Different Strokes for Different Folks: National Brands Achieve Comeback vs House Brands

As developing nations become more of a factor in the battle for consumer goods dominance, companies fight for position using a variety of tools. For the past few years, house brands - those developed, branded and owned by retailers - have gained prominence as the economy soured, costs became more a concern and the extra percentages of margin more crucial. As the BRICs and others continue their upward trajectory and the developed economies recover to some degree, global or national brands have begun to claw back some of the share they lost.

The competition has broad implications because it not only speaks to perceptions of quality and household or personal success, but also to trends in technology and business strategy. Earlier posts in this space today discussed Apple's and Twitter's determination to wrest exceptional profits from developers using their platforms. The experience of the mass retailers - like Wal-Mart - is instructive because they have learned some hard lessons about the trade-offs between dominating their space and sharing the credit (and profits) with branded suppliers.

Samar Birkwadker assesses the competitive landscape in The Hub:


"Although there is no dearth of opinions on how the battle between national consumer packaged-goods and retailers’ store brands will pan out in the United States, most analysts agree that it’s shaping up to be quite a contest. Long seen as beacons of trust and credibility, national brands watched their market shares erode as retailers became more sophisticated at developing and selling their own store brands.

To be fair, without the right retail partners, national brands couldn’t have created the differentiation that has allowed them to command a premium over their store-brand counterparts. Retailers have played along for the most part by relying heavily on leading national brands to lure customers through their doors.

In the last decade, the rapid evolution of store brands has led to converging competencies, and now store and national brands are at war for the same consumer dollars. It may sound like an oxymoron, but in spite of intensifying competition, future success for both will depend not only on how well their playing fields and core competencies are defined, but also on how well they can manage the strategic relationships with each other.

During the mid-2000s, store brands were hailed as the second coming of retail, providing wonderful new opportunities for growth in previously unchartered territories. With share-of-sales growing at an average annual rate of 0.5 percent between 2005 and 2009, store brands became a poster child for practicality and austerity in tough economic times, according to Information Resources, Inc. But starting in 2010, the recovering economy created a new set of realities. Now, in 2011, retailers are forced to rethink their store-brand portfolio strategies in order to remain relevant in a world where, more than ever, consumers seek brands that not only offer value, but also speak in a unique, identifiable voice and deliver substance with purpose.

Although store-brand sales are still growing nearly twice as fast as sales of national brands, the abating recession has toned down some of the irrational exuberance. Ambitious store brands dressed in fancy packaging can no longer masquerade as the real deal. Retailers are quickly learning that prime shelf space and guaranteed foot traffic can’t make up for puny marketing budgets and half promises.

For example, in October 2010, Walmart rolled back Project Impact, a two-year long initiative with a goal of satisfying shopper assortment expectations by expanding store-brand varieties and scaling back the number of national brands it carries. In March 2009, greatly underestimating the inherent strength of popular national brands, Walmart replaced them with several extensions of its Great Value brand in new packaging and advertised them with better in-store signage.

This initiative failed to deliver the estimated increase in foot traffic and instead compromised Walmart’s destination strategy by limiting the retailer’s ability to retain its customers. Most important, it worked against Walmart’s brand promise of being a destination for lower-priced national brands.

The fact that national brands are reclaiming some of their lost share in the recovering economy indicates that store brands still have a long way to go before they can credibly sing a tune other than value. It also suggests that a majority of store brands, even at lower price points, lack the compelling, believable proposition necessary to compete against heritage national brands that have stayed relevant by working hard to strengthen their unique meaning in customers’ hearts and minds.

As the recession ends, consumer shopping habits and attitudes toward brand consumption are changing. This shift is creating greater overlap in the competencies of retailers and national-brand marketers. Below are some predictions and best practices for store and national brands going forward.

Acceptance of store brands in the United States has grown, but it’s still nowhere near the levels seen in European markets. In 2011, US retailers must continue to borrow store strategies from progressive retailers across the pond. Tesco and Marks & Spencer have created powerful hybrid portfolios, taking advantage of “branded house” strategies for massive efficiencies. They are creating dedicated brands for specialty categories, such as skin care and organic food, where they lack credibility and consumer permission for brand stretch.

Progressive retailers such as Target, Whole Foods, and Safeway have led the way in the US by creating tiered portfolios of cross-category brands such as Archer Farms, 365 Everyday Value, and Eating Right, that speak to the unique sensibilities of their customers’ lifestyles and help fulfill their unmet needs. It is critically important for retailers to continue to identify and fill in gaps left wide open due to the lack of innovation among national brands.

Tesco: More than 70 percent of the merchandise that Tesco carries across all categories is part of the retailer’s Good, Better or Best store-brand portfolio. An industry-leading 50 percent store-brand share of the retailer’s total sales allows Tesco to carry enormous assortments and reap higher margins.

Whole Foods: The retailer offers tiered store brands including the more value-priced 365 Everyday Value and 365 Organic Everyday Value lines, and the Whole Foods Market line, which often features artisanal or small-batch specialty products. Whole Foods sells store-brand goods across many categories that include everything from frozen dinners to supplements to shampoo and snacks.

Safeway: Safeway’s lifestyle-focused O Organics and Eating Right brands have become some of the largest-selling brands in the category — even managing to cross over to non-Safeway retail channels. This is a great example of how progressive US retailers can use sophisticated store-brand portfolios to “fill in the gaps” and deliver total solutions to customers.

