Protecting Market Share

The supermarket industry sells the most fundamental of commodities, but the dynamics within the once-sleepy industry have grown fascinating over the past decade. Virtually every retail segment—from mass merchants to convenience stores to warehouse clubs—has taken a bite out of the supermarkets’ pie, eroding the segment’s overall customer wallet share. As a result, the various regional and national grocery players have been forced to respond to this trend in several disparate ways.

First we saw a spate of mergers and acquisitions. Theoretically, the bigger you are, the better your economies of scale. This theory helped the big chains get even bigger. Unfortunately, differences in systems, procedures and even product naming conventions (which is surprising, given the ubiquity of UPC codes) have prevented many of these mergers from yielding promised cost reductions.

Further, the axiom of business life—that you cannot expense control your way to long-term profitability—has once again proven to be true. Sales results remain unimpressive while profitability stays marginal.

To combat these issues, savvy regional supermarkets have taken a very different tack. To start, they focused on their fresh merchandise offerings, including meats, prepared products and deli items. While the move was initially a success, it did not remain exclusive to the supermarket industry for long. Innovative convenience stores responded with their own improvements in deli and sandwiches, creating a need for even greater improvements across supermarkets.

One of these was the repositioning of private label. The most successful supermarket retailers have raised the bar on their private-label programs, and these moves have helped chains to increase the percentage of private-label foods they sell.

Two recent announcements highlight two supermarket chains’ winning commitment to their private-label programs:

H.E.B., a regional grocer with more than 300 stores in Texas and Mexico, announced the selection of Eqos’ business solutions to support and expand the retailer’s global-sourcing and supplier-management operations. To enhance its private-label offerings, H.E.B. is placing a big bet that its private-label foods can successfully compete with national brands.

Publix, a regional grocer in the Southeast, and a consistent winner in customer-service surveys, announced one of the more innovative BOGO (buy one get one) promotions ever. Each week for the next five weeks, Publix will designate three national brand products and their Publix-brand counterparts. If a customer buys the national brand, she will get the Publix brand free.

These supermarkets are betting they can meet the national brands on taste, look, feel and packaging to increase their overall gross margins from their traditional razor-thin levels.

However, the kind of quality control and supplier management required to sustain these private-label programs in grocery are serious. Not only must the products pass the consumers’ taste tests, but they also have to adhere to high standards of safety and traceability.

Unfortunately, working to be the purveyor of private-label foods’ advantage has been the core of the recent pet-food debacle. For example, even though it revealed that “healthy” national pet food brands had been produced by generic supplier Menu Foods, North Americans suddenly became painfully and publicly aware that its trusted suppliers outsource their production to the same companies that created “lesser” private-label merchandise.

A recent RSAG Research report (available at http://www.retailsystems.com/index.cfm?PageName=ProductRequest&ProductId=47) showed that retail winners typically sell a higher proportion of private-label merchandise than their underperforming peers. It’s good to see supermarkets joining that trend. We’re also glad to see that the best companies recognize that sourcing, visibility and supplier-management technologies are necessary components of any private-label programs.

More importantly, we’re excited to see these interesting developments in this seemingly once less-than-interesting industry.