, private-label dollar sales in all channels shot up by 3.3 share points. On an all-channel basis, private-label has become the category leader in an additional 50 categories since 1997 and is now the number-one "brand" in 197 or 25 percent of the 775 categories in which private-labels are represented.</div> <bR> <div> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="1" WIDTH="228" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="VOID" RULES="NONE" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 133 WIDTH="213"><bR> <div> <B>What is significant about private-label growth trends during the 1990's is that they accelerated despite a strong economy. </B></div> <bR> </tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="133" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> </tR> </TABLE></div> <div> Importantly, 95 percent of private-label growth has come from existing private-label categories -- as opposed to new categories -- suggesting that retailers have become far better marketers than in previous years. In addition, achieving this growth was not an easy task because most of the large private-label categories -- like cheese, bottled water, pet food, paper products and soaps and detergents -- are those categories in which national brand competition is most intense.</div> <bR> <div> What is significant about private-label growth trends during the 1990's is that, for the first time, they accelerated despite a strong economy, which runs counter to the common belief that private-label fortunes are primarily tied to poor economic conditions.</div> <bR> <div> The other key change is that between 1997 and 2002 -- again for the first time -- private-label household penetration began to evolve beyond its traditional demographic to upper middle class/affluent consumers. In fact, according to a Y2000 Gallup Poll, 71 percent of supermarket shoppers now consider private-labels to be the same as or better in quality than national brands. This finding was subsequently confirmed by a 2002 IRI survey of over 5,000 consumers in 16 cities in which 66 percent of respondents said they feel that private-labels offer "excellent quality." To top this off, in late 2003, Nielsen announced that private-labels had finally achieved 100 percent household penetration and that the average supermarket shopper now buys private-labels about 70 times per year.</div> <bR> <div> For the future, industry experts predict strong "breakout" private-label growth that defies previous patterns due to:</div> <bR> <div> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="1" WIDTH="573" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="VOID" RULES="NONE" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=CENTER HEIGHT= 57 WIDTH="7"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Increased investment by mega-retailers in whom PL Dollar share now averages 22 percent.</div> <bR> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 57 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Increasingly sophisticated programs – multi-tiered offerings, lines targeted at specific consumer segments and influx of European learning.</div> <bR> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 76 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="76" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="76" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Innovative development and marketing strategies -- <I>e.g.</I>, Wal-Mart's acquisition of former P&G White Cloud and Costco's co-branding with Starbucks.</div> <bR> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 95 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="95" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="95" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Sheer breadth and depth of private-label availability beyond traditional supermarkets: between 1997 and YE 2002, mass merchandisers, supercenters, clubs and small format value discounters hijacked 13 share points from supermarkets' private-label dollar sales.</div> <bR> </tD> </tR> </TABLE></div> <bR> <div> Lest anyone think these "facts" to be short-term blips, let's take a look at the longer term and draw a comparison between how the private-label market is beginning to shape-up in the U.S. with what has already happened with private-labels in other countries:</div> <bR> <div> While U.S. retailers have made solid gains with private-labels since 1990, other countries' private-label shares have established benchmarks that act as a narcotic to profit-starved U.S. retailers. Through August, 2003, Nielsen reports U.S. private-label dollar share to be 15.1 percent (all outlets excluding Wal-Mart). Compare this to Switzerland (38 percent), Great Britain (31 percent), Germany (27 percent), Spain (23 percent) and France (21 percent) and one can quickly see why -- relatively speaking -- U.S. private-labels are only on the launching pad.</div> <bR> <div> Between 1975 and 2000, private-label unit share in U.K. supermarkets catapulted from 25 percent to 45 percent while dollar share jumped from 20 percent to 43 percent. The key here was consolidation. In 1977, the Top Five Supermarkets in the U.K. controlled approximately 35 percent of the business. Between 1977 and 2000, these same five supermarkets grew their share to 85 percent. If one plots U.K. private-label sales as a percent of total supermarket sales during these same years, the pattern is that private-label share growth gradually but inexorably follows consolidation, as the surviving retailers grow more determined to increase profits and get better at marketing their own brands. </div> <bR> <div> If one compares Safeway's private-label growth with Safeway's total corporate growth since 1995 -- the year that Safeway began its acquisition spree -- this pattern already appears to be surfacing in the U.S. Between YE 1994 and 2000, Safeway doubled total corporate sales -- from $15.6B in '94 to $32B by YE 2000. During these same years, Safeway private-labels -- which had remained relatively flat at around 22 percent of sales between 1990 and 1994 – gradually began to take off -- jumping from 22.5 percent of sales by YE 1994 to 29 percent of sales by YE 2000.