The Private Label Playbook

Less Stock, More Profit

Todd Hale
Thought Leadership, ACNielsen Consumer Segmentation & Targeting

Marc Dietz
Product Marketing, DemandTec

Kevin Sterneckert
Information Systems, Daymon Worldwide

John Krohn
Information Systems, Daymon Worldwid

Private label has gone mainstream in a big way, graduating from lower shelf placements and questionable quality to bona fide contender for consumer dollars, duking it out with branded products in the retail ring. While private label category sales have leaped forward, private label category strategies have lagged behind. Now there's a playbook for retailers that spells out winning private label strategies designed to increase key category metrics such as revenue, volume and profit by taking an integrated look at optimizing assortment and pricing.

In an industry first, ACNielsen, Daymon Worldwide and DemandTec teamed up to conduct a comprehensive review of private label market dynamics, including consumer attitudes and purchase behavior, as well as in-store tests that explored the interaction between assortment and price in optimizing category performance. The study's goal: establish a repeatable methodology that will enable retailers to objectively evaluate alternative pricing and assortment scenarios, taking into account the interplay between those two variables for branded and private label goods.

Valued consumers
To paraphrase a quote from the movie Field of Dreams, Kevin Costner's character is told, “If you build it, they will come.” Turns out, that theory applies to private label as well. Retailers who proactively build their private label business cultivate a customer base predisposed both to buy more private label goods and hold those products in high regard on important attributes like quality.

Skyrocketing gas prices have underscored the fact that, when consumers feel a pinch at the pump, they pinch their pennies and pump more money into private label purchases. In general, heavier private label shoppers shop more often, buying more branded and more private label products. The net take here: shoppers reward stores that recognize their value orientation and enable them to save by carrying both private label and branded offerings. See chart 1.

For a good-news/bad-news twist, findings also showed that, unfortunately, the top spending consumer segment has a weaker private label commitment than less wealthy counterparts. Savvy retailers can convert this into a good news scenario, capitalizing on the opportunity to ring up higher sales by offering premium private label goods with more appeal to upscale shoppers. Boosting the private label advertising budget, in-store features and displays and scheduling in-store sampling occasions can stimulate private label trials and convert skeptical shoppers.

Quality now (at least) at parity
In the early years of private label, buyers were forced to sacrifice product quality to realize needed savings. That is no longer true. In fact, one-third of consumers polled by ACNielsen emphatically asserted that some private label goods are even “higher quality” than brands. Almost six in10 consumers rated private label products “just as good” as the branded competition.

When quality really matters, 80% of shoppers still believed that private label products were acceptable. Perhaps the ultimate testament to private label quality gains resides in the fact that 90% of study respondents said they “felt comfortable” serving private label foods to their guests.

Gone are the days of the generic, stenciled black type on white background packages. Private label lines now feature attractive, colorful labels with appetite appeal and high-quality graphics every bit as stylish as national brands.

Points about price
The fundamental appeal of private label goods has never changed—they're a great value. Two out of three survey respondents described private label as “an extremely good value.” Once shunned as the exclusive purview of lower income, blue collar families, private label has broken through the income barrier. Today, the numbers show a high buyer development index for households with incomes of $70,000 or more per year.

Me-too branded products with few or no meaningful points of difference have left consumers hungry for offerings in the right price/value range, and with a bad taste for many branded goods. Simply put, almost three-quarters of shoppers don't think brands are worth the extra price. And it's not about the money. Thirty-six percent of respondents noted that they would be willing to pay the same, or more, for private label items that they really like.

A word of advice about private label pricing strategy—retailers should stop thinking in terms of price gaps and start aligning private label pricing with the product's value proposition—including quality, packaging, etc. Deploying this approach allows the price itself to act as a consumer cue, accurately communicating value.

Best product, best price model

ACNielsen, Daymon, and DemandTec developed a six step process for rationalizing product assortment and optimizing price on a category basis. To test the model, a number of categories were analyzed using the systematic optimization process. We'll explore the case of bottled-up demand in the salad dressing sector to illustrate how the process works
in the real world. See chart 2.

Step 1: Identify SKU Proliferation. The analysis begins with an evaluation of the number of SKUs in the pourable salad dressings category. Over time, in an effort to satisfy consumer demand and accommodate new entries, retailers continue adding SKUs. Often, this happens without an understanding of the incremental gain from listing each product, or how adding one item impacts overall category profitability.

Although consumers desire choice, too many choices prove confusing and counterproductive, frustrating shoppers. Not only do similar products confuse the selection process, they also steal volume from private label goods and negatively impact profitability. Plotting the percent of category sales against the number of items in the category yields a sales curve that reveals the points of diminishing, and marginal, return.

This becomes the first marker in the process, one that factors in sales velocity and contribution to category sales to determine the optimal number of SKUs for a category.

