‘Refrigerated and Frozen Food Retailer’ magazine wrote about price wars in food and grocery retail, between retailers, or between retailers’ private labels and national brands.  

The comments about the difference between retailers’ own brands and national supplier brands are particularly interesting. The question, whether retailers’ own brands necessarily need to be cheaper and whether they can catch up later, is also very acute.

To me, the price difference here is really reflected by the difference between whether you are creating a brand (albeit one that is available only in one chain of stores) or a lower-priced private label. 

A brand needs distinctiveness, a private label is mostly a me-too. A brand needs to build its own relationships and desirability beyond the store it is available in, while private label sells because there is an existing customer for something else that it is knocking-off. (Of course there are private labels that are not me-too and that are distinctive, but they are the exceptions proving the rule, so I would much rather go with the simplified view of the world for now.)

Finally, migrating up the price curve is difficult in the best of times. Believing that it can be done quickly after an introductory low price, in the current economic scenario, would be highly optimistic. 

Price-optimization solution providers believe that retailers can increase private label prices:

DemandTec’s Derek Smith is seeing smaller price gaps between national brands and private label, with private label also adding more tiers. This allows one tier to fulfill the opening price point in a category, with the other tier playing roughly on par with the national brand or even priced above it…

“You also have to understand what price gap is necessary to get the consumer to trade up or down,” depending on your strategy, he adds. For example, you might want to incent shoppers to trade down to your private label, so you get more margin. So… do you raise the price on the national brand, lower the price on the private label, or do a bit of both? Once again, it will depend on your customer set and their purchasing history…

Lyle Walker, VP of marketing, KSS Retail, has seen some of the retailers he has worked with raise prices on their private label without losing sales – thus significantly increasing category profits. “We build demand models with two years’ worth of POS history, and then dynamically adjust elasticity values based on weekly updates of POS data,” said Mr. Walker. 

Of course, Mr. Walker also qualifies the argument by saying that the increment may be “pennies here and pennies there,” implying that the discount for private label may still remain large enough for the customer not to notice the “pennies” being added on gradually.

Which sort of negates the whole question about whether retailers’ private label can really compete by pricing on par with national supplier brands, doesn’t it? 

(The original RFF article is available here.)

The Indian consumer market remains one of the most attractive and sustainable markets for international companies. It has even been described as a market of a lifetime by some, meaning that a brand can live through a whole lifecycle of decades if it launches in the market today. The last decade has made the Indian consumer even more visible and desirable to consumer goods companies from around the world.

So it is hardly surprising that many international food and beverage brands have entered the market in the last few years, either by appointing wholesalers as their distributors in the market or, occasionally, establishing a more direct presence through joint ventures or subsidiaries. 

These companies have been helped along by the growth of modern retail chains. These offer a familiar sales environment to most of these companies who sell through supermarket and hypermarket chains in other countries. 

However, the market presents international brands and their distributors with two challenges. 

First, the question whether they should stick to only selling through the more “organised” retail chains. If they do so, they could focus commercially on a limited number of larger business accounts, and service them efficiently as they do the large retailers in other markets. It would also provide them – in the Indian context – an upmarket environment where the display and promotional means allow a more premium positioning.

However, even the largest store chain has a limited footprint, while India’s vibrant mom-and-pop retailers form a much larger platform and continue to reach out to a much larger market than the modern traders. So by focussing on the chain-stores alone, international brands would miss out on the majority of the Indian consumers who do not have a chain store near them, or choose to continue shopping at the traditional stores. 

On the one hand you might think that it is logical to reach out to as many customers as quickly as possible. On the other hand, “foreign” equals “exotic” in the dictionary, which equals mysterious, interesting, glamorous and so on. So some of these brands actually benefit from maintaining an aura of exclusivity, and it helps if their distribution is limited. 

This challenge, therefore, needs to be addressed by each company specifically, keeping its brand and business objectives in mind.  

The second concern is more widespread and includes both the branded supplier as well as the retailer, whether chain-store or traditional mom-and-pop. It is a given that the international brand will share a store environment with local brands. Unless, of course, an international brand creates a separate exclusive branded store (easier to do in fashion and lifestyle products than in food and grocery), or it is only sold in stores which sell only foreign merchandise (of which there are very few).

So the second question is: in the shared retail environment, should the international brands be mingled with local brands and products, or should they be displayed apart from local brands? This question is relevant even if a brand is only present in the modern Indian supermarkets.

