Retailers are significantly growing private label shelf space and share
by leaving only the strongest CGP brands to pull in traffic, then
trumping the CPG efforts with increasing price differentials between
CPGs and private labels.
So, who wins and who loses with this scenario?
- Private label manufacturers continue to grow with little to no
investment cost beyond expanding their manufacturing bases and
associated costs with fulfilling new orders. - Consumers get better prices, less selection and arguably lower quality.
- CPG companies are left with the privilege of funding a long term
strategic shift that ultimately leads to overall category compression.
Even if they win, their vitality in the category has to be questioned. - Retailers get simplified shelf sets that lead to lower overall costs
and better margins. But under a hyper compressed version of this model
in the US, only Walmart wins. Here's why;
If a CPG wins a category "jump ball" because they spend more money on
marketing to drive customers to a retailer's shelf, cut their margins
in exchange for greater volume, and then find themselves sitting on the
shelf as the only name brand next to a private label, with more "jump
balls" on the horizon, over time the effort isn't worth the spend.
What's a CPG company to do when it's category is under the microscope with a major retailer?
The logical solution is to pick and choose their best retail customers
and retool their models based on profits vs. share and volume.
The millions of dollars that must be spent to maintain a retail client,
with the on-going chance of getting d-listed, can be better spent
growing profitable businesses elsewhere.
As this trend continues, CPG companies will have more lessons under
their belt and will begin to pick and choose the battles they have the
highest probability of winning. In a perfect retail scenario many categories will become exclusively private label and CPG brand margins will be squashed.But if that continues as a trend over the long haul in the US, Walmart
wins all the business away from other retailers, because other
retailers cannot compete against their volume and purchasing power.
What other differentiators are out there that a retailer can use to survive against Walmart?
Quality, Selection, Service, Location and Technology.
Smart retailers are now considering the overall health of their shelf
set and partnering with brands to solve their biggest challenges. Those
that don't, and simply follow the private label, price compression
model are signing themselves up for a challenge they cannot win, unless
they can trump Walmart on service, location and technology.
speaker wireless says:
Definitely a great post. Hats off to you! The information that you have provided is very helpful.
May 2, 2010 @ 3:53 am