</div> <bR> <div> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="1" WIDTH="228" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="VOID" RULES="NONE" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 95 WIDTH="213"><bR> <div> <B>It is not inevitable that all national brands must get pummeled by private-labels. </B></div> <bR> </tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="95" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> </tR> </TABLE></div> <div> One can almost count on this pattern repeating itself as other supermarkets become more desperate to increase profits in an environment where real growth is hard and the channel itself is losing share. One of the reasons for the mergers-and-acquisitions over the past eight years is the acquirer's confidence in its ability to grow private-label share in the acquiree up to the level of the parent company. Thus Kroger (25.5 percent) buys Fred Meyer (17 percent); Albertsons (27 percent) buys American Stores (17 percent) and Safeway (30 percent) buys Von's (13 percent), Randalls (13 percent) and, finally, Dominicks (11 percent).</div> <bR> <div> The prospect for manufacturers who do not keep this threat top-of-mind and consciously strategize to counter it appears to be a serious re-division of the combined manufacturer/retailer/wholesaler operating profit pool. In 1982, for example, when private-label share in Great Britain was 25 percent, manufacturers controlled 80 percent of the combined industry operating profit pool. By 2000, when private-label share in Britain had climbed to 45 percent, manufacturer's share of this pool had shrunk to 60 percent.</div> <bR> <div> It is not inevitable that all national brands must get pummeled by private-labels. In Britain, for example, the average share of 52 leading brands measured fell only from 34.2 percent to 32.6 percent between 1975 and 1999. The "losers" were the smaller "trade dependent" brands that invest less in marketing and attempt to compete on price with private-labels. In fact, 19 of 52 brands in the U.K. in 1975 – those with the largest market shares and the best continuous sales levels -- remained category leaders in 1999.</div> <bR> <div> U.S. retailers are also not always successful in the private-label categories that they enter. While they have been very successful in commodity categories such as milk (59 percent), cheese (34 percent), canned vegetables (31 percent) and baked goods (26 percent), they have been relatively unsuccessful in high value-added categories such as cookies (11.9 percent), cereal (10.1 percent), pet foods (9.8 percent), carbonated soft drinks (6.3 percent), snacks (5.4 percent) and candy (3.5 percent).</div> <bR> <div> Why? The antidote boils down to a carefully blended combination of one or more of the following factors:</div> <bR> <div> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="1" WIDTH="573" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="VOID" RULES="NONE" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=CENTER HEIGHT= 38 WIDTH="7"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="38" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="38" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Heavy manufacturer brand ad spending</div> <bR> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 57 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Consistent innovation with products that private-labels cannot easily duplicate -- <I>e.g</I>., Crest White Strips and Crest Whitening Plus</div> <bR> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 38 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="38" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="38" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">SKU proliferation</div> <bR> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 57 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Price gap management/strong national brand merchandising support (50 percent of branded chocolate is sold on promotion)</div> <bR> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 38 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="38" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="38" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">DSD -- <I>i.e.</I>, in-store control</div> <bR> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 57 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Judicious sharing of consumer information in category management presentations -- <I>i.e.</I>, why educate your competitors?</div> <bR> </tD> </tR> </TABLE></div> <bR> <div> One example of how one brand successfully strategized its way out of the private-label quagmire is Heinz Ketchup. Prior to 1998, Heinz Ketchup had a limited number of SKUs, was premium priced, had little or no advertising and was losing share to private-labels and lower-priced second- and third-tier brands.</div> <bR> <div> Between 1999 and 2002, Heinz Ketchup fought its way back through innovation -- EZ Squirt Bottles, Spicy Flavors, a "trap cap" that eliminates watery ooze and "Mystery Colors" to appeal to kids –innovations that added SKUs which left less shelf space for competitors.</div> <bR> <div> Then Heinz launched a major ad campaign to market the innovations and use the profits from introducing the new flavors to close the price gap between Heinz and private-label by 17 percent. Result: Heinz regained control of its brand and grew its share by six points, taking most of this from second- and third-tier brands and leaving private-label little room to grow.</div> <bR> <div> And what about Kraft? According to Wall Street analysts, Kraft allowed the price gaps between its brands and private-labels to grow too large and then "failed to develop new products that private-labels couldn't copy."</div> <bR> <div> Result: Three successive years of share losses to private-labels in its 3 largest categories, culminating in a series of 2003 sales and profit forecast reductions and -- ultimately -- a reorganization that cost Betsy Holden her job as Co-CEO.</div> <bR> <div> For whom does the bell toll? It tolls for thee. </div> <bR> <bR> </td> </tr></table></body>