CLOSING THE GAP
THE GROCER - May 19th 2001

Own label has moved on and many suppliers need to develop a lean-build, high-value-adding approach to keep up, says Jonathan Smith of Axis Management Consulting

Remember the old world of own label? Go back 10 years to the days when the own label product was the one in a white box with a retailer’s logo on the outside, inferior product inside, and a few pence knocked off the price.

Since then, things have moved on dramatically.

Where products ranges were narrow and based on the mainstream bestsellers from branded houses, ranges are now wide and serve a whole variety of segments.
Where branded houses once led the way in innovation, there are now many categories in which most of the innovation comes from the retailer’s brand.
And where product quality was almost uniformly inferior, it is now often the best in the category.

The branding of own label has also evolved massively. The basic logo-only branding has been replaced by more advanced approaches. Retailers now effectively operate a portfolio of brands ranging from premium to value and covering a range of niches such as healthy eating and kids.

The once seemingly inexorable growth of own label has now stopped. Indeed own label share has reduced slightly in the last couple of years. Retailers now seem less hell bent on driving own label share for its own sake. They are more concerned with using own label as part of their efforts to differentiate themselves from other retailers.
Taken together, these changes add up to a massive shift in the nature of the own label game. So surely the capabilities needed to be a first rate own label supplier must also have changed considerably.

And yet, in the face of these massive changes, many suppliers have not adapted sufficiently. A gap has opened up between the needs of the situation and the practice of many suppliers. As a result, many suppliers are therefore not taking full advantage of the opportunities presented.

The companies that have tended to be thought of as strong own label suppliers generally excelled in delivering against an agenda very largely set by the retailer. Given a retailer’s requirement for a product of a given type, size and cost, they could execute better than the next guy.

However the range of skills needed by suppliers has continued to widen. A whole new agenda has emerged comprising a range of business development skills that were previously more common in branded manufacturers understanding consumers, growing categories, developing new product concepts, and so on.
All of this, of course, has to be managed despite cost pressures more acute than ever before.

In many sectors dominated by own label, consumer-oriented such as marketing, new product development, and category management were, until recently, largely absent and to this day remain very under-developed.

Companies without brands of their own often had no marketing function and had conducted little or no market research. Product orientation was dominant.
Many suppliers have become adept at responding to the NPD requests of their retail customers. Few have mastered the art of steering their product development destiny. Even fewer successfully control the often considerable costs of product development despite the cost pressures involved in running an own label operation.
So the challenge for suppliers is to develop an approach to own label which gives them the ability to act in a proactive, value-adding way without piling on the overheads. This is especially critical for smaller suppliers that do not already have large commercial functions.

Suppliers need to keep focused on generating new ways of improving category performance without becoming bogged down in the process and bureaucracy. The aim must be to maximise the number and scale of positive hits on category profits.

The benefits of this lean-build, high-value-adding approach can be great. As well as directly assisting profitability, the perceived value of the supplier to the retailer is maximised, thus improving security of business.

Working effectively on own label business, whilst no easy task, brings a number of important benefits.

Meeting the stringent demands of UK major multiples sharpens the performance of companies across a whole range of areas from food safety to logistics and from customer services to product development. Like many good medicines, it may not taste good but it does work!

Own label work must inevitably involve a more closely bonded relationship with the retailer than branded supply. Done well, it provides numerous opportunities both to improve security of business and to identify growth potential.

In the new world of own label, the balance of advantages between smaller and larger companies is changed. On the one hand, larger companies may benefit from economies of scale and their size may give them credibility and clout with the retailers.

On the other hand, a number of factors work in favour of smaller companies. For suppliers struggling with the costs and effort required to maintain weaker brands, own label business may be a more viable option. Own label business also provides growth opportunities for suppliers who for reasons of cost could never hope to develop brands of their own. Smaller companies are often able to move faster and be more innovative. And many niches that are of little interest to larger suppliers provide useful opportunities to smaller ones.

So what are the key elements of the lean-build, high-value-adding approach? How do you maximise positive influence while keeping costs under control?
Firstly, run a joint venture. Treat your own label business as if it were a 50/50 joint venture between you and the retailer. Assume responsibility for all aspects of its success, whether you’re invited to or not. For example, don’t wait to be asked for input on pack design - develop ideas, check them with consumers and present recommendations for improvement. When this is working well, managers from both supplier and retailer will be genuinely working to a largely shared agenda.
Secondly, practice focused category development. Use a mixture of small-scale consumer research, in-depth store visits, and modest amounts of data analysis to identify ways of improving category performance. Generate ideas, agree actions with the retailer, and work jointly to make them happen. In effect, this is category management without all the jargon, complexity and bureaucracy which brought that idea into disrepute.

Thirdly, operate proactive, cost - effective NPD. Too often in the food industry, we see NPD which is both costly and ineffective. Failing projects cost a lot of money and hamper the effectiveness of managers. In the retailer brand arena, far too much of it is also largely reactive.

Own label NPD needs to be conducted proactively, with the aim being to set as much as possible of the agenda with the retailer. In such a cost-pressured business, the company’s total NPD effort needs to be actively managed for both cost and success rate. The failure to make effective use of consumer research early in the life of projects ensures the survival of too many ideas that will ultimately fail for lack of consumer appeal. Quickly killing off a few doomed projects may help the bottom line as much as a successful launch.

Fourthly, practice total cost management. Many own label suppliers have pared away at costs for so long that there seems like there is little left to cut away. Approaches such as Activity Based Costing (ABC) offer fresh alternatives for attacking costs by helping managers understand what factors are driving total costs within their business. The various retailer-led initiatives such as Tesco’s Value Chain Analysis also offer new possibilities by looking at costs along the full length of the supply chain.
Lastly, focus on beating the competition. At the end of the day, succeeding in own label is a competitive sport. Actively seek out information on how your competitors are operating as well as what they are doing in terms of products launched, business won, and so on. Compare this with what you are doing and develop a systematic programme to improve capabilities and processes.

In summary then, the world of own label has moved on a long way in recent years. Many suppliers have not yet fully adapted to take advantage of the opportunities that now arise. They need to develop an improved approach to value adding that is consistent with the cost pressures inherent in own label business. Such improvement is achievable for suppliers large and small. In other words, the own label gap can be closed.

Contact - Jonathan Smith
E-Mail - jonathan.smith@axisconsulting.co.uk
Telephone - 01865 516441