The Battle of the Basket: Part Two... "The Retailer's Arsenal"

During the long "cold war" between retailers and CPG brands, the balance of power has constantly shifted back and forth as each side tries new strategies and tactics in pursuit of the loyalty of the shopper.

In the last segment, we described some of the skirmishes between retailers and CPG; in this piece, we explore some of the weapons in the retailer's arsenal:

• The retailer controls the data. Gone are the days when IRI aggregated POS data and sold analysis back to both CPG and retailers. While a few retailers (Walmart first among them) use their sales data to shift responsibility for category management back to their suppliers, most retailers are keeping sales data close to their chest, choosing market basket analysis and optimization over collaborative category management. This gives them a first mover advantage and a faster response time to shifting consumer demand.
• Private label means lower price. Increasingly, despite maintaining equivalent quality (in some cases, higher "quality" alternatives appealing to specific buyers), retailers are dropping prices on private label. While both CPG and private label prices rose steadily until recently, in Q3 2009, CPG prices stagnated with a 0.3% rise... while private label prices plunged 5.3%. Retailers are trimming the fat off recently plumped margins, and in truth... they can cut even further.
• Premier shelf real estate for private label brands. As we mentioned in the first segment of this series, more and more categories are seeing national brands relegated to second tier positions with the retailers own private label brands positioned at eye level... and increasingly on end caps.
• Smaller stores, smaller assortments. As grocers experiment with smaller stores, not only are they reducing assortments across the board, they're also increasing the share of private label on the shelves that remain. Kroger currently 27% of its sales in private label, giving the retailer a lot of room to maneuver.
• Dominant positions in staples. Fashion offers an intriguing example of private label power: the same shoppers who turn up their noses at a $90 jacket from the Gap in favor of spending $200 on a Burberry coat have no qualms about buying blouses, skirts and denim at Old Navy. 
• Private label can be more fun. Take Trader Joe's... who spends next to nothing on advertising its overwhelmingly private-label assortment, eschews discounts in favor of simply calling attention to new products each month in their "Fearless Flyer" circular. With a revenue of $7.9 billion in 2009, it is a fraction of the size of rivals like Safeway ($44.1 billion) and Kroger ($76 billion), it has an incredibly passionate fan base. Trader Joe's can boast 156,478 fans on its Facebook page, while Safeway at five times the size has only 62,673, and Kroger - almost ten times larger - a mere 11,673. And private label pioneer Wegmans (who launched their own product lines in 1979) has a comparable fan base with 71,628 fans for its $4.8 billion in revenue. Wegmans has also used social media in innovative ways with a naming contest for its cocoa cereal product and passionate fan tweeting about their "W'O's" cookies.
• Retail brands can penetrate every product category. While shoppers might squirm slightly at the thought of Pampers yogurt or Chef Boyardee toilet paper, retail brand families can easily span virtually every product category in the store. Safeway, for example, has private label brands of diapers & baby products, gourmet food, pet care, dairy products, meat, deli products, paperware, and ready-made meals... not to mention one of the most successful organic brands, retailer OR national. This means greater mindshare as shoppers move through the store.

Of course, the United States is one of the latest fronts in the battle between retailer and CPG. Europe, and in particular, the UK has been a familiar battleground for years as mega-grocers like Tesco, Sainsbury and ASDA have been driving private label aggressively even before the current recession drove private label popularity in the US to record levels. Tesco (who currently accounts for more than half its sales through private label) has historically offered four different levels of private label in each category: Tesco's Discount, Tesco's Value, Tesco's Premium and Tesco's Finest. And in launching their foray into the United States via the "Fresh & Easy" banner, Tesco continued this strategy, offering a huge proportion of private label products and raising the quality bar by elminating artificial colors and flavors and transfats in its private label products.

So, has the balance of power shifted permanently to retailers? Can CPG regain the competitive edge and the market share they've sacrificed for higher margins? The next segment of this series will take a closer look at the secret weapons in the CPG arsenal and how they're shifting the battlefield to their advantage, so  stay tuned for more from the front lines of the battle of the basket.

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[Danny Gottleib]

UPDATED: "80 percent of respondents agreed that [retailers are] as good as or better than national brands at 'offering products I trust.' "

http://www.brandweek.com/bw/content_display/news-and-features/packaged-goods/e3i3ddc3639f0395ca89c44ab9019aa60ef