Counter Attack

With private-label promotion poised to take off, national brands find themselves in need of a new defense plan.

Retailer consolidation has given grocers more money to further advance already strong private-label initiatives, and classic brand promotion is the next step in private label’s marketing evolution.

Private-label sales rose 3.2 percent last year, outpacing a rise in total supermarket sales of 2.3 percent, according to the New York City-based Private Label Manufacturers Association.

Results were even more dramatic in drug stores, with store brands up 7.3 percent and total sales up only 3.3 percent, and among mass merchandisers, with store brands up 17.5 percent to a 14.2 percent rise in total sales, per PLMA.

Private-label food will be a $100 billion-plus business by 2005, predicts Destination Products International, a Toronto-based food company. It’s already zoomed to $43.3 billion in North America this year, up $2 billion over ’98. That’s giving national brands – especially mature and second-tier brands – more competition for shelf space. They’ll continue to be squeezed out as grocers ratchet up their own marketing, including classic brand promotions.

“Private labels are brands in themselves, and retailers regard themselves as sophisticated marketers, not store operators. They’re very aggressive,” says San Francisco-based TradeMarketing’s director of client services, Steve Cleere.

Well-marketed private label is forcing national brand leaders and second-tier brands to set new promotion strategies. National brands have to be innovative, provide new features, and be ready to compete on price. Private label must look for ways to brand entire sections of the store that have been under-branded or not branded at all.

Growing sophistication

Ironically, national brands gave grocers the tools for private-label promotion. Packaged goods manufacturers’ category management programs planted the marketing seed with retailers; brand leaders offered to manage a total category to boost overall sales for grocers – mostly by boosting their own brand’s sales. “It backfired,” says Cleere, because manufacturers gave too much information away. oRetailers began to think, ‘How can we increase our market share by selling our own label?'”

As grocer consolidation snowballed, private-label promotion became inevitable. “Retailers generated a lot more detailed information about the customer, increasing their power via manufacturers,” explains New York City-based Merrill Lynch analyst Mark Husson. Retailers also became more competitive on price and product quality. And now private-label experts (like Albertson’s) are buying their less-experienced brethren (like Dominick’s), so top management’s private-label priorities are playing out in more stores. That means there are more private-label goods on shelves, and promotion has become “absolutely essential to the success of these store brands,” Husson says.

Wall Street is also pushing private-label promotion. “Retailers are becoming aware that Wall Street is looking at their numbers, and that their shareholder equity is tied to brand equity. This is providing a whole new incentive for private labels to get out there,” says Husson.

Getting to know them

This spring, A&P ran an extensive promo tying its America’s Choice label to Warner Bros./Morgan Creek Productions’ animated film, The King & I.

“Part of our strategic plan is to grow America’s Choice as a way of increasing sales,” says vp-marketing and corporate affairs Andy Carrano. A&P ran a premium offer on 70 kid-skewed SKUs like fruit snacks, cookies, and lunch bags, offering plush bean-bag toys based on animal characters from the film. Packages carried the mail-in offer via stickers and back panels. A cause overlay donated a portion of sales to Unicef. The Gable Group, San Diego, handled.

The film fizzled at the box office, and A&P didn’t get the sales lift it hoped for. Carrano is warily eyeing future entertainment tie-ins. “As a retailer, we always have to be alert to ways we can truly differentiate our brand,” he says.

Other grocers have stepped up merchandising in under-branded departments. Perishables, for instance, are a particularly attractive promotion area because they account for nearly one-third of all supermarket sales, per Information Resources, Inc., Chicago. Such perimeter departments are critical to establishing the retailer’s image.” Pick any state and you’ll find a truckload of examples. In North Carolina, Durham-based Kerr Drug has a new private line for its 770 outlets that boasts 550 SKUs, including 77 vitamin, herbal supplement, and organic products. The line initially was promoted with heavy in-store advertising and marketing such as a launch-week 50%-off sale, gift-basket giveaways, and extra coupons for friends and family members.

Over in Matthews, NC, Harris Teeter of Matthews, NC, went on the road and into homes to run a sweepstakes. A touring van cruises neighborhoods, stopping randomly at houses and paying the inhabitants $50 for every Teeter product found in the kitchen or medicine cabinet. The chain is also running an August sweeps with a grand prize of a $5,000 U.S. savings bond and a first prize of a year’s worth of free groceries.

“Promoting on the basis of price is a thing of the past,” says PLMA president Brian Sharoff. Instead, grocers are using othe theater of the store” as a promotion stage, and developing new specialty items such as premium perishables and fresh baked goods. At the same time, grocers are spending more on displays and cross- merchandising, especially via meal solutions centers.

That activity means new competition for national brands – but new opportunities, too. There is plenty of private-label promotion, but major brands still represent the vast majority of consumer sales, Cleere says. National brand manufacturers are coupling product innovations with promotions designed to drive consumer awareness. New products aim for “promotion at trial,” says Cleere, starting with an FSI supported by in-ad activity and P-O-P. Follow-up couponing (including coupons delivered in-store to competitors’ users), and volume promotions, multiple-purchase incentives, and price deals support. The chief point is to “produce unique products, under a brand line extension, using research and development – aiming to have things out there not replaceable by a private brand,” he says.

