WHY GROCERS NEED to START OPERATING LIKE CONSUMER BRANDS by Gavin Parker, Alessio Agostinelli, Holger Gottstein, Rune Jacobsen, Yossi Arouch, and Kai Oberschmidt

WHY GROCERS NEED TO START OPERATING LIKE CONSUMER BRANDS By Gavin Parker, Alessio Agostinelli, Holger Gottstein, Rune Jacobsen, Yossi Arouch, and Kai Oberschmidt

or most established grocers, because of strong house brands and ex- Fprivate-label products are a big compo- tremely efficient value chains, with a much nent of revenue—but not as big as they smaller set of SKUs that still meet a major- could be. And because these products are ity of most shoppers’ needs. Another is the offered in addition to a huge range of threat of online commerce. Already, many branded goods, they create complexity at CPG companies are establishing their own each step of the supply chain. connections to consumers, capturing data and insights and, in some cases, selling di- We believe established grocers need to re- rectly to them. In this environment, grocers think their strategy for private-label prod- that do not differentiate themselves with a ucts. By developing true retailer brands strong set of unique retailer brands risk be- that can compete with—and often beat— ing outexecuted by value grocers and com- established CPG offerings, grocers can dif- moditized by online players. ferentiate themselves from their peers, better engage with their customers, and drive down operating costs across the entire val- Growing Threats ue chain, from production to in-store oper- Established grocers can see precursors of ations. (A “retailer brand” is a product and the threat from value-based competition in label that are developed internally by a other industries, like fashion, and the stories grocer, with far better execution than a tra- do not end well. Multibrand retailers such ditional private-label offering.) as department stores are struggling, and sales growth has shifted to highly efficient While this has long been recognized as an branded retailers like Zara, H&M, and Pri- opportunity for established grocers, several mark. These players have reengineered their developments are making it a strategic ne- supply chains to get their own branded cessity. One impetus is the rise of value- products—and no others—onto store based grocers, which have grown in part shelves in lead times measured in weeks, thanks to highly efficient distribution net- while still retaining the advantages of a works and stores. Some of them deliver the simpler supply chain and operating model. kind of in-store experience that was previ- ously limited to luxury retailers but at much These grocers have the mindset of a CPG lower prices. As a result, these lower-cost company. They think like a brand and de- players have won over customers. They have velop products like a brand, yet—similar to taken significant share from multibrand re- fashion players such as Zara and H&M— tailers, and future growth is on their side. they control the route to market through their own stores, giving them a huge cost In the grocery industry, value retailers such advantage over CPG suppliers. (For some as Aldi, Lidl, Mercadona, BIM, and Trader categories, value grocers control the pro- Joe’s are now creating the same challenges duction facility as well. Lidl, for example, for established players. These chains have manufactures its own ice cream and expanded rapidly in the past decade, in chocolate.) part through robust internal brands. They develop their own products by capitalizing By contrast, mainstream grocers have his- on strong customer insights and efficient, torically developed private-label products end-to-end value chains. for different reasons—to gain marketing power over the CPG brands they carry or Because their products are so popular with to give consumers lower-cost options. consumers, value retailers can carry far Those early offerings from grocers may not fewer SKUs overall—but still meet the have been very high quality, but they were needs of most shoppers—leading to sim- good enough, and because they didn’t re- pler supply chains and operating models quire any marketing (essentially riding on that give them a huge advantage over oth- the brand of the store itself), they delivered er grocers. Store shelves are less cluttered, solid margins. prices are lower, and the products are as good as—or better than—national CPG Yet as value retailers have become more brands. For categories such as pasta, choco- sophisticated—with low-priced, high-quality late, coffee, orange juice, dish detergent, products—traditional grocers have tried to and toothpaste, value retailers win in head- keep up by launching different tiers and to-head comparisons with major brands, at lines of their own private-label products: prices that are 50% to 75% lower. Further entry-price offerings, along with goods in compounding their advantage, some value segments such as kids, organic, and premi- retailers, such as Aldi, have recently begun um. This has led to higher overall sales but selling top national CPG brands, helping also massive assortment sizes and far them attract brand-conscious customers greater complexity. (See Exhibit 1.) These

Exhibit 1 | The Assortment at Traditional Grocers Can Be Much Larger Than at Value Retailers

SAMPLE PRODUCT CATEGORY: MAYONNAISE

TRADITIONAL TRADITIONAL TRADITIONAL VALUE VALUE VALUE RETAILER 1 RETAILER 2 RETAILER 3 RETAILER 1 RETAILER 2 RETAILER 3

Number of private- 13 of 41 17 of 39 8 of 30 5 of 7 5 of 7 1 of 5 label SKUs (33%) (44%) (27%) (71%) (71%) (20%)

Number of private- 4 of 10 4 of 11 3 of 9 1 of 2 1 of 2 1 of 4 label brands (40%) (36%) (33%) (50%) (50%) (25%)

Price range ($) 0.75–5.41 0.75–4.55 0.75–5.77 0.75–1.99 0.75–1.99 2.15–5.83

Six to seven times more SKUs Five times more brands Same starting price Sources: Retailer websites; BCG research; BCG analysis.

The Boston Consulting Group | Why Grocers Need to Start Operating Like Consumer Brands 2 products lack scale and thus don’t have the developing retailer brands can improve cus- margins to justify that complexity. They are tomer engagement and loyalty. the worst of both worlds—they don’t have the brand equity of CPG offerings, and they can’t beat the internal brands sold by value How to Get There grocers on either price or quality. For most established grocers, developing a retailer brand strategy will require significant effort and investment focused on sev- The Value in Retailer Brands eral priorities. The stakes have never been higher, and the potential advantage of retailer brands has Define a clear vision and strategy. The never been more apparent. Grocers that leadership team needs to establish the get this right can differentiate themselves aspiration for how the private-label busi- from their peers by offering products that ness will fit into the organization and— customers truly want—rather than prod- more important—into the overall brand ucts they’ll settle for—and that are avail- architecture. Grocers can choose from three able only in the grocers’ own stores or on models: their websites. •• The first model (and the historical norm) In addition, retailer brands can help grocers is to create a single master brand across become more customer centric and innova- all product categories with a direct tie tive. Many traditional grocers have strong to the grocery brand itself. But given relationships with CPG companies, but they how much power brands can have in don’t have a deep understanding of their influencing purchases, this traditional customers. Developing retailer brands re- approach is not enough to truly differ- quires direct engagement with customers to entiate a grocer from its peers. understand—and meet—their needs. This evolution can lead to increased sales vol- •• The second model is to develop a set of ume, at both a brand and a SKU level, and consumer brands for each category, greater overall value contributed to the bot- with a master brand endorsement tom line. (See Exhibit 2.) Most important, indicating that the product has been

Exhibit 2 | The Evolution from a Private-Label Model to a Retailer Brand Model

ACTING LIKE A CPG USING THE RETAILER BRAND MODEL INNOVATING IN RETAILER BRANDS Loblaws BECOMING MORE Trader Joe’s SYSTEMATIC Walmart Mercadona APPLYING THE Aldi Lidl PRIVATE-LABEL MODEL Giant Eagle Kroger Tesco Carrefour

Value from retailer brands retailer from Value Dunnes Stores Schnucks Morrisons

Increasing volume by brand and SKU • Classic “me too” • Systematic push of own • Building of strong brands • Management and approach brand to meet consumer and management of them execution of a brand • Limited to imitating demand end to end strategy like a CPG national brand products • Involves devoting • Usually entails a separate company yet with no dedicated internal resources to brand function with • Features strong customer resources and minimal develop products across dedicated resources, insights, marketing, internal capabilities a wider range of catego- a focus on quality and branding, and innovation, ries and tiers but with price, strong product with the best price and limited innovation development and quality oﬀer marketing, and some product innovation Source: BCG analysis.

