Brandweek, September 3, 2007

As Anyone on Either Side of the Branding Fence Will Attest, This Kind of ...

As anyone on either side of the branding fence will attest, this kind of dominance for a private label brand would have been unthinkable just a few years ago, when name-brand pet foods such as Purina and Alpo were the unquestioned top dogs on the store shelves. But, thanks in part to the transparency of the Internet and in part by the store brands themselves, private labels have captured a good chunk of major-label customers. According to an Ipsos MORI survey last year, 41% of consumers said they frequently drop store brands into their shopping carts these days versus 12% in 1991.

That's not the end of the story, though. Major labels aren't sitting idly by while store brands steal their customers. There are several ways to counter the private label menace, including advertising, innovation and targeting.

For some, reliance on these marketing pillars seems tipping the scales in their favor. According to data from IRI, 12 of 15 private labels in the categories of disposable diapers, household cleaners and laundry detergents witnessed an erosion of sales in the past year, with some products suffering year-over-year declines as much as 13%. In a few cases, the defense strategies major brands have adopted involve returning to the very roots that defined the brand to begin with.

"Brands stand for something," said Ken Harris, managing director at Cannondale Associates, Evanston, Ill. "Private label products do not generally lead with consumers, they are fast-followers of manufacturers. This gives brands an advantage."

IN DEFENSE OF ADVERTISING

In an age where the reach of television is constantly questioned and consumers are blitzed with more and more ads, it may be surprising that packaged goods companies are pouring more money into advertising. But Heinz, Sara Lee, Campbell and Kraft, among others, have all followed the same playbook of late: Focus on a few core brands and significantly increase advertising. And most have noted a correlation between that enhanced ad spend and increased sales. (Not all though: Kraft lost market share in half of its U.S. businesses this past quarter.) Though Target has spent modest amounts to advertise its Archer Farms food line, this is still one area where major labels have an unquestionable edge.

"Ten years ago, advertising was used to compete with other national brands," said Candace Corlett, principal at WSL Strategic Retail, New York. "Now, it has to accomplish the same results, [but] against different competitive sets: national brands and retailer brands. This is a tool retailers do not own. They do not have a budget for it."

No one has (yet) figured out how advertising manages to instill brand loyalty. Repetition may create awareness, but what creates that positive association that makes consumers want to pay extra money for something they know is pretty much the same?

Jan-Benedict Steenkamp, professor of marketing at the University of North Carolina-Chapel Hill and co-author of Private Label Strategy: How to Meet the Store Brand Challenge, suggested that the role of advertising these days is to reinforce the message that consumers are making the right choices. "Retailers have the advantage of being 'around the corner' from their consumers," he said. "So national brands have to reassure consumers about their brands through advertising."

INNOVATE OR PERISH

Another way to reinforce that connection is by maintaining a steady pipeline of new products. What better way to convince the consumer that the brand (and they, by extension) are on the cutting edge and the best of the best? "The combination of advertising and new products is especially powerful," noted Nirmalya Kumar, a London Business School marketing professor and co-author of Private Label Strategy. According to Kumar's research, a dollar spent on ads for a brand's new product is, on average, five times more effective in boosting sales than the same dollar spent on ongoing, maintenance advertising.

Kumar says if a rollout is backed by heavy advertising, that combo can make the product up to 70% more likely to be purchased. Heinz, for one, has seemed to have figured this out as well. In addition to boosting its marketing budget by about 40% over the last year, the company has also introduced about 100 new products.

New products introduced under the rubric of a name brand are themselves a strategy of increasing importance in the battle against the private labels. There's a simple reason: As is true with advertising, major brands have the R&D budgets to drive it, whereas private labels are historically imitators. Major brand marketers, said Palmer, "must innovate around how to make the brand [deliver on its] promise, we must innovate in how we deliver the brand promise and we must innovate in the way we talk about the brand." In fact, two distinct advantages emerge from the innovation strategy: Private labels can't knock off everything, so a large brand that increases its product portfolio can compete based on variety. In addition, a major brand that rolls out a new product benefits from a margin of time after the rollout to draw customers before a private label might start knocking it off and selling it at a lower price point, even if that gap is fairly brief. After all, it only took competitors a few weeks to knock off Procter & Gamble's Swiffer mop in 1999.

Even so, analysts say it's self-defeating for marketers to stop thinking of ways to innovate, even in categories that may seem to have hit a dead end, innovation-wise. "Five years ago Heinz was losing share to private label, it was discounting its ketchup and the category as a whole was declining," said Gary Stibel, CEO of the New England Consulting Group in Westport, Conn. In response, Heinz flexed its R&D muscle and counterpunched with a raft of specialty ketchups: green (as in the color), organic, reduced-sugar and low-carb. "Now Heinz's market share is growing and the category is growing," Stibel said.

Heinz constitutes a 60% share of the ketchup category, but the brand still continues to deliver innovation to its customers. "We use private label as a rallying cry. It's simply another competitor," said Andrew Towle, global marketing officer at H.J. Heinz, Pittsburgh. "We win by ensuring that we are offering our consumers superior taste, more convenient packaging and constant innovation. We always make sure the performance gap is in our favor."

In the course of developing its new ketchup offerings, Heinz also focused on innovative packaging—the company has experimented with replacing the words "tomato ketchup" with sayings like "french fries not included," for instance—as a way to gain an edge on the incessantly copycatting private labels.

"Just a brand name and competitive price will not work. Brands need to have clear and compelling packaging on shelves," said Eli Portnoy, chief brand strategist at The Portnoy Group, Orlando, Fla. "Design [is a] heavy influencer in impulse purchases, so the more attractive the design, the more likely it is to catch the consumers eye in-store."

Gillette, said observers, is another company that's used innovation to strategic advantage in the fight against private label. In the last few years Gillette introduced the Mach III razor followed by Mach III Turbo. Before those had fully penetrated the market Gillette launched Fusion and then Fusion Phantom. "Gillette has lowered the ceiling," Harris said. "There is not a lot of space for others to compete. Just as one new product hits the market, Gillette is already working on the next."

So too is Kimberly-Clark, which underwent the rankling experience of watching store brands begin to erode its profitable diaper business. Initially, Huggies had made a name for itself with its "flexible gathers" elastic feature that prevented leakage. But then store brands came out with their own bunching diapers. Recently, Huggies hit back with Gentle Care diapers for newborns and Natural Fit for older babies. Both new products feature specially designed contours that fit the curves of the baby's anatomy, based on age. "Diapers are a zero sum game," said Deb Bauer, the brand's marketing director. "We need to keep ahead of our competitors in the product innovation area."

Analysts agree that, although it can be frustrating to see how quickly store brands release copycat products, innovation is essential. "Brands have to continue to innovate to exist," said Portnoy. "Companies like P&G create categories to stay ahead of their competitors—branded and private-label—and to stay relevant with consumers."

Added Harris: "If a private label comes along and copies it—as long as they don't steal the intellectual property—that's [just] business today."

TARGET PRACTICES

Another way to turn consumers into brand advocates is to single them out. By targeting the young, it's possible to start a lifelong habit; seeking out the not-so-young can flatter the consumer, prompting an affinity for the brand.

Gillette took the former approach with its Fusion, which it mails out to boys within a month of their 18th birthdays. "Sampling is the best way to get products in consumers' hands and we want Gillette to be the razor in their hands as they experience their first shave," said Matthew Wohl, Gillette gm-global grooming, male premium systems.

Meanwhile, social networking sites have been cited as key connection-drivers for brands seeking segments in the market. Both Huggies (huggiesbabynetwork.com) and Pampers (pampers .com) created web sites that don't just plug the brand, but furnish usable, real-world content for expectant mothers. The sites are designed to be comprehensive resources for moms, offering articles on pregnancy and baby care topics; answering questions; and they may also allow communication with other moms. There's some debate about how well this tack works (even brand marketers admit some moms will still buy the cheaper diaper no matter how much time they spend on a company Web site), but most brand execs believe the practice is effective. "It's an important prebuilding relationship," said Huggies' Bauer.

Huggies' outreach is offline, too. In addition to a partnership with Meredith Corp., through which Huggies produces advertorial-driven mini-magazines dispensing child-rearing advice, Huggies also has inked an exclusive partnership with the Newborn channel in hospitals and Infamil formula. The channel offers advice to new mothers while the gift packs sent to hospitals include Huggies diapers and coupons. "We want to be able to reach moms at the earliest possible stages," said Bauer. "If moms like Huggies they will continue to use the brand and recommend it, which is why we invest so much to make sure we are delivering on a regular basis. All of these initiatives help Huggies connect the brand with moms at a time when they are looking for relevant information about solutions for their children."

Advertising, innovation and targeting are hardly the only tools at a brand marketers' disposal for fighting private label, but they are no doubt near the top of the list. Another emerging weapon is social consciousness, which makes the consumer feel the extra money they spend for a product is going for a good cause.

"Consumers are deliberately choosing brands that are 'giving back' or being socially conscious," said Portnoy. "Consumers expect companies to come to market with something that is truthful [and] sincere."

A good example of this is Starbucks, which has a line of branded beverages available in retail locations. The brand adopted an environmental mission statement as early as 1992—putting it considerably ahead of the eco curve that seems to have taken off after Al Gore's An Inconvenient Truth was released in 2006. Starbucks has pioneered ways of sourcing the enormous amounts of coffee beans that it requires while maintaining sustainable growing/harvesting practices and, more recently, assisting local communities by donating proceeds from its branded Ethos water.

Observers note there are still some old-school marketers that "don't get it" with regard to being socially conscious; they are probably missing the boat. Major trends repeatedly point to consumers wanting—indeed, expecting—brands to make a demonstrable commitment to social and environmental change.

Which raises the point that some companies, with apparent justification, feel as though they don't need change at all. Private label is more of a threat to some brand categories than others, with a number of brands (candy, beer, and cosmetics, to name a few) being in the position to need no special defense tactics.

"Can you think of any private label candy? Not really," said Cannondale's Harris. "Beer marketers have done brilliant jobs in creating images for their brands. There is a badge value or cachet associated with beer. You wouldn't want to be the guest showing up at a party with store brand beer. Private label has not evolved to that point." He adds that beer marketers are constantly innovating as well—from light beers, to low carb, to darker brews and new delivery methods such as aluminum bottles, the beer industry continues to break new ground.

For most, however, private label competition is a reality that's probably here to stay—and intensify—with some predicting that major labels may soon have more to fear than losing customers; they'll lose retailers, too.

"If marketers are not paying attention to their brands, they can't be surprised if they start losing distribution," said Harris. "A retailer can always find one brand to replace another. Very few brands don't have a counterpart."

Which is why the cycle—answering imitation with innovation, among other tactics—is one that will likely keep repeating itself. In the process, however, it will also afford major brands a chance to hold their ground. "If a brand invests in the quality of the product, delivers a differentiated product, invests heavily in innovation that reinforces the promise of the brand and doesn't raise the costs ahead of inflation," said Palmer, "the brand will be successful against private-label competitors."