Product line of defense

That’s got national brand marketers on the defensive. Schering-Plough had to rethink its promo strategy for Afrin and Drixoral decongestants when Wal-Mart introduced an Equate store brand in ’97. It was the first big threat to Schering’s $2.5 billion over-the-counter drug business after the Madison, NJ-based company formed customer teams to represent its whole portfolio, replacing separate groups representing single brands like Dr. Scholl’s and Coppertone.

Wal-Mart began pricing Equate cough and cold medicines specifically to undercut Afrin and Drixoral, then priced at $2.58 and $3.60, respectively. The attack was working: All key indices for the two brands were down.

According to an industry source, Bentonville, AR-based Wal-Mart learned that Southern retail chain Dollar General Stores had cut a deal with a nasal-spray maker to sell a private-label spray for 99 cents. The source says Wal-Mart approached its own nasal-spray manufacturers with a blunt message: We know how much it costs to make this spray, and no Wal-Mart customer is going to find a cheaper product at Dollar General Stores. Soon after, Wal-Mart was stocking Equate nasal spray for 98 cents. (Wal-Mart officials declined any comment.)

Schering-Plough knew it had to respond, and fast. Jay Joyce, vp-national accounts, contacted TradeMarketing Inc., a promotion agency that had been working with the drug manufacturer to put together “all the promotional tools that we knew worked from the brand side,” says Cleere. Progress had been good, with the launch of several promotions that reflected both account and client needs, and business was building.

Then came the Equate attack. oThere’s no doubt that we faced a real threat to our brands,” says Caitlin Papas, Drixoral brand manager. “The key was swift response. How quickly could Schering respond promotionally until we could bring the brand back under control?”

Schering and TradeMarketing quickly put together a “Private Label Defense Plan” for Afrin and Drixoral consisting of six months of exclusive promotions for Wal-Mart, each to be executed according to a strict and specific timetable, says Papas.

The first wave featured a 60- to 90-day supply of instant redeemable coupons worth $1 off, placed in stores by retail merchandising firms. “The purpose of the IRCs was simply to stop brand erosion,” says Cleere. It was a hasty decision based on a determination “not to have a loyal Schering user standing at any shelf thinking, `Do I want to give up the benefit of my brands?'” Cleere says.

Within four months, Schering followed up with a buy-one-get-one-free IRC offer scheduled to last 60 days. Since the product was “sold by need,” Schering wanted to keep loyal customers supplied for a longer period. The result was an immediate sales spike, Papas says.

The third promo centered on a bonus pack offering 33 percent more product to ensure customers got a good price value. It was more complicated than the first two efforts because it took time to get the packs produced, delivered, and into the store on the prescribed date. But the underlying strategy was simple: Save Schering money. The company still wanted to maintain customer price value, but in a manner less costly to the bottom line than the IRC efforts. In the end, Schering held its own against Equate.

Bringing up the rear

Second-tier brands are more likely to be squeezed out by private label. “Second- or third-level manufacturers are in a category that has a high degree of risk,” Sharoff says. Some brands survive as niche brands. Consider Pittsburgh, PA-based Wise potato chips, well known on the East Coast but nowhere else. A buyer for Pathmark will say, “I’m not taking Wise off the shelf – there’s too much brand loyalty for it to simply disappear,” says Cleere.

Second-tier brands must make certain they’re never “priced out of the category,” Cleere advises. Multiple purchase incentives can secure an audience. Also, smaller brands bring incremental marketing money to retailers “that may justify having their presence on the shelf,” he says.

The key to survival is to represent “some segment of consumer demand so the retailer doesn’t dare discontinue you because he doesn’t want customers shopping for you at some other store,” Cleere says. Account-specific promotions and participation in retailers’ own promotions lets a smaller brand ohelp market a category, using things like loyalty cards and other programs that could prove important to staying alive,” he says.

“Just like McDonald’s, store brand quality increasingly is going to be consistent from one grocery retail location to another,” says Cleere. “You combine that development with growing retailer marketing expertise, new promos, and new branding efforts that have store brands hitting parity with national brands, and private label is just going to explode,” he says.

That could make for a lot of wounded brands.

Knowing that retailers were seeking greater flexibility in the promotional menus offered by marketers, Madison, NJ-based Schering-Plough two years ago developed a comprehensive, account-specific plan originally executed in top drug chains. The program was “a kind of one size fits all” strategy, mainly because pricing pressures didn’t allow for much incremental spending, says Steve Cleere, director of client services at San Francisco-based TradeMarketing Inc, which works with the drug company.

Schering had just switched its sales force from brand-specific groups to customer teams that could present the whole company portfolio. But at the end of the selling season, not a single retailer had chosen a program from the company’s menu.

Why? Slowly, Schering realized it was because none of the promotions had offered exclusivity.

“Exclusivity is no longer an option, it’s a necessity,” says Cleere. “Exclusivity is being demanded by retailers because it gives them cachet. It allows a retailer to say, `I am the only one in the marketplace making this offer.’ It’s a quid pro quo you ignore at your peril.”