The Boston Consulting Group | Why Grocers Need to Start Operating Like Consumer Brands 3 selected by the retailer. E.Leclerc in Analyze the organizational changes re- France is a good example of this model. quired. There are various ways to position The chain offers a brand of yogurt that the retailer brand unit within the organiza- competes with national versions such as tion, depending on the grocer’s maturity Danone but at a much lower price. The level. Companies at the earliest stages of the only signal to consumers is a small seal journey will likely still benefit from having a of retailer approval on the package. single, centralized department that is part of the overall buying team but also handles •• The third—and preferred—model is to the retailer’s own brands. Retailers that are create a set of brands for individual further along will likely need to set up a product categories that function like dedicated unit within the organization. This consumer brands, with no visible tie to structure ensures that the retailer brand the grocer. These products are devel- team has sufficient power and accountabili- oped on the basis of direct customer ty, can directly access customer insights, and insights that the retailer captures and works closely with functions such as mar- analyzes, and they feature the right keting, quality, and category management. combination of quality and value within their category to make them a credible Notably, management will need to review alternative to existing CPG offerings. and align KPIs and incentives to ensure that the entire organization can move to- Understand customer needs and build a gether while still preserving relationships strong R&D and innovation function. with its CPG suppliers. For example, Migros, Grocers also need to map and prioritize a grocery chain in Switzerland that sells pri- customer demands so that they can more marily its own retailer brands, has a struc- effectively meet those needs. Innovation is tured incentive system in place that focuses a critical aspect of this process and one on the value from specific products. where most grocers will need to make dramatic improvements. More broadly, Consolidate and build scale at the level of innovation is a means to create excitement individual products and brands. To gener- among consumers and employees alike, ate and capitalize on their scale, grocers leading to a more dynamic and vibrant should consolidate sourcing, testing, quality store experience. (See the sidebar.) control, packaging and design, and other functions that apply across categories. At Establish a clear value proposition for each each step of the value chain, the grocer can quality tier or brand. As value grocers have design these product attributes to be as improved their quality standards, the efficient as possible and thus keep prices traditional three-tiered structure used by low. More important, aspects such as many mainstream chains—one lower-price packaging can create an emotional connec- SKU, one standard, and one premium—is tion with consumers and persuade them to less relevant. Instead, companies need to pick a product up off the shelf, particularly rethink the value proposition for each of for new and unfamiliar brands, while their own brands. generating significant cost savings at all stages of the value chain. The value proposition could vary at a category level—the grocer may keep two tiers Capitalize on the existing ecosystem. for some types of products and consolidate Grocers have several significant advantages down to a single offering for others. Simi- over CPG companies. For example, they can larly, grocers may opt to develop catego- give their own branded products prominent ry-specific brands—for example, one for shelf and display space. And they can capi- fresh food, another for health and beauty, talize on their workforce as a de facto mar- a third for healthy packaged foods. In some keting team. Most grocery chains have cases, a grocer may even opt to buy an ex- hundreds of thousands of store employees, isting category brand rather than building who serve as the face of the company to it from scratch. customers. By tapping these employees to

The Boston Consulting Group | Why Grocers Need to Start Operating Like Consumer Brands 4 FOUR LESSONS FROM MERCADONA

