MANUTAILING.

A BrAnd Point MAnAgeMent PersPective: tHe neW MAnUFActUrer/ retAiLer PArAdigMEXECUTIVE SUMMARY.the time is right for the marriage of cPgs new product development expertise and retailers access to shoppers and ability to execute. today there are constant questions about traditional medias effectiveness, a segmented customer base, and a vast majority of purchase decisions being made at the store shelf. in this light, who can justify the traditional brand or new product development cycle? something more insightful, more collaborative and above all more agile is called for. this is manutailing.

ThE hISToRY of PRIVATE LAbEL For over a century, consumer packaged goods manufacturers have dominated brand innovation, formulating products and driving consumer motivation for purchase, while retailers have served as the real estate managers governing where these new products are sold. essentially, cPgs invented and retailers stocked the shelf. this approach became so integrated that through the concept of category champions, cPgs took control of retailers merchandising strategies and in some cases drove store layout. But as this model evolved, the more progressive retailers began packing products under their own brands and the industry of private label was born. Private label was initially successful due to the simple proposition of value alternative. For individuals shopping on a budget or for higher income shoppers in low involvement categories, private label provided an attractive price point. this concept flourished, as it not only provided incremental revenue for the retailer via better margins, but it also positioned the competing cPg offerings as more innovative and of higher quality, thereby substantiating the price premium at which they still operate today. Private label has grown more sophisticated over the years. noticing the margin opportunity in converting cPg sales to PL sales, retailers began creating dedicated teams to help manage and build their private-label business. this business now comprises two distinct but simultaneous strategies. the first involves a three-tiered approach to value alternatives: opening price point (value), mid-tier (national brand equivalent/nBe, e.g. oreos) and premiumtier (also nBe, e.g. Pepperidge Farm). the second strategy introduces opportunistic category brands, which are created and launched into specific categories where the tiered strategy either has a limited potential for success or just doesnt get permission from the consumer. this is essentially how the private label industry has worked over the last three decades. once cPg products (or in some cases, new categories) have proved successful, retailers have launched value alternatives. to be fair, in some instances retailers have innovated unique line extensions, flavor options and interesting licensing arrangements. But for the most part, cPgs drove true product innovation. As a rule, the grocery retailer industry norm was to have specific cPg targets for their product development teams to work against.

the traditional retail model has evolved notably in the past 30 years, and so has the relationship between consumer packaged goods manufacturers (cPgs) and the businesses who sell their goods. As todays retailers continue to improve the quality of their own brands and gain a greater share of the market, this not only affects the role of manufacturers: this shifting dynamic paves the way for new opportunities for cPgs and retailers to combine their best practices, forging stronger, mutually lucrative affinities.

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MANUTAILING: A BrAnd Point MAnAgeMent PersPective

once relegated to replicating cPgs offerings with a lower-price and lesser-performing value alternative, [retailers] are now creating brands based on distinct consumer need states.ThE LANdSCAPE IS ChANGING today, retailers specifically grocery and mass merchandisers are rethinking conventional business models. once relegated to replicating cPgs offerings with a lower price and lesser-performing value alternative, they are now creating brands based on distinct consumer need states. And this, given the recent history of PL success stories including Krogers disney wellness line as well as safeways eating right and o organics is just the beginning of larger changes to come. there are three key elements driving this belief: 1. Consumer behavior: comprehensive analytics of loyalty card data are providing deep behavioral insights into retailers customers. By understanding the combinations of purchases in shopping trips and analyzing switching behavior over time, retailers are gleaning insights and perspective that surpass those available to cPgs. with significantly less choice. And an inspired and inspiring PL offering can be that choice the majority of the time. But narrower choices means cPgs need to make the right choice. card data is a crucial tool here. 3. Consumer Expectations: What weve learned is that consumers get this. they understand the private label concept that retailers source similar (if not the same) products and present them under the retailers own names or a unique brand, and sell them for less. But now consumers expect a strong private label offering. Because of great experiences with the exclusive retailers and the history of strong PL programs as with Loblaws, safeway, Kroger, target, costco and others, consumers expect, or actually demand, strong private label alternatives.

