A wonderful presentation from McKinsey & Company. Private label - the new normal - why it is here to stay, here to grow, and best practices.

1. Driving innovation
through the
private brand
organization
July 2011
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2. McKinsey & Company | 1

3. US consumers still feel pressured
38% 42%
Are having a hard Are living
time making ends paycheck to
meet paycheck
45% 57%
Are making
Are somewhat or significant lifeplan
very worried changes because
about losing a job of declining asset
values
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4. Consumer response to the downturn that has created a
“new normal”…
Changing
HABITS
Trading Cutting
DOWN BACK
PENNY
Shifting pinching
CHANNELS
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5. …and consumers say these behaviors will stick
Percent
changing Percent intending to
Behavior behavior keep behavior
Purchase high-end 89
45
designer/luxury brands less
Shop at club stores more 35 88
Shop at mass merchants 84
50
more
Shop at dollar stores more 40 81
Purchase private brand/
50 80
store brand products more
Go out to eat less 60 71
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6. As a result, US private brand share has the High growth assumption
2010 revised base
potential to reach 24 percent 2007 base
Projected private brand dollar share
Percent
Higher growth assumptions
30 ▪ Consumers increasingly embrace PL
▪ Retailers like Walmart, Target, and
25 Costco continue to grow PL
24% ▪ Additional retailers expand PL
$40 B offering to differentiate and compete
20
19% ▪ Retailer consolidation continues
15 Flat growth assumptions
▪ Market has reached the equilibrium
level of PL share at current levels
10
▪ Manufacturers provide a stronger
value proposition for consumers and
5 retailers that curbs PL attractiveness
▪ Retail economics continue to make
0 PL investment difficult
04 06 08 10E 12E 14E 16E
▪ No external shocks occur
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8. Organization is more than just structure – each element
plays an important role in driving innovation
Style
Strategy Skills
Shared
values
Staff Systems
Structure
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9. STRATEGY
There is no „one size fits all‟ answer - the right organization
depends on what you are trying to achieve
Differentiate to
drive trips, build
“The private baskets and
brand cement loyalty
Sophistication
journey”
Improve value
perception
to win the weekly
grocery trip
Enhance
profitability
Penetration
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10. SKILLS
Several key capabilities are required - the importance of eac
capability depends on what you are trying to achieve
1 Customer intelligence and trend identification
Identify
2 Product innovation
3 Product development
4 Quality assurance
Develop
5 Category management
6 Project management
7 Brand management
Market 8 Packaging
9 Marketing and merchandising
10 Supplier selection and negotiation
11 Supplier development
Source
12 Supply chain optimization
13 Inventory management
Measure 14 Performance management
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11. SKILLS
Tesco uses customer intelligence and trend identification to
tailor ranges and products to different customer segments
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12. SKILLS
Their strong category management skills result in
thoughtfully designed category architectures
Private brand
Best Best
Tesco Strong Carlsberg
Bitter Special Brew
£3.98 £4.72
4x440mL 4x450mL
Good Good
Tesco Hofmeister
Value Lager Lager
£0.92 £2.24
4x440mL Better 4x450mL
Tesco Dutch £1.78
Export Lager 4x500mL
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13. SKILLS
To re-launch core-tier, ASDA leveraged existing and built
several new capabilities, including product development
▪ 1,000 reformations,
and 500 new
products, all tested
and approved by
customers
▪ In-store signage
and merchandising
reinforce emphasis
on customer input,
with significant
space dedicated to
private brand items
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14. SKILLS
They also enhanced its customer insight
capabilities to test products with consumers
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15. STRUCTURE
The right organization structure evolves as private brand
becomes more sophisticated and developed
ILLUSTRATIVE
Increasing PB penetration and sophistication
Merchan
Private -dising Private
brands brands
team Brand team
Design
mgmt
Private
brands team
Product Product
Brand Technical Product Merchan- Brand Technical
Marketing develop- Vendor Marketin develop- Marketing
mgmt QA develop- dising mgmt QA
ment g ment
Technica ment
l
Current merchandising QA
organization
When it is appropriate
▪ Focused on building ▪ Cross-category innovation ▪ Organization is fully aligned
core range and (e.g., Tesco Finest) on the role of private brand
enhancing profitability ▪ Focus on rapidly – part of culture
expanding private brand ▪ Private brands at maturity
tiers and ranges
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16. STRUCTURE
These retailers have evolved their models over time
Increasing penetration and sophistication
▪ Large dedicated team of ▪ Integrated into merchant
~350 employees focused on organization
rapidly building out tiers and ▪ Small dedicated team for
largely new items brand management and
innovation