The high penetration of store brands in Europe has led national brands to invest heavily in research-and-development to help feed their innovation pipeline. American national brands must follow suit to stay ahead. According to a recent study by Deloitte Insights, only four in 10 national brands invested more in product research in 2010 than they did 10 years ago.

National brands can minimize retailers’ store-brand opportunities by taking advantage of their superior research-and-development abilities to innovate new products, going beyond the line extensions they’ve relied on so heavily. National brands must continue to be better than retailers at tapping into consumers’ desires, motivations, and behavior to identify white spaces and build compelling brand propositions to fulfill unmet needs. These innovations need to be flawless, furious, and done faster than ever before, making it difficult, if not impossible, for retailers to imitate.

Procter & Gamble: The national powerhouse was able to create a unique and ownable proposition and drive higher differentiation for Dawn by using Olay’s brand equity in the dishwashing soap segment. Dishwashing brands have touted their ability to be “gentle on hands” in the past. However, borrowed equity from Olay, a cross-category brand, adds a huge dose of credibility and helps Dawn break away in a commoditized category that’s crowded with look-alikes.

Swanson: Packaging its broth in cartons with re-closeable lids rather than cans enhances convenience for customers, making it easier to save unused broth and reducing the amount that’s thrown out and wasted. Although a simple feature, Swanson has discovered that consumers are willing to pay extra for it.

McCormick: Home cooks can prepare meals like gourmet chefs without having to purchase a separate grinder. McCormick invested in structural design and now includes a built-in grinder in the bottle tops of certain spices and seasoning mixtures. Retailers find it difficult to invest in innovations like this for their store brands because they can’t match the volumes required to make it cost-effective.

However, while consumers may be receptive to a store-brand product when it comes to staples or other general merchandise, they may not be as open to a grocery chain selling advanced skin care products under its own label.

To drive higher differentiation, progressive retailers must invest in holistic brand development programs that build their parent brands. Investing in store environments, aisle promotions, retail execution, couponing, product bundling and sophisticated research and market intelligence, can help retailers create even more compelling products and lasting relationships with their shoppers.

CVS: CVS’ store-brand portfolio of health and beauty products offers a plethora of premium items such as anti-aging and mineral makeup, advanced skin revitalization treatments, and more. This has helped the retailer go head-to-head with leading national brands such as L’Oreal and Aveeno. In November 2008, CVS debuted Beauty 360, an innovative store-within-a-store concept that offers an upscale shopping destination to time-starved women. Exclusive store brands — including 24-7, Skin Effects, Christophe Beverly Hills, Essence of Beauty, and Lumene — are spotlighted.

National brands must focus on inculcating a culture of true innovation that can create higher differentiation, help them remain relevant, and most important, create deeper, lasting bonds with their customers. They should better use their brand stature and vast network to crowdsource customers’ opinions and understand their needs. By opening up the innovation process, national brands can identify market trends quicker, leading to better consumer insights, and consequently, to stronger brands.

Procter & Gamble: In 2011, P&G plans to increase its product innovation and marketing spend by 30 percent by developing new products and honing existing ones through its collaborative, open-innovation Connect+Develop initiative. The program was started in 2001, and now, after 10 years, more than 50 percent of P&G’s innovations come from outside collaborators that include consumers, entrepreneurs — and competitors.

Mountain Dew: In 2009, Mountain Dew decided to begin researching a new flavor. It created a Facebook and Twitter campaign called DEWmocracy to recruit loyal fans, creating buzz leading up to its very successful product launch. Retailers lack the loyalty, credibility, and resources needed to create similar immersive experiences for their brands.

Collaboration is Key to Success

Store and national brands need to offer value plus exciting brand promises in order to compete for shopper dollars. In the future, success for both will depend on how well they can expand their competencies, and on their ability to join forces.

Strategic partnerships with national brands can help retailers focus their resources on core destination categories and improve their in-store experience while delivering total solutions to shoppers. National brands can meanwhile gain shopper insights from retail partners, earning greater ability to focus on shoppers across departments and drive product and brand differentiation in their core categories.

A recent Nielsen report stated that only 20 percent of national brands realize the full potential of their collaborations with retailers. Nielsen studied activities of national brands achieving full potential (or “winners”) and found they have a tendency to cast a wider net when seeking out retail partners: Fifty percent of winning companies approached 10 or more retailers as potential collaborators, versus only 22 percent of “non-winners.” In addition, the winning national brands are much more likely to place high importance on sales, profit and strong growth outlook. Campbell’s Soup worked with retailer Kroger to develop its Simple Meals concept, which took into consideration Kroger’s merchandising tactics to create solutions for busy, end-of-aisle shoppers who were looking for grab-and-go meal ideas.

Kimberly-Clark, in collaboration with research partner Red Dot Square Solutions, developed virtual-reality technology, which it has used with retailers such as Walmart and CVS to develop virtual in-store environments to create better shopping experiences and develop effective product-bundling strategies.

With an eye on shoppers, national-brand marketers and retailers must together determine which trends drive customers’ choices and what’s needed to create powerful propositions for their unmet needs. By bundling across categories, retailers and national-brand marketers can offer complete solutions that reinforce the value of the store and the brands it carries.

For example, shoppers looking to buy their favorite national brand of low-calorie frozen dinner are likely to take advantage of a bundled promotion that offers diet-friendly store-brand drinks and snacks. Focusing on comprehensive solutions based on a shopper’s lifestyle can help national-brand marketers and retailers successfully serve the needs of a lucrative consumer segment together.