Prices of imported merchandise of international brands tend to be high, because the base price can be high to start with, and import duties and other costs push the price up further. So a popular option so far has been to bunch imported brands together at the retail store on one or a few shelves. The reasoning is that these are speciality products, expensive and with a limited consumer base. Shoppers who know about these brands will seek them out, and they are likely to also shop for other imported brands at the same time, so it makes sense to display them together. 

Some brands are happy with this display strategy, because it makes a clear statement that their brand is a premium “exclusive” brand, and it prevents a one-to-one comparison with lower priced local competitors.

However, brands that want to be visible to a wider set of consumers would be unhappy with this arrangement.  Their take would be that by bunching high priced merchandise together, the retailer is creating an area which becomes a dead zone that is avoided by most shoppers. Thus, a brand that could be otherwise sold to more consumers is forced to become a niche product due to the limited visibility.

Regular readers would know that our approach to creating or judging strategy is dogmatic only in one aspect: “to avoid the cookie cutter”. Whether you’re selling meat snacks, exotic meal packs, kettle chips or iceberg lettuce, multiple factors determine whether a particular international product should be segregated or displayed alongside local brands. And that strategy needs to be dynamic.

The first factor to consider is how familiar is the product itself to the customer frequenting the store. Let’s take an imported salsa as an example. In a location where the customers may not be familiar with Mexican cooking, it makes sense to not just display tortillas, salsa, sour cream and beans together, but also to offer samplers and give away recipes. While the salsa may be of an imported brand, the beans may be of an Indian brand, and the tortillas and cream may be from a local supplier. 

In this case, where each component of the meal originated is less important than the fact that the complete meal needs to be presented together to the customer. Putting the imported salsa with other imported products when most of them may not be sure how to use it does not encourage customers to buy it. 

In any case, as familiarity increases with time, the product may become more widely available, other international and national brands may also appear on the shelves, and segregation becomes a non-issue.

The tendency of the store’s consumer to compare and decide on the basis of price – as mentioned earlier – can also be an important factor. In some cases, the product may need to be insulated from this comparison, and placed in a defined area with other high-priced imported brands. In other cases, if the brand is strong enough to stand on its own, it could be placed in high-traffic locations with higher-volume lower-priced brands.

The overall store positioning and product mix have a very large role to play in the decision about segregation. If a supermarket has an upmarket catchment, and carries a higher proportion of premium products, intermingling may be the norm rather than an exception. The customer who is serving herself would probably find it most convenient to have the local and imported baked beans or olive oils displayed together. The price premium may even play to the imported brand’s advantage in such upmarket environments and catchments, conveying some form of qualitative superiority. 

If a store has a wide enough assortment of imported products which are significantly higher priced than local variants, then it may make sense to do an “international corner”. But for this to work, the customer base must already be reasonably aware of the individual products being sold. The international corner also needs to be kept fresh, with new brands and new varieties of product to keep the foot traffic alive and the products moving. Even then, “packaged solutions” and demonstrations are needed to maintain visibility.

Let’s understand one fact – people adapt exotica into their consumption culture so deeply until it you can’t differentiate between the local and the international. Indian cuisine would be incomplete without potatoes, chillies and mangoes. However, the varieties of all three crops available in India today are reported to have been brought from the Americas and west Asia a few hundred years ago. Among companies, Colgate, Vicks, Horlicks and Bata are all international brands that Indian consumers commonly accept as their own. 

Most international companies want to target the millions of Indian middle class households, but their pricing, distribution and retail strategy is too exclusive, conservative and totally contrary to this objective. 

Our suggestion would be: go out as wide as you believe is appropriate, because being invisible does no good to the brand. Put your exotica within the reach of the consumer, alongside competing local products. 

As long as you’re prepared to support the brand, and sustain efforts to encourage consumers to try the product, there would be a time when your brand is no longer treated as exotic. And that would be a good thing, if you’re looking for large numbers.

New York Times reports that Cablevision will provide targeted ads to selected homes based on a variety of criteria. (Cable Companies Target Commercials to Audience).

Department store pioneer John Wanamaker is reported to have said that half his advertising was wasted, but complained that he didn’t know which half it was.

