Driving innovation through the private brand organization

Driving innovation through the private brand organization

July 2011

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

McKinsey & Company 2 |


US consumers still feel pressured

Are having a hard time making ends

meet

Are living paycheck to

paycheck

Are somewhat or very worried

about losing a job

Are making significant lifeplan changes because of declining asset

values

38%

45%

42%

57%


Consumer response to the downturn that has created a “new normal”…

PENNYpinching

CuttingBACK

ChangingHABITS

ShiftingCHANNELS

TradingDOWN


Percent intending to keep behaviorBehavior

Percent changing behavior

…and consumers say these behaviors will stick

Purchase private brand/store brand products more 50

Purchase high-end designer/luxury brands less 45

Shop at mass merchants more 50

Go out to eat less 60

Shop at club stores more 35

Shop at dollar stores more 40

71

80

81

84

88

89


19%

24%

0

5

10

15

20

25

30

16E14E12E10E080604

$40 B

Projected private brand dollar sharePercent

Flat growth assumptions

▪ Market has reached the equilibrium level of PL share at current levels

▪ Manufacturers provide a stronger value proposition for consumers and retailers that curbs PL attractiveness

▪ Retail economics continue to make PL investment difficult

▪ No external shocks occur

Higher growth assumptions

▪ Consumers increasingly embrace PL

▪ Retailers like Walmart, Target, and Costco continue to grow PL

▪ Additional retailers expand PL offering to differentiate and compete

▪ Retailer consolidation continues

As a result, US private brand share has thepotential to reach 24 percent

High growth assumption

2010 revised base

2007 base

McKinsey & Company 8 | 8

Organization is more than just structure – each element plays an important role in driving innovation

Style

Skills

Systems

Strategy

Staff

Sharedvalues

Structure


There is no ‘one size fits all’ answer - the right organization depends on what you are trying to achieve

Penetration

Enhance profitability

Improve value perception to win the weekly grocery trip

Improve value perception to win the weekly grocery trip

Differentiate to drive trips, build baskets and cement loyalty

So

ph

isti

cati

on

“The private brand journey”

STRATEGY


Several key capabilities are required - the importance of eac capability depends on what you are trying to achieve

Identify

Market

1 Customer intelligence and trend identification

2 Product innovation

11 Supplier development

3 Product development

4 Quality assurance

7 Brand management8 Packaging

9 Marketing and merchandising

12 Supply chain optimization

5 Category management

10 Supplier selection and negotiation

Develop

Source

6 Project management

Measure 14 Performance management

13 Inventory management

SKILLS


Tesco uses customer intelligence and trend identification to tailor ranges and products to different customer segments

SKILLS


Good

Best

Their strong category management skills result in thoughtfully designed category architectures

Tesco Strong Bitter

£3.98 4x440mL

Carlsberg Special Brew

£4.72 4x450mL

Tesco Value Lager

£0.92 4x440mL

Tesco Dutch Export Lager

Hofmeister Lager

£2.24 4x450mL

Good

Best

Private brand

SKILLS

Better£1.78 4x500mL


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

SKILLS


They also enhanced its customer insight capabilities to test products with consumers

SKILLS


The right organization structure evolves as private brand becomes more sophisticated and developed

Increasing PB penetration and sophistication

Merchan-dising

Technical

QA

Brand mgmt

Design

Product develop-

ment

Marketing

Private brands team

Private brands team

Brand mgmt

Product develop-

ment

Merchan-dising

Technical QA

Marketing

Private brands team

Brand mgmt

Product develop-

ment

Technical QA

VendorMarketing

Current merchandising organization

ILLUSTRATIVE

When it is appropriate

▪ Organization is fully aligned on the role of private brand – part of culture

▪ Private brands at maturity

▪ Cross-category innovation (e.g., Tesco Finest)

▪ Focus on rapidly expanding private brand tiers and ranges

▪ Focused on building core range and enhancing profitability

STRUCTURE


These retailers have evolved their models over time

Increasing penetration and sophistication

▪ Large dedicated team of ~350 employees focused on rapidly building out tiers and largely new items

▪ Integrated into merchant organization

▪ Small dedicated team for brand management and innovation

▪ Large dedicated team with limited integration with merchants

▪ Increased integration and collaboration with merchants (though not fully integrated like Tesco)

STRUCTURE


Although Tesco has integrated private brand into its merchandising organization, a central team still drives cross-category innovation

Commercial and Trading

Director

Category Director

Brand Management

BuyingProduct

DevelopmentTechnical

Business/ Customer Planning

International Buying Office; sourcing hubs,

sourcing support

Category Director (s)

STRUCTURE:


Co-locating the Own Brand team with Merchants ensures alignment

STRUCTURE

ExamplesCategory Manager

Merch Planning

Analyst (dedicated)

Pricing and Promotions

Analyst (shared) Marketing

Analyst (shared)

Supply Chain Analyst (shared)

Own Brand Analyst (shared)

Space Planning/Analyst (shared)

Merchant-led category team structure


A ‘national brand-like’ top-to-top process could help set private brand strategies and drive innovation

38

38

38

50

63

50

75

88

100

10038

15

21

35

38

56

15

44

56

74

Supply chainimprovements

CRM-based tactics

Exclusive packaging

Expanded Assortment

Availability improvements

New shopper marketing programs

Exclusive products

New pricing strategy

New promotional strategy

New merchandisingstrategy

Types of collaboration effortsPercentage of respondents

Dif

fere

nti

ato

rsG

oo

d h

ygie

ne

Others

Winners

SYSTEMS – PROCESSES


A competitor formulation breakdown process often create unprecedented transparency and identifies cost savings

7580

10090

DISGUISED PRODUCT EXAMPLE

Product A Product B Product CClient product

Country origin 3

Country origin 2

Country origin 1Fruit juice exampleBase 100

NOTE: Pictures are illustrative and not representative of actual products

SYSTEMS – PROCESSES


Fast follower apparel retailers clearly identify who they are following and have processes to track trends

SYSTEMS - PROCESSES

$230

$4990


UK restaurantsNiche products in North America

Restaurants in urban markets

UK C/L

Example: Indian food in the mass market

The same systematic approach can be applied in foodSYSTEMS - PROCESSES

Privatebrand

development


KPIs need to be tailored to the organization and where it is in the private brand journey

▪ Overall category profitability (rate and $)

▪ 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 in private brand penetration, with targets assigned to category and private brand teams

▪ 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)

NOT EXHAUSTIVESYSTEMS - MEASUREMENT

Foundational metrics

Growth and innovation metrics


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

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

SHARED VALUES


Skills

Strategy▪ How well has the organization defined

its aspirations for private brand and is there alignment on these aspirations?

▪ What skills does your organization excel at today and how can you better leverage these to drive innovation and growth?

▪ What are the key areas that you need to shore up to achieve your aspirations?

Key questions to help you get started


Systems/Processes


▪ How well have you defined your sources of innovation? How systematic are your 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?


Systems/Measure-

ments

Sharedvalues


▪ How do you define success today?

▪ Are there simple changes to KPIs that could quickly create better alignment and focus on aspirations?

▪ How integral is private brand to your corporate strategy?

▪ Do Senior leaders champion private brand? If not, what are the barriers?

Driving innovation through the private brand organization

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