▪ Large dedicated team with ▪ Increased integration and
limited integration with collaboration with merchants
merchants (though not fully integrated
like Tesco)
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17. STRUCTURE:
Although Tesco has integrated private brand into its
merchandising organization, a central team still
drives cross-category innovation
Commercial
and Trading
Director
International
Brand Category Buying Office;
Category
Management Director sourcing hubs,
Director (s)
sourcing support
Business/
Product
Buying Technical Customer
Development
Planning
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18. STRUCTURE
Co-locating the Own Brand team with Merchants
ensures alignment
Merchant-led category team structure
Space Examples
Category Planning/Analyst
Manager (shared)
Merch
Planning Own Brand
Analyst Analyst
(dedicated) (shared)
Pricing and Supply
Promotions Chain
Analyst Analyst
(shared) Marketing (shared)
Analyst
(shared)
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19. SYSTEMS – PROCESSES
A „national brand-like‟ top-to-top process could help set
private brand strategies and drive innovation
Types of collaboration efforts Winners
Percentage of respondents Others
100
Expanded Assortment
38
Differentiators
New merchandising 100
strategy 74
88
New promotional strategy
56
75
New pricing strategy 44
50
Exclusive products
15
New shopper marketing 63
programs 56
Good hygiene
50
Availability improvements
38
Supply chain 38
improvements 35
38
Exclusive packaging
21
38
CRM-based tactics
15
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20. SYSTEMS – PROCESSES
A competitor formulation breakdown process often create
unprecedented transparency and identifies cost savings
DISGUISED PRODUCT EXAMPLE
Fruit juice example Country origin 1
Base 100 Country origin 2
Country origin 3
100
90
80 75
Client product Product A Product B Product C
NOTE: Pictures are illustrative and not representative of actual products
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21. SYSTEMS - PROCESSES
Fast follower apparel retailers clearly identify who they are
following and have processes to track trends
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22. SYSTEMS - PROCESSES
The same systematic approach can be applied in food
Example: Indian food in the mass market
Niche Restaurants Private
UK restaurants UK C/L products in in urban brand
North America markets development
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23. SYSTEMS - MEASUREMENT
NOT EXHAUSTIVE
KPIs need to be tailored to the organization and
where it is in the private brand journey
Foundational ▪ Overall category profitability (rate and $)
metrics ▪ Private brand profitability – overall and penny profit
relative to national brand
▪ Private brand SKU efficiency (i.e., sales per PL SKU)
▪ Private brand penetration by category
Growth and ▪ Growth in private brand penetration, with targets
innovation assigned to category and private brand teams
metrics ▪ Private brand market share and share of growth
▪ Percentage of sales from new private brand items
▪ Private brand brand value perception
(from customer)
▪ Number of private brand SKUs vs.
competitors
▪ Number of new items launched
▪ Private brand health
(quality, value, and innovation)
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24. SHARED VALUES
Finally, highly visible, senior-level commitment to private
brand is required to deliver a differentiated program
Private brand
penetration grew over 15
points during Leahy’s term
as CEO
Private brand is
embedded in several
areas of the “steering
wheel” that is used to
measure performance
and guide decision
making
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25. SHARED VALUES
At Loblaw, both Dave Nichol and more recently Galen
Weston have successfully championed private brand
Dave Nichol created a
“control brand culture”
when he launched and
built out the PC and No
Name brand.
In more recent years,
Chairman Galen Weston
has championed private
brand and commitment
remains strong
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27. Key questions to help you get started
▪ How well has the organization defined
its aspirations for private brand and is
Strategy there alignment on these aspirations?
▪ What skills does your organization excel at
today and how can you better leverage
Skills these to drive innovation and growth?
▪ What are the key areas that you need to
shore up to achieve your aspirations?
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28. Key questions to help you get started
▪ How well have you defined your sources
Systems/ of innovation? How systematic are your
Processes scans
of these sources and how do these scans
feed the pipeline?
Retailers:
▪ What national brand processes could be
effectively applied to private brand to drive
innovation and growth?
Suppliers:
▪ How could you change your interactions
with your customers to drive growth?
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29. Key questions to help you get started
▪ How do you define success today?
Systems/ ▪ Are there simple changes to KPIs that
Measure- could quickly create better alignment
ments and focus on aspirations?
▪ How integral is private brand to your
Shared corporate strategy?
values ▪ Do Senior leaders champion private
brand? If not, what are the barriers?
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