RETURN ON INVESTMENT

BARBARA MURRAY

NEW YORK -- In an era when a half-dozen food retailers control the majority of sales in the United States, the real "national brands" driving growth in the very near future will be the private labels of large chains, according to a panel of experts assembled by the Private Label Manufacturers Association here.

For that reason, retailers should closely examine the return they are getting from investment in their own brands, including the marketing aspects, the PLMA said in a study just published titled "Store Brands Return on Investment."

The panel met last November in Chicago. Participants included experts in retail productivity, merchandising, category management, private label development, brand marketing, investments and retail stock valuations.

The growing strength of the American retail establishment is a recurring theme sounded by the PLMA panel, which was moderated by John Lord, associate dean of graduate education, Erivan K. Haub School of Business, St. Joseph's University, Philadelphia.

"Kroger and Safeway are costing it out, but the regionals -- those with $500 million or less per year in revenue -- are not spending much time promoting their private label," commented one panelist, Ralph Jacobson, director of retail consulting for Arthur Andersen for the Pacific region, and based in Los Angeles. Jacobson previously spent 17 years with Jewel food stores.

Exceptions to the broad dismissal of the regionals, he said, are Randall's in Texas, and Shaw's, Genuardi's, Wakefern and Pathmark, all in the northeastern states. Randall's, now part of Safeway, "really pushed hard to develop signature items," Jacobson said. And the wholesalers, a Supervalu or a Fleming, and the cooperatives, like Associated Grocers or Unified Western Grocers, certainly do analyze the costs of private label.

The PLMA panel began with a focus on establishing a framework for judging the true value of a private label program, including discussions on: the investment needed in a store brand effort, a calculation of ongoing expenses, a way to measure all aspects of income and revenue, and, "ultimately, a formula that reveals the true return on investment (ROI) of the program."

Elements of investment include packaging, warehousing, implementation issues, such as planograms and merchandising; the launching of a product; the cost of getting the product in front of consumers, and building awareness.

A special emphasis was placed on marketing. Said Jacobson, on the panel: "Promotion has everything to do with the success of private label. Even if you commit to just one stockkeeping unit in cookies and promote it hard, you can make it a top seller." Another pointed out that the cost of category management can run as high as $20,000 per category.

The panel emphasized that retailers calculate the impact on the products' gross profits when the marketing and merchandising expenses are deducted. "Heretofore, very few chains had that figure in their budget," one panelist pointed out. "Once applied, the results would equal the true net profit of the private label program, and only then can retailers begin to do the ROI of private label 'the right way."'

Another highlight is leverage, in that retailers are in a better position to capture national brand deals if they have strong private label counterpart products. Further, the larger pool of money that flows from such better deals can then be re-invested in even better private label offerings.

The single most important investment a retailer can make in its private label program, the panel agreed, is commitment. "Failure of private label is likely to occur if there is a lack of commitment from upper management and throughout the organization," they said in the report.

On commitment, Jacobson, who spoke with SN recently, said that a certain store brand item might bring in less than 1% of revenue, "and if that's where it is, why carry it? If so, it's dead stock. If I'm not keeping up, then I shouldn't carry it. It should be of value to the customer. If some store brand is a dog, don't feel compelled to have private label in every one of the 240 categories in Center Store.

"Once you start to get great turns, and are not carrying any back stock, then it means people are looking for it, and value it."

Safeway Select is now in all Safeway divisions with its gourmet-level products within that line. "They've got some great sales results out of that," Jacobson added. In Chicago now, too, Safeway owns Dominick's, he pointed out, "but if you shop at Vons or Dominick's, it has the Safeway brand." This might be confusing, because the consumer may have never heard of it, and it can't be called Vons brand or Dominick's brand, since this one is not the same as the old brand, which was under another name.

"There's a lot of pride out there," the consultant continued. Killing the name of Lucky was a big mistake for Albertson's, he said, since it was the low-price leader. In his opinion, "People don't care who owns the food, just don't change the name or make the environment look any different." Others thought differently, that the merger of Albertson's and Lucky stores in California would work out well because of the positive message that was communicated to consumers.

A store brand does not have to be a low-price leader, Jacobson said, offering as examples the store brands of Wegmans, based in Rochester, N.Y.; Harrods, of London; and Shaw's, from New England, which Jacobson said is "good quality stuff, in the top 3-5 in the U.S. in terms of private label. They got some help from their parent, J. Sainsbury, of the UK."

A panelist offered that Shaw's Supermarkets, West Bridgewater, Mass., has developed a way to rank its top 250 items, finding that 60 to 70 of them are private label.

The reason national brands are vulnerable now to aggressively marketed private label goods is that the big brands are too concerned with defending their market share, rather than optimizing margins for the retailer, the panelists said. They no longer represent excellence in their product categories, and are more interested in maintaining the status quo than forging ahead with product development, fearing that taking a chance could imperil their market share, according to the report.

The panel also agreed that store equity is a foundation for the development of store brand loyalty. Retailers need to leverage their store loyalty to benefit their private label profitability. That loyalty, however it was created, is what brought the shopper to the store, not the private brand. Loyalty is attached to the store. So, if it successfully attaches private label to the name of the store, the retailer can extend that loyalty to its store brand line.

Some proof of this was offered, based on American Stores' changing the Sav-On store name to Osco in California. It also put Osco private label in the stores, and private label sales fell. Then the retailer changed back to the Sav-On store but kept the Osco private label, finding that its private label sales were restored, and even increased. The moral is that consumer loyalty was to Sav-On, not to the Osco private label.

The panelists determined that the outlook for store brands is bright. What the report calls "a seismic change in retail operational philosophy" is looming, one that will call for more innovation in private label development. Among its main causes is consolidation, which leads to more choices for the consumer. More outlets are chasing the consumer, and forcing retailers to look to themselves and to building their store brands.