Mercadona is the leading grocer in Spain, can understand customer pain points with a 23% market share and more than and unmet needs. For example, the 1,500 stores of about 1,600 square center in Valencia focuses on health and meters and 8,000 SKUs each. Over the beauty products, with a large bathroom past 15 years, Mercadona has created a and hair salon; another center develops competitive advantage through its private household cleaning supplies. Observers brands. The company’s success offers at that center noticed that some home- four clear lessons for other grocers that makers asked for vinegar to clean tile want to develop strong internal brands. floors. (Vinegar is a traditional cleaning product in Spain.) After gaining this 1. Start with customer needs. Merca- insight, the company developed a dona was one of the first supermarkets winning vinegar-based product for its to reverse its model from supply driven Bosque Verde line. to demand driven. The company and its employees are obsessed with the needs 4. Create efficiencies at each step of of the “Boss” (in other words, the the process. Mercadona brands offer customer). The product development better quality at lower prices because process starts with understanding the the company manages the product end needs of the Boss, and then the compa- to end and eliminates any costs that do ny works with a set of preferred suppliers not add value for the Boss. For example, to optimize all specifications required to it avoids unnecessary and non-user- develop a winning product. In total, the friendly packaging to reduce prices and company introduces 300 new products improve the customer experience. In each week, so store assortments are addition, high sales volume for each constantly changing. product leads to efficient production and competitive purchasing from suppliers 2. Develop individual brands for and enables the use of a fully automated specific categories. Mercadona warehouse, pushing supply chain (and develops individual brands for product thus overall) costs down substantially. categories such as Deliplus (cosmetics and beauty products), Hacendado (packaged foods), Compy (pet foods), and Bosque Verde (environmentally friendly cleaning supplies). For example, Deliplus overtook L’Oréal in value share after 2011. Deliplus is supported by a dedicated magazine (called La Perfum- ería), and each store features specialist perfume consultants who advise shoppers and offer value-added services such as gift wrapping.

3. Focus on quality and innovation. To develop innovative and high-quality new products, Mercadona built 13 innovation centers. More than 8,000 customers spend time at Mercadona’s centers each year; they have an opportunity to try products in development under real- world conditions so that the company

The Boston Consulting Group | Why Grocers Need to Start Operating Like Consumer Brands 5 advocate for retailer brands—and capture Costco partners with Starbucks for its consumer insights—grocers can ensure that Kirkland Signature brand. Similarly, for these products get into the hands and some smaller grocers, it may make sense to shopping carts of customers. This will be a collaborate with players in other geograph- particularly useful strategy as grocers begin ic markets, forming a single organization to reduce store complexity, thus freeing up that can benefit from scale advantages some employees’ time. without creating direct competition.

Engage with consumers across all media. Most grocers have a traditional means of o win in the current environment, interacting with consumers, through Ttraditional grocers need to think and methods such as weekly coupon inserts. operate more like a CPG company. They Instead, they need to think like a CPG can—and, we argue, must—move away company and engage with consumers in from the typical wide range of private-label new ways, across all channels—such as offerings and consolidate down to fewer social media. The goal is to get customers SKUs with higher sales volume for the win- excited and create an emotional connec- ning retailer brands that remain. Success tion with the retailer’s brands. won’t come easily, but grocers don’t have much choice. They can continue clinging to Explore partnerships and alliances. Finally, their established business models and keep local retailers should explore alliances with losing business to value grocers and online other players—through either joint ven- competitors, or they can rethink their ap- tures or M&As—in areas such as sourcing proach to brands and set themselves up to and product development. For example, win their customers back for good.

About the Authors Gavin Parker is a partner and managing director in the Sydney office of The Boston Consulting Group. He specializes in helping large national and international grocers transform themselves to improve perfor- mance. You may contact him by email at [email protected].

Alessio Agostinelli is a partner and managing director in the firm’s Milan office. He specializes in retail and consumer goods. You may contact him by email at [email protected].

Holger Gottstein is a senior partner and managing director in BCG’s San Francisco office. He is a specialist in retail and consumer transformation. You may contact him by email at [email protected].

Rune Jacobsen is a senior partner and managing director in the firm’s Oslo office and the leader of the firm’s global retail sector. You may contact him by email at [email protected].

Yossi Arouch is a principal in BCG’s Milan office. He specializes in transforming grocers and developing private-label brands. You may contact him by email at [email protected].

Kai Oberschmidt is a principal in the firm’s Düsseldorf office, specializing in grocery transformation and value retailers. You may contact him by email at [email protected].

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