By combining this level of understanding with an everevolving and more sophisticated supplier base, retailers 2. Retail formats: some of the most successful retailers are able to act on new consumer trends far more quickly. are exclusive brand retailers. iKeA, H&M, Apple all the net for manufacturers is that new product introductions derive the majority, if not all, of their revenue from their (often costing $20 million or more) were once justified by own brands. Many leading retailers are now discontinuing the fact that there was time to build a brand through third- and fourth-place cPg brands to create focused choice trial campaigns and repeat programs. retailers, in turn, and cleaner stores. And the much-heralded success of would wait for the brand to develop and then launch their trader Joes has proven that own-brand penetration of 70 own branded version once the business hit certain prepercent doesnt have to come at the expense of consumer determined dollar thresholds. now retailers are so in tune satisfaction with selection. in most food categories, trader with their consumers needs and have such responsive Joes offers only its house-branded products, one-upping manufacturing networks that they are able to identify and the other highly praised format, club stores, where product mimic new products in a much shorter period of time in selection is normally limited to one national brand and one essence chopping the tail off the cPgs investmentvery well-received private label alternative. All of these recovery curve. formats justify, if not prove, that consumers are comfortable

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MANUTAILING: A BrAnd Point MAnAgeMent PersPective

WhAT doES ThIS MEAN? today there is far more cost-recovery risk for cPgs launching new brands. they no longer have the consumer attention and limited-competition landscape to build their brands. therefore, there will be a reduction of those big media spends for new brand launches; half as many new brands were launched in Q1 2009 as the year before1, and fewer brands will succeed. cPg manufacturers can wait for the market to produce new brands e.g., soBe or Burts Bees but amid the competition, theyll have to overpay for the limited number that prove successful. in october 2007, the clorox company signed a deal for $925 MM for Burts Bees, paying a premium of over five times the brands annual sales of $170 MM.2 And retailers are showing no signs of slowing their production. on the contrary, in some cases, they have been criticized for simply chasing targets in the number of new products they are generating, without apparent concern for how overall sales will be impacted. this observation was brought to light in a recent issue of the Australian Financial Review, citing retailer coles rapid launch of house-branded products (including a Youll Love coles energy drink) that cropped up on shelf long before time would allow for standard market research.3

A NEW APPRoACh: CPG/RETAILER PARTNERShIPS cPgs need retailers the top ten retailers now generate an average of 30 to 45 percent of a given manufacturers global sales.4 And retailers need cPgs, not only to allow for well-known national brands among their selection but also for their ability to keep incumbent product categories relevant through innovation and line extensions. Quite simply, this calls for the marriage of cPgs new product development expertise and retailers access to customers and ability to execute. in an era marked by constant questions about traditional medias effectiveness, a distracted customer base, and a vast majority of purchase decisions being made at the store shelf, who can justify the traditional brand development cycle? What about new ways of combining specific attitudinal learnings from research with the behavioral trends of real shopping activity? What about creating brands that consumers truly need and want and having the ability to modify learnings in a fraction of the time based on real consumer behavior? What about taking the best practices of manufacturing brands and blending them with best practices of retailing brands? this is manutailing.

What about taking the best practices of manufacturing brands and blending them with the best practices of retailing brands? this is manutailing.

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MANUTAILING: A BrAnd Point MAnAgeMent PersPective

AN ARGUMENT foR MANUTAILING

our initial recommendation is that manutailing relationships be structured around mutually agreed-upon Under this concept, cPgs would carry out their traditional buy horizons. that is, the cPg and retailer will establish brand development activity, i.e., identify a consumer need and then create a solution and brand development platform. a time frame say three years under which they will partner, exclusively, to develop the brand. At the conclusion But instead of spending millions of dollars on advertising and slotting, and hundreds of thousands of dollars in sales of the three years there will be a buy option for both sides, with the brand being sold to the highest bidder. the benefit development, they would take the concept directly to a network of strategic retail partners. this partnership would for the retailer will be a successful proprietary brand that will remain so; or for the cPg, a successful brand that can then foster a brand development program that focuses be scaled based on real market performance. on store-level execution and trial of the brand where so many purchase decisions take place. Brands the next SUMMARY: ITS TIME generation of great brands would be built where they are these are times of change and transition. great brands merchandised and bought. and great companies are built where others encounter Media spends could be reduced and be more effective based obstacles and/or get muddled in complexity. Airline on specific regional insights from the retailer. And truly deregulation hindered the major airlines and gave birth to comprehensive brand-planning programs could integrate southwest and JetBlue. sub-optimal plant configuration and those spends with circular activity, direct mail, store antiquated thinking took down old detroit and gave birth associate training, end-caps and other in-store activity. to the Prius. its time for concepts like manutailing to allow it would be an industry blend of discipline expertise like a new breed of consumer brands to be born. an architect and a builder; an engineer and a manufacturer; Just five years ago, the concept a playwright and an actor.Footnotes: 1. Mintel Global New Products Database, April 2009. 2. Investors Press Release, The Clorox Company, October 31, 2007. 3. House Brands Fuel Supermarket Turf War. Australian Financial Review, June 2, 2008. 4. Private Label Strategy: How to Meet the Store Brand Challenge. Boston: Harvard University Business School Press, 2007. p. 156.

ThE ISSUE of oWNERShIP A primary obstacle facing manutailing is the issue of ownership. Who truly owns the brand? or, perhaps more importantly, how would financial markets value a successful manutailing brand relative to the other aspects of that companys traditional business? this is only really an issue if the companies, especially the cPgs, hold to their traditional business constructs. the manutailing concept, by nature, distributes the financial risk of brand development by reducing cPgs capital outlay and replacing it with retail activity. the retail activity, while difficult to accurately measure, will almost certainly be worth more than what the manufacturer would traditionally spend to launch and initially support a new brand. so who gets more credit for the new brand (assuming its successful)? once the brand is developed, established and self-sustaining who gets it?

of allowing retailers to participate in the fundamental aspects of brand development would have seemed reckless, at best. But the changing consumer landscape demands new thinking around how to best build relationships with those who try, and repeatedly use, products. And with so many large grocery and mass merchandisers bringing in cPg executives to run their corporate brands programs, manutailing is a mutually beneficial approach. More than just a matter of both sides cooperating, its smart, and a win-win. Manufacturers get the retailers attention and the exclusivity they desire without the threat of a private label offering for a specific period of time, and retailers get the true product innovation and cPg collaboration that will deliver destination brands.

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AboUT ThE AUThoR eric Ashworth is chief strategy officer for Anthem Worldwide where he leads large-scale branding initiatives for major retailers and cPg companies across the globe. eric has held senior brand and marketing management positions at global branding agencies and consumer product companies. eric has served as a guest lecturer on brand strategy at the Haas school of Business at the University of california, Berkeley.

Anthem Worldwide, a schawk strategic design company, is an integrated global network that provides innovative solutions to articulate, unify and manage brand impact. Anthem creates compelling brand experiences by aligning its strategic, creative and executional talent worldwide with the business needs of companies seeking a competitive advantage. Anthem offers a full range of branding and design services to our clients including campbells, coca-cola, e-Mart, Fosters, general electric, Hbc, Kimberly-clark, Microsoft, nestl, Procter & gamble, revlon, safeway and Unilever. With our network of world-class design professionals in 12 cities, Anthem is presently located in chicago, cincinnati, London, York, Melbourne, new Jersey, new York, san Francisco, singapore, sydney, toronto, and Hilversum. For more information on Anthem, please visit http://www.anthemww.com. 2009 schawk, inc. All rights reserved. no part of this work may be reproduced in any form without written permission from the copyright holder. schawk is a registered trademark of schawk, inc. the schawk, Anthem and BLUe logos are trademarks of schawk, inc.

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MANUTAILING: A BrAnd Point MAnAgeMent PersPective