With such targeted advertising on cable, he would have not only been able to tell which half was being wasted, but would have also been able to reschedule it to reach the right audience and avoid the waste. Cable companies with a good consumer database and analytics should be able to figure out who would be watching what shows, and target the ads accordingly (e.g. late-afternoon may trigger fast food ads in households with kids).

The article says: “…Cablevision will use its targeting technology to route ads to specific households based on data about income, ethnicity, gender or whether the homeowner has children or pets…viewers may not realize they are seeing ads different from a neighbor’s. But during the same show, a 50-something male may see an ad for, say, high-end speakers from Best Buy, while his neighbors with children may see one for a Best Buy video game.”

This could, of course, sound very creepy to an average customer who doesn’t want to know that he or she is being tracked.

If fact, the article quotes Marc Rotenberg, the executive director of the Electronic Privacy Information Center, a Washington-based civil liberties group, as saying that the company needs to show that the information “can’t be reverse-engineered to find the names of individuals that were watching particular shows”.

But let’s face it, in today’s environment, if we’re online or on a communications device, there is a good chance that we can be / are being tracked.

We can expect the tug-of-war about consumer privacy to continue, but this is too seductive a tool for advertisers to ignore, especially in a downturn. 

Luxury has its ups and downs. Assuming that the economy will look up at some point of time in the near or distant future, luxury brands will shine again, even if they’ve muddied themselves slightly in the puddles of discounting.

Public (and industry) memory is short, especially in fashion, where you might be as good/bad as your last collection. There are plenty of luxury brands which had once been pushed to the dustiest back shelves, that have come back into fashion in recent years. So I’m sure many of the brands will be forgiven their current trespasses.

And, as a precursor to that, someone’s going to come back very soon with the bumper sticker from the post dot-con days which read: “I want to be irrationally exuberant again!”

But on a more rational note, brands which have tried to “democratize” luxury by tinkering with the basic product quality and not paying attention to the brand values would find it harder to climb up again. Just because you want to reach a larger audience you cannot inherently reduce the promise of a brand. Especially when there is true quality available across the price spectrum today.

Who knows, we might even get back to the days when the joy of luxury was based on having truly superior products rather than just a name that a lot of people recognise.

About 7 months ago a spat occurred between the leading retail company in India Future Group and branded supplier Cadbury’s, with respect to margins offered to the Future Group. (A friend described it as a Bollywood saga.) Future Group had also previously had run-ins with other suppliers including the likes of Pepsi. (The previous post is here.)

Now there’s a European film noire sequel in the making, in a battle between the Belgian retailer Delhaize and European FMCG big daddy Unilever. Delhaize has suspended purchases from Unilever as, according to Delhaize, Unilever is making “unacceptable demands” that the chain stock more Unilever brands.

Like other branded suppliers, Unilever has obviously been impacted across Europe and the US as retailers have become more sophisticated in their approach to private label and squeezed out brands that they have been able to replace with their own products.

Given further weakening of the economic scenario, it is likely that consumers would switch to cheaper private labels offered by retailers, and retailers would be tempted to give over even more shelf space to their own labels where they get higher margins than branded products – a continually losing spiral for the branded FMCG companies.

According to a consumer survey carried out by an agency in Flanders in northern Belgium, apparently 31 per cent of shoppers polled were choosing to shop at chains other than Delhaize, and another 19 per cent were not happy with Delhaize decision (but there doesn’t seem to be indication yet that they would switch). Most of the customers who said they were remaining with Delhaize are either switching to other brands or to Delhaize’s own label products.

However this brawl ends, and whether it turns out to be a win-lose or a lose-lose situation, even this survey demonstrates that the retail store has the upper hand – less than one-third of the surveyed customers displayed their hard-core brand loyalty by switching to other stores.

That is obviously a worrying sign for branded suppliers who have invested humongous sums of money and decades of effort in developing their brands. But it also raises questions about whether the consumer is really perceiving any value out of the billions in advertising and millions of man-hours spent by the FMCG companies in developing the nth variation of toothpaste or detergent.

Tough times raise tough questions, and the ones that comes to mind are these:

• In recent years FMCG companies have rationalized their brand portfolios, but have they done enough?
• Are they really clear about the value the remaining brands are delivering?
• Are the retailers really playing fair when they build up so-called partnerships with suppliers, only to take on board the product learnings and then develop own-label copycat products (sometimes down to package colouring and graphics)?

What do you think?