Private Label Marketing - The upside and dark side

Private label - The upside and dark side for the retailer, consumer and bottom line profits

Every economic downturn has retailers expanding their offerings on private label products to meet the expected change in financially strapped consumer purchase habits. The perceived win for the retailer increases margins. However, leadership retailers like Wal-Mart, Target, Kroger, Walgreen's, and Costco have learned that in good times and difficult times, you don't put margin in the bank, "YOU DEPOSIT PENNIES" or DOLLARS. It's called "Gross Margin Return On Investment: or GMROI and they have perfected it after years of research on their consumer purchase habits and put the learning into developing business models that evaluate dollar profit per square foot of shelf space. If you had seen the Wal-Mart ad this past week, It was all branded products. Branded companies do the marketing, generate consumer interest to purchase a category product and motivate them to go to a store. These are the 20% to 40% of the shoppers that buy 80% of the high value products they like to sell because they are the most loyal and they BUY MORE ALL THE TIME...... All the consumer insight data supports that fact. They always tend to buy branded products which are larger transaction builders and the total cash register ring per trip is the highest of any consumer base.

Private label has never done the consumer research or introduced new products that created a category or new segment. They are followers and they can actually hurt category sales, now the dark side!

- A retailer can sell a box of private label at $1.39 per unit with a 35% margin while the branded comparison sells for $2.19 and the margin is 25%. The quality and units of measure may not be the same, however, the consumer appears to save money. First, for each sale the retailer just lost $ .80 in their cash register as sales revenue generated. Multiplied by 100's of categories and 10,000 or more items in each store and you can understand why Channel retails sales can be down sharply with an overly aggressive private label campaign.

- In this example, for every consumer traded down to the private label for a branded item, the retailer made more margin but made $ .49 on the private label sale, but missed the $ .55 the branded sale would have generated or they lost $ .06 on the potential sale. That's what is called managing and merchandising to generate cash flow and "PENNY PROFIT".

- Back to GMROI and it's impact on Channel cash flow and working capital. Many retailers today still "buy and hold" due to big deals. However GMROI is an industry standard which it deals with velocity of a product, the cash/revenue and profit generated from each individual product. If you have an item on the shelf with a 45% margin and only one is sold every couple of weeks or less, the GMROI would be terrible and most retailers would discontinue the item ASAP! That's not smart cash management any more and lowers available working capital.

My wife shops at a nationally known store and some of their tactics has been to eliminated selected branded products and only offer private label. After several months of this frustration, she no longer shops that store close to our home and drives further to find the products she wants. Great example of not catering to your best consumer and reward consumer loyalty for the sake of margin. We have had five children and would suggest the store manager never knew my wife stopped shopping there, she just left.

If you need help with retail marketing and channel management, please call Gary Pawlovich at (920) 265-9500.

To Your Success!

Gary Pawlovich, Executive VP of Business Development
The Geisheker Group marketing firm
(920) 265-9500
"We don't help you compete, we help you dominate!"