Rob Schram, Vice President Assortment, The Nielsen Company
Brian Ruggiero, Client Manager, and Nan Schoenleber, Project Manager
SUMMARY: Retailers in the U.S. are expected to decrease the assortment of items in their stores by 15% on average over the next year. Do store brand items fit in to this new vision of de-cluttering the store? While the development of store branded items in the U.S. has consistently outpaced branded items in growth rate, assortment growth obtained through acquisition of branded item shelf presence in certain categories can lead to an overall decrease in category sales.
In an industry where retailers are dramatically changing their go-to-market strategy by trying to do more with less—simplifying their stores and revamping the center store—are store brands exