Facts on Store Brands: Not As Bad As You Think
By Greg Orth, Director

Store brands can be a nationally branded company's worst nightmare, whether you are the top selling brand in a category or the fourth or fifth brand. The impact store brands can cause on a branded manufacturer's resources can be daunting. But before reacting with programs designed to compete directly with store brands, branded manufacturers need to understand if store brands truly compete with their branded products.

While store brands have always been around, their growth has accelerated over the last few years. Major retailers are investing more money and effort to raising the level and image of their store brands, trying to convince consumers to switch to stores brand which, on average, reportedly cost between 5 and 20% less than national brands.

For example, Target is revamping its brand using a new Up & Up label with creative packaging and innovative design, while Wal-Mart's Great Value brand has undergone a significant change as well. In fact, analysts predict that Wal-Mart's Great Value brand could account for over 40% of sales over the next three years (significantly up from the current 16%) . Fittingly, branded manufacturers aren't going to sit idly by. The problem is that branded manufacturers are often making decisions to significantly alter their go-to-market strategies, innovation plans and/or spending to combat store brands when they don't necessarily have to.

Let's be realistic: store brands can be just as much a competitor to a national brand as Coke is to Pepsi. But the level of impact store brands can have is often misunderstood and can frequently be over rated.

What can a manufacturer do to understand the impact and interaction store brands have on their business? First, a company must understand how the consumer is using and shopping the category to know what role their brands and competitive brands play within that category (including store brands). Second, a company must truly understand the environment in which their products compete and the sales impact store brands are having on their business. Manufacturers need to get the facts on the true interaction between national and store brands to make sure store brands do not exceed their fair share of shelf space and promotions. And finally, all options of competitive response should be evaluated before acting on them because, in many cases, it is a matter of looking at what you are doing that works best and not what store brands are doing. All of this needs to be done in collaboration with the retailer to ensure best practices are applied to the entire category and not in favor of any particular brand or product.

Recently an over-the-counter (OTC) medicine company went through such a process. Alarmed by the rate at which they saw store brands growing, they were planning to commit a large amount of funding and resources to combat store brands by creating new products and altering their promotional plans. But when a consumer behavior-based analysis was performed, it became clear that while store brands did indeed compete with the OTC company's brands to a certain extent, they weren't cannibalizing any more of their business than they had in the past. Store brands were primarily benefiting from increased distribution at retail and, to a lesser extent, the economic environment.

Let's look a little closer at this example. First, it was necessary to understand how the category is organized from a consumer perspective to determine how the consumer shops the category. In general, there is a direct need for both branded and store brand products because the diverse consumer base demands it. In OTC medicine, some consumers shop primarily by price and will favor store brands, but many other consumers will only buy a national brand because of the associated comfort and safety they feel with branded products.

In this case, our analysis of consumer usage and purchase behavior showed that store brands were having limited impact on the OTC company's brands. All metrics showed that the interaction and switching between the national brands and the store brands had not changed much over the course of the prior year and, in fact, over the course of the last 5 years. While store brands were flourishing, it wasn't coming at the expense of the OTC company's brands. A business drivers' analysis revealed that the lackluster performance of the company's brands was a direct reflection of their own go-to-market actions and not due to the impact of store brands.

Prior to the consumer behavior-based analysis, the company was planning on developing new bundled products to compete against store brands. They were also going to deeply discount their products to compete with the lower priced store brands, thus significantly eroding profit margins. After completing the analysis and realizing store brands were not the cause of their current performance, they focused on maintaining the equity of their brands to meet consumer needs through positioning refinements, increased advertising spending and category-leading innovation -- not lowering the value of their brands to compete with store brands. They also recognized that simply changing their promotional practices across all classes of trade was going to have a significant impact in revitalizing their brands and marketplace performance. Through these actions the OTC company redirected a significant amount of time and resources back to building the equity of their brands and, consequently, driving share growth in the category.

Every category is different and the interactions between national brands and store brands can vary widely between categories. Often, the right step is to focus on building the value bundle for your brand, not pricing your brand lower to compete with store brands. In every case, it is imperative to get the facts to understand the interaction dynamics for your brands...and only then take the necessary steps to compete.