The own-label versus national brand debate that has dominated the UK grocery industry for decades is in the throes of a sea change, which is creating all manner of new opportunities – and dangers – for marketers on both sides.
The issue, as it was summed up by Sainsbury’s Andrew Glover, one of the new breed of marketers at Marketing Week’s recent conference on efficient consumer response (ECR), is that retailers are realising they need to go beyond existing skills “to become excellent builders of brands” – a statement so obvious that it’s tempting to pass it over as just another vacuous repetition of an eternal marketing truth.
In fact, it’s changing everything. At the heart of the notion of building retail brands lies a different attitude towards everything the retailer sells. As Glover explained, the big shift among retailers is a move away from an inward-looking concentration on things such as operational efficiency, costs and buying skills, to an outward-looking focus on customers and their preferences.
Under the old “trading mentality” everything was judged in broadly financial terms: What is the margin? What is its rate of sale? What return will it give me per square foot of space? The new marketing-led mentality adds another layer for consideration: how each item/category can help the retailer differentiate itself from its rivals.
How on earth can national brands help retailers in this quest? The very idea strikes a potentially mortal blow at their underlying logic, which is that they are universally available. If I can buy Ariel or Coke at Tesco, Sainsbury’s or my local independent corner shop that means, almost by definition, Ariel and Coke are not helping these retailers differentiate what they offer. That’s why Dave Nichol, own-label crusader and former president of the Cott Corporation, the own-label beverage supplier, dismisses national brands as “promiscuous”. “They are like ladies of the night,” he sneers. “They will sell to anybody.”
In reality, the retailer quest for brand differentiation is turning out to be more subtle. ECR-inspired category management is encouraging retailers to stop viewing each category as a trading unit in its own right – a certain amount of space that must deliver a certain return – and to start asking how each category helps attract and keep its particular target group of customers.
This has the result that some categories become “destination” categories which, as Glover put it, “people drive past Tesco for”. Others become “routine” categories which, as long as they are managed properly, people buy once they are in the shop. Yet others become convenience or seasonal, and so on. The fortunes of many brands, and own-label suppliers, rest upon how each retailer decides to play this destination-shopping game.
For example, in the destination shopping game “promiscuous” national brands rarely come top of the retailer marketing agenda (except through promotions). The obvious opportunities for differentiation lie in categories such as fresh produce, wine or cheese which are already own-label dominated. The difference is that the retailer no longer wants own label as a cheap “me-too” – that’s yesterday’s trading mentality – but own label as a superior, exclusive, innovative offer. The pressure is on for own-label suppliers to stop copying national brands and to start genuinely innovating and forging proprietary – perhaps exclusive – relationships with their retail customers.
This search for exclusivity and innovation also opens up enormous opportunities for small niche brands – so long as they don’t mind being heavily reliant on just one or two key customers. They can prosper by helping these customers develop exclusive offerings – something that sells in Sainsbury’s but not in Tesco, or vice versa. The danger, of course, is that the brand is effectively captured by the retailer, becoming what Nichol calls a control brand: a brand formally owned by the manufacturer, but whose destiny (and marketing strategy) is effectively controlled by the retailer.
A second outcome is that in routine categories such as soft drinks, yellow fats and soap powders, the retailer focus is shifting. Shafting brands through own-label challengers is no longer as important. Getting the range exactly right for the retail brand’s particular customer base is much more important, and retailers are much more open to manufacturer suggestions as to how to maximise category profitability.
That’s good news for brands. But there is twist in the tail: maximising category profitability involves a revolution in marketing thinking as it shifts the key marketing question from the traditional one of “what can this channel do for my brand?” to “what can my brand do for this channel?”
Those brands – and brand manufacturers – which can embrace this shift and align their marketing skills and spends to each retailer’s marketing objectives, are finding new vistas of opportunity opening up before them. Retailer power stops being the Big Bogey and becomes a friend. If they’re clever, brand manufacturers can harness it in their favour. That’s why people like Procter & Gamble managing director Paul Polman suggest that ECR could bring not just widely discussed efficiency savings worth about seven per cent of sales, but revenue increases of 30 to 40 per cent – gained at the expense of his competitors.
Yet even here there are dangers. Too intimate an ECR relationship with one retailer might provoke another to give you the cold shoulder. And the retailer quest for sharper differentiation is showing in the form of mounting pressure on national brands to offer retailer exclusives, whether through exclusive stocking of new products for certain periods of time, exclusive packaging, pack sizes or flavours, exclusive promotions, and so on. This is creating a new level of complexity, cost (and politics) for brand managers to deal with.
No player, whether a grocery multiple, power brand, niche player or own-label supplier, dares remain aloof from these shifts. True, they are only in their infancy. Sainsbury’s, for example, only started recasting its category strategy earlier this year. But as the environment for both retail and manufacturer brands changes yet again, only those which are quick to adapt will prosper.