Do It Yourself
By David Bishop

Consumer acceptance, margin pressures and competitive differentiation all explain the heightened interest by convenience retailers in developing private label products. And, while developing a private label program may be fairly similar across retail trade channels, bringing it to market in convenience presents some unique challenges. But if you get it right, you'll realize the tremendous advantages associated with private label.

Information for this article was gathered through a proprietary Balvor/NACS retailer survey, in-market retail price checks, store visits, a review of publicly available secondary sources and most importantly, interviews with convenience retailers experienced with private label. However, because of the sensitivity of the topic to retailer strategy and supplier relations, no retailers are directly cited.

Current Market Size
In 2007, private label market share in the United States, based on dollar sales, was 15.7 percent according to the Private Label Manufacturers Association's (PLMA) 2008 Yearbook, which measures sales in the drugstore, mass and supermarket channels. According to PLMA, which publishes the annual factbook based on data provided by ACNielsen, private label market share grew to 15.7 percent from 15.2 percent of total dollar sales in 2006.

Supermarkets lead the retail grocery channel for private label in the United States with dollar sales share ranging between 18 and 19 percent, depending on the information provider.

Convenience retail, on the other hand, has some room to grow. Currently, pri-vate label represents around 3 percent of in-store dollar sales for the convenience channel. The recent Balvor/NACS retailer survey found that 40 percent of the retailers indicated that private label share was 3.9 percent or less of their in-store sales, while another 28 percent reported that private label products were more than 10 percent of sales. (chart 1)

The good news is that new shopper insights from the Food Marketing Institute indicate that consumers are increasingly reaching for private label brands. Twenty-four percent indicated they reached for a private label product during almost every shopping trip so far in 2008, up seven percentage points from 2006.

Defining "Private Label"
Understanding what we mean by "private label" is critical for gaining agreement on what is or is not included in establishing meaningful performance metrics. With convenience retail, it's evident that the terrain is still unclear. Only 20 percent of retailers indicated that their company has a stated dollar sales goal for private label.

So, for the purpose of this article, private label includes:

• Control brands: someone else's brand that offers similar financial benefits as other private label brands, but are not exclusively available at your store.
• Exclusive brands: brands typically jointly developed, but owned by the suppliers and only available at a particular retail chain. 
• Store brands: as the name states, the store banner as the brand itself. 

Retailer Motivation
In 2004, Tom Ryan, the CEO of CVS said, "Everybody sells what we sell," meaning that consumers can go just about anywhere and find national branded products.

This sentiment is echoed by convenience retailers; many view private label as a way to create competitive points of differentiation. In fact, more than 70 percent of the retailers we surveyed indicated that to "give consumers a reason to shop your stores" was one of the top two objectives for introducing private label. (chart 2)

However, a large undercurrent is pushing convenience retailers to develop private label: finding new sources of profit. This helps explain why 78 percent of retailers agreed that "declining overall profit margins" was the driving interest in private label. Only 53 percent agreed that the "deteriorating economic conditions in the U.S." is accelerating development activities, while 65 percent believe that private label will drive more consumer visits.

So, the big question is: "How do I use private label to drive stronger profits?"
 
Two Schools of Thought
The school of differentiation focuses on leveraging private label to distinguish a store's offering. Retailers embracing this rationale believe that by having unique products "only available" at their stores that they'll be more successful in compelling consumers to bypass a competitor's location for their own. These retailers tend to have a longer horizon for building private label sales and more frequently use store brands. They spend added marketing resources on off-site activities, including billboards, radio and event marketing.

Then there's the school of optimization, which focuses on leveraging private label to drive stronger profitability. Retailers following this rationale believe that they can increase penny profits on existing sales by offering the consumer greater value in the form of lower retail prices. These retailers typically focus marketing resources on building awareness in the store through signage like shelf danglers or channel strips. And, these retailers usually offer either control brands or exclusive brands, depending on the category.

Many retailers apply a hybrid approach, alternating between the two, depending on the strategic and economic value of the target category.

Product Focus
Foodservice is currently the bull's eye that convenience retailers are trying to hit, as it offers the most private label success. Seventy-two percent of the convenience retailers we surveyed already offer private label products in hot dispensed beverages, while 55 percent do so in food prepared on-site. (table 1)

The survey also uncovered that further expansion of private label will continue. Ten percent of the retailers plan to introduce new private label products in either food prepared on-site or commissary/packaged sandwiches within the next six months.

Most convenience retailers understand that hot dispensed beverages is a good fit for private label because it is purchased very frequently, consumers generally plan to buy before visiting the store, it's the anchor for the morning daypart, and competitors inside and outside of convenience have their own brands. But national brands in hot dispensed beverages still have a role. At least 3 percent of retailers indicated that they had already tested and discontinued private label products in hot dispensed beverages, which implies that 25 percent probably use a national brand program. 

The Opportunity
Outside of foodservice, most retailers are pursuing non-alcoholic packaged beverages (table 1), with emphasis on bottled water and, more recently, energy drinks.

