Own-label steamroller rumbles on

During the recession, many grocery brand manufacturers comforted themselves with the thought that own label would stop rising once the good times returned. It hasn’t happened. In December 1993, own-label penetration in all stores was 52.2 per cent. A year later it was 53.9 per cent, and by December 1995 it was 54.5 per cent (Nielsen figures) – and it’s still increasing. Even though some players such as Sainsbury’s are reining back, others like Kwik Save and Asda are piling in. Why? Because own label offers them an irresistible double whammy of better value for consumers and higher margins.

The astonishing thing is that decades into the emergence of this phenomenon, so much of what passes as informed debate within the marketing fraternity is laced with wishful thinking, self-contradictory or plain superficial. Marketers talk hopefully about “a swing back to brands” assuming that their brands have a prior and natural claim on consumers’ hearts which is sometimes ignored for baser reasons, such as price. They rail against retailers’ wicked copycatting: apparently the self-same consumer who is now supremely sophisticated and marketing literate is too naive and foolish to tell the difference. Or they bemoan the lack of determined long-term brand-building which they ascribe to the attitude of their own employers, or the City.

They’re all issues, of course. But they all skirt gingerly around the real point. Despite what both sides say about partnership, a battle is going on between two competing business systems, and only the fittest will survive.

Once upon a time there was no contest. The brand manufacturing system was unquestionably superior. Everything was aligned. Brand manufacturers commanded econ-omies of scale in both sourcing and production which enabled them to offer superior value to consumers. Mass advertising helped drive the demand that in turn promoted mass production by keeping brands top of consumers’ awareness. National distribution created mass presence and availability, driving sales and reinforcing brands’ share of mind.

And the healthy margins generated by the synergy between mass production, advertising and distribution, allowed manufacturers to invest in research and development and offer genuinely improved products. This, in turn, created new reassurance of value for money and extra sales, thereby adding impetus to the virtuous circle. Like a Chinese puzzle, every part of the jigsaw helped keep the rest in place.

What’s happened in recent decades is that an equally coherent system with equally mutually reinforcing parts has emerged. New technologies are allowing own-label manufacturers to produce smaller batch runs at lower costs: so the benefits of economies of scale are declining. Many products face diminishing returns on innovation (I like my McVitie’s biscuits and my Coca-Cola exactly how they are, thank you), yet at the same time shop owners are discovering they have enormous opportunities to innovate and to offer a better shopping environment.

Own-label products also lay claim to cost advantages, both on marketing and distribution – a few dedicated trucks from factory to retailer regional distribution centre is nothing compared with the cost of a fleet serving every retailer, wholesaler, and convenience shop.

This means all the paraphernalia of advertising, distribution, and new product development that made the brand manufacturing model so powerful decades ago is unravelling, and becoming an enormous cost burden instead – a burden that adds up to 50 per cent on to the final consumer price and allows retailers to undercut brands while creaming off higher margins. The virtuous cycle goes into reverse, and becomes a vicious circle.

There are many ways to tackle the issue. For a start, it’s still plausible to make the old model really hum with synergy.

For example, it is possible to deploy true mass production and advertising economies of scale (Walkers crisps); ensure massive investment into distribution or innovation is turned into genuine, unique brand benefits (Procter & Gamble’s demonstrable product superiority); and to use consumer insight to create new sub-categories (Mller, Wash & Go, Tropicana).

It’s also possible to add value to and streamline the old model. This can be done by cost cutting to minimise the own-label price advantage (P&G’s Project Breakthrough); by adding layers of service such as advice helplines; and by using consumer insight along with brands, IT and management skills to help drive retail customers’ costs down and improve sales and margins (category management).

Other strategies involve turning a weakness – long brand tails – into a strength, by exploiting the power of the range: cross-promoting one’s brands (Danone in France); creating cross-promoting meal solutions in store (Nestlé’s breakfast displays on the Continent); using range synergies to build databases for direct promotions (Heinz, Unilever); building direct relationships with consumers for range cross-selling (Nestlé’s Buitoni Club); or creating virtual shops to sell the range direct (Nestlé’s experiment in Switzerland).

There are three striking things about this list. First, there is still a wide choice of possibilities – but they’re not all compatible. You can’t do a Walkers and a Buitoni at the same time, so hard decisions need to be made.

Second, they require real focus and commitment. If you don’t reach critical mass along your trajectory, you’re wasting your money. This takes what PepsiCo executive Peter Thompson calls “intestinal fortitude”: the guts, for example, to spend 6m on new foil wrapping to improve Walkers product freshness – without putting up the price.

Third, only a small proportion of packaged goods manufacturers seem to accept this need for focus and system-wide response. Brands are just the highly visible tip of a system iceberg, and most brand managers are still responding at the superficial “what we need is a cleverer campaign” level.

The big question is what to do if brand, category or company circumstances rule out options like those above. Waiting in the wings must be a new packaged goods brand model. This will embrace flexible, low-cost production, focused distribution, widespread innovation as opposed to narrow product innovation, and lean, focused marketing communications. All right, that’s mimicking the key attributes of own label. But as retailers know to their benefit, imitation is the sincerest form of flattery.