Step 2: Consumer Decision Tree. Once we've identified that SKU proliferation exists, we need to gain insight into how people shop the category to begin to understand which items are duplicative and which are not. What does the consumer decision process look like? What factors come into play when a shopper compares products? How do those factors rank in terms of order of importance? Do shoppers apply the same factors to branded and private label products?

In the pourable salad dressing example, the overwhelming number of consumers first choose between a light and regular version of the product. When listing selection attributes, shoppers assigned the light vs. regular variable an importance weight of 47. Next in line, but only about half as important to shoppers, is the brand vs. brand vs. private label decision. A close third in the purchase selection ladder is the matter of product size. Perhaps surprisingly, running fourth in the shopper decision hierarchy by a very wide margin, comes the flavor attribute.

What this tells us is that for this particular case study, brand is more important than flavor when creating variety in the pourables category. Therefore, it is important to carry a variety of brands, but not important to carry every line extension and flavor of each brand.

Step 3: Consumer Brand Loyalty. Having quantified the number of available options and how shoppers choose among them, the study turns to the issue of consumer brand loyalty. In order to make informed de/listing decisions, retailers will require a method for understanding how unique or exclusive consumers consider each SKU to be, how loyal they are to that particular SKU, and finally, how that SKU interacts with private label offerings.

Among the SKUs under the microscope, Brand D dressing registers below the expected index of 100 on the exclusivity scale, well below the norm on the brand loyalty scale, and extremely high on the private label interaction measurement.

In summary, this Brand D product was viewed as a me-too entry with no unique appeal and no point of difference on which to build repeat purchase among loyal customers, but a tendency to pull sales away from the private label ranks. See chart 3.

To identify low contributing or vulnerable items, products were “fit” statistically into a quadrant analysis that assigned each SKU to either the niche, power, weak or mid-tier quadrant based on its ability to attract exclusive buyers and the associated dollar sales rate. An identified poor performer based on lower exclusivity and higher switching rates with PL was Brand D products.

Step 4: Brand Substitutability. Some brands offer such a unique consumer experience that they have no substitutes. Most brands encounter some degree of substitutability, from low (consumers may switch retailers before they switch brands) to high (consumers will readily switch and are virtually indifferent between brands).

When seeking to optimize category performance, determining the degree of substitutability is imperative, along with the direction of the substitution, whether buyer volume shifts to other brands or transfers to the private label alternative. At this stage of the process, a simulation model iteratively removes each item from the category as if it was de-listed, and measures the percentage change in SKU unit volume. When Brand D was de-listed, private label volume increased. See chart 4.

Step 5: Scenario Design with Buyers. Armed with a wealth of information that defines how the category operates and how consumers view and interact with individual SKUs, the process turns to the issue of de-listing. Poor performers from the first four steps get placed into a candidate product de-listing pool.

The process then couples this quantitative information with qualitative input from buyers, drafting three alternative scenarios for optimizing assortment (a scenario being a
variation of the assortment). Qualitative input includes factors such as local preferences, relationships with important suppliers, trade fund availability and the competitive dynamics of the marketplace.

Step 6: Optimize Prices/Deploy Best Scenario. A major finding of the study is this: pricing and assortment decisions are inseparable and interdependent. Long-held beliefs about private label pricing relative to national brand pricing are simply wrong. There is no such thing as a single, acceptable price gap that should separate the two.

Testing this hypothesis, we selected a primary goal for the pourable salad dressing category (category profit) and secondary goal (drive volume to private label/maintain competitiveness) to direct required trade-off decisions. We then optimized pricing for the three candidate scenarios, per category. For example, in pourable salad dressing, we simulated the following alternative scenarios:

• Scenario 1—remove nine SKUs comprising 3% of the category, targeting under-performers only;
• Scenario 2—remove 24 SKUs comprising 10% of the category, including under-performers and mid-tier SKUs with low exclusivity and high private label interaction; or
• Scenario 3—remove 37 SKUs comprising 15% of the category, including under-performers, mid-tier SKUs with low exclusivity and high private label interaction plus additional mid-tier SKUs.

The optimal solution proved to be Scenario 2, and the results speak for themselves. Overall category profit (the primary goal) increased by five percentage points, with both unit volume and sales revenues up 0.5%. Private label volume (a secondary goal) bumped up even more, growing by 7.4%, a beneficiary of the product pruning process along with a variety of unique brands. Further, category increases did not come at the expense of competitiveness or price image. See chart 5.

While results varied by strategy and category, the general outcome never changed—all category metrics improved when prices were optimized and improved more so when both assortment and pricing were factored into the demand equation.

Shifts in consumer acceptance, the maturation of brand presentation and the dramatic increase in product quality have combined to elevate private label to contender status. This study demonstrates that private label products are currently undervalued—and underpriced—in the marketplace.

To remedy that situation, retailers should adopt best practices that include:

• Treating pricing as an integral part of the category management process;
• Instituting a more granular or zoned approach to pricing;
• Emphasizing the right mix and number of image items;
• Using a fact-based, scientific approach to optimize category performance.