Interestingly, fluid milk may offer the strongest opportunity of any packaged goods category for convenience retail. Consumers are very familiar with private label milk and most convenience stores typically offer only one line of milk in the store.

In terms of the overall size of the opportunity for private label, many convenience retailers estimate that it could become 12.5 percent of in-store sales. Some retailers even target much higher goals in excess of 20 percent.
 
Innovator's Dilemma
Some of the leading convenience retailers in private label are relying as much, if not more, on strategic vision -- not necessarily economic analysis for identifying opportunities. This difference in approach and perspective is often what leads marketers and merchandisers to argue over the validity of various opportunities.

One good example is the small percentage of convenience retailers that have already introduced private label wine. This may seem odd given that dollar share for private label wine in drug, mass and supermarkets is essentially zero.

However, if retailers look at the tremendous success that Trader Joe's has had introducing "two-buck Chuck," it's easy to conclude that consumers are willing to buy more affordably priced wines -- as long as the quality is acceptable.

And, as strong private label retailers like Trader Joe's expand or as new retail formats such as Tesco's Fresh & Easy enter more U.S. markets, a greater percentage of households will become exposed to higher quality private label products -- both fresh and packaged. Over time, this will help convenience quickly follow into categories previously thought unimaginable.

Branding Strategy
Given the range of private label strategies available, table 2 summarizes how convenience retailers are using, or are considering using, the various forms of private label branding. The Balvor/NACS survey revealed that:\

• Store branding is most commonly used in fresher categories like hot dispensed beverages, commissary/packaged sandwiches and fluid milk.
• Premium private label branding is typically concentrated in various snacking categories and wine. (The term "premium" refers more to product quality and not necessarily retail price.)
• Price-value brands generally are most prevalent in larger categories where national brands have both a strong market share position and high brand loyalty, such as cigarettes, candy and packaged beverages.
• Control brands, while not the most common strategy pursued are more likely used in salty snacks and candy -- primarily bagged -- and commissary/packaged sandwiches.

Retailers indicated that control brands, when used, are more commonly focused in smaller, less strategic segments, such as general merchandise, health and beauty care and non-edible grocery.

Distribution Is Key
Distribution is a critical component of private label. It can erode the financial value of selling private label altogether, and it's especially relevant in convenience as most retailers are dependent upon wholesale distributors to deliver products to the store.

Wholesalers will commonly require a slotting allowance or an up-charge, in the case of beverages like bottled water. However, some wholesalers may waive up-front payments if the retailer is able to satisfy the minimum order requirements, has above-average volume per outlet, or is integral to keeping the wholesalers system-wide cost down.

If distribution costs are causing the numbers not to work, retailers can evaluate the wholesaler's control brands program, if available. Alternatively, a retailer could investigate if it makes sense to have one of the DSD suppliers distribute the product. 

Role of Pricing
While less than one-third of the retailers indicated that a primary objective of private label is to "offer consumers a lower-priced alternative," they still focus on determining how much lower the price needs to be. Offering a price that's too low leaves profits on the table, and, alternatively, pricing too high diminishes volume sales of a product that would generate higher penny profits per unit sold.

The question takes on added complexity for the retailer when other variables influence the pricing strategy, such as:

• Established share goals and timing to achieve those goals.
• Recent introduction of private label into a category.
• Presence of strong national brands in the marketplace.
• Relative importance of brand in a shopper's purchase decision.

These variables help to explain the range of price differential documented across various retail channels for non-alcoholic beverages. For instance, a Balvor price survey found that grocery had the smallest price gap of 21.1 percent, followed by convenience at 22.4 percent and drugstore at the high end with a gap of 34.5 percent.

Chart 3 analyzes price differential across various subcategories of packaged beverages in convenience stores where both a national and private label brand are available.

Bottled water reports the smallest price differential, indicating that retailers are pricing their products much closer to the price of the national brands, while the opposite is true for carbonated soft drinks (CSD). A key reason that water's gap is so low is because retailers generally believe that brand is not one of the top decisions driving its purchase. 

It's important to note that these price differentials are based on everyday prices. The issue of protecting or shielding private label when national-branded products are price promoted is not addressed in this article, but it does underscore the need to clearly understand the role that private label plays in your organization and ensure that category managers are executing pricing actions consistent with that vision.

Summing It Up
Whether the objective is to capture profit opportunities, create competitive differentiation or some combination of the two, private label can help. The right strategy is the one that you can realistically execute -- consistently -- in your store.

A private label focus requires retailers to begin thinking like marketers, which is probably why many successful retail merchandisers often struggle with this strategy. However, as consumer acceptance for private label, margin pressures on the business and competitive threats all continue to increase, convenience retailers will find that private label plays a vital role in creating additional points of differentiation that will build traffic and profits over the long term. 
 
David Bishop specializes in convenience retail and is the managing partner with Balvor LLC, a sales and marketing consulting firm in Illinois. He can be reached at davidbishop@balvor.com.