Driving innovation
through the
private brand
organization
July 2011
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of
McKinsey & Company is strictly prohibited
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US consumers still feel pressured
38%
Are having a hard
time making ends
meet
45%
Are somewhat or
very worried
about losing a job
42%
Are living
paycheck to
paycheck
57%
Are making
significant lifeplan
changes because
of declining asset
values
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Consumer response to the downturn that has created a
“new normal”…
Changing
HABITS
Cutting
Trading
BACK
DOWN
Shifting
CHANNELS
PENNY
pinching
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…and consumers say these behaviors will stick
Behavior
Percent
changing Percent intending to
behavior keep behavior
Purchase high-end
designer/luxury brands less
45
89
Shop at club stores more
35
88
Shop at mass merchants
more
50
Shop at dollar stores more
40
81
Purchase private brand/
store brand products more
50
80
Go out to eat less
60
84
71
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As a result, US private brand share has the
potential to reach 24 percent
High growth assumption
2010 revised base
2007 base
Projected private brand dollar share
Percent
Higher growth assumptions
30
25
24%
$40 B
20
19%
▪
▪
Consumers increasingly embrace PL
▪
Additional retailers expand PL
offering to differentiate and compete
▪
Retailer consolidation continues
Retailers like Walmart, Target, and
Costco continue to grow PL
Flat growth assumptions
15
10
▪
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
5
0
04
06
08 10E 12E 14E 16E
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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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STRATEGY
Sophistication
There is no ‘one size fits all’ answer - the right organization
depends on what you are trying to achieve
“The private
brand
journey”
Differentiate to
drive trips, build
baskets and
cement loyalty
Improve value
perception
to win the weekly
grocery trip
Enhance
profitability
Penetration
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SKILLS
Several key capabilities are required - the importance of eac
capability depends on what you are trying to achieve
Identify
Develop
Market
Source
Measure
1
Customer intelligence and trend identification
2
Product innovation
3
Product development
4
Quality assurance
5
Category management
6
Project management
7
Brand management
8
Packaging
9
Marketing and merchandising
10
Supplier selection and negotiation
11 Supplier development
12
Supply chain optimization
13
Inventory management
14
Performance management
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SKILLS
Tesco uses customer intelligence and trend identification to
tailor ranges and products to different customer segments
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SKILLS
Their strong category management skills result in
thoughtfully designed category architectures
Private brand
Best
Best
Tesco Strong
Bitter
Carlsberg
Special Brew
£3.98
£4.72
4x440mL
4x450mL
Good
Good
Tesco
Value Lager
Hofmeister
Lager
£0.92
£2.24
4x440mL
4x450mL
Better
Tesco Dutch
Export Lager
£1.78
4x500mL
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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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SKILLS
They also enhanced its customer insight
capabilities to test products with consumers
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STRUCTURE
The right organization structure evolves as private brand
becomes more sophisticated and developed
ILLUSTRATIVE
Increasing PB penetration and sophistication
Merchan
-dising
Private
brands
team
Private
brands
team
Brand
mgmt
Design
Private
brands team
Marketing
Brand
mgmt
Product
development
Technical
QA
Vendor
Marketin
g
Technica
l
QA
Current merchandising
organization
Product
development
Merchandising
Brand
mgmt
Product
development
Technical
QA
Marketing
When it is appropriate
▪
Focused on building
core range and
enhancing profitability
▪
▪
Cross-category innovation
(e.g., Tesco Finest)
Focus on rapidly
expanding private brand
tiers and ranges
▪
▪
Organization is fully aligned
on the role of private brand
– part of culture
Private brands at maturity
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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)
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STRUCTURE:
Although Tesco has integrated private brand into its
merchandising organization, a central team still
drives cross-category innovation
Commercial
and Trading
Director
Brand
Management
Buying
Category
Category
Director
Director (s)
Product
Development
Technical
International
Buying Office;
sourcing hubs,
sourcing support
Business/
Customer
Planning
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STRUCTURE
Co-locating the Own Brand team with Merchants
ensures alignment
Merchant-led category team structure
Space
Planning/Analyst
(shared)
Category
Manager
Merch
Planning
Analyst
(dedicated)
Pricing and
Promotions
Analyst
(shared)
Examples
Own Brand
Analyst
(shared)
Marketing
Analyst
(shared)
Supply
Chain
Analyst
(shared)
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SYSTEMS – PROCESSES
A ‘national brand-like’ top-to-top process could help set
private brand strategies and drive innovation
Winners
Types of collaboration efforts
Percentage of respondents
Others
100
Differentiators
Expanded Assortment
38
New merchandising
strategy
100
74
88
New promotional strategy
56
75
New pricing strategy
Exclusive products
44
50
15
Good hygiene
New shopper marketing
programs
63
56
50
Availability improvements
38
38
35
38
Supply chain
improvements
Exclusive packaging
CRM-based tactics
21
38
15
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SYSTEMS – PROCESSES
A competitor formulation breakdown process often create
unprecedented transparency and identifies cost savings
DISGUISED PRODUCT EXAMPLE
Country origin 1
Fruit juice example
Base 100
Country origin 2
Country origin 3
100
90
80
Client product
Product A
75
Product B
Product C
NOTE: Pictures are illustrative and not representative of actual products
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SYSTEMS - PROCESSES
Fast follower apparel retailers clearly identify who they are
following and have processes to track trends
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SYSTEMS - PROCESSES
The same systematic approach can be applied in food
Example: Indian food in the mass market
UK restaurants
UK C/L
Niche
products in
North America
Restaurants
in urban
markets
Private
brand
development
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SYSTEMS - MEASUREMENT
KPIs need to be tailored to the organization and
where it is in the private brand journey
Foundational
metrics
Growth and
innovation
metrics
▪
▪
Overall category profitability (rate and $)
▪
▪
Private brand SKU efficiency (i.e., sales per PL SKU)
▪
Growth in private brand penetration, with targets
assigned to category and private brand teams
▪
▪
▪
Private brand market share and share of growth
▪
Number of private brand SKUs vs.
competitors
▪
▪
Number of new items launched
NOT EXHAUSTIVE
Private brand profitability – overall and penny profit
relative to national brand
Private brand penetration by category
Percentage of sales from new private brand items
Private brand brand value perception
(from customer)
Private brand health
(quality, value, and innovation)
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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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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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Key questions to help you get started
▪
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?
Strategy
Skills
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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?
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Key questions to help you get started
Systems/
Measurements
Shared
values
▪
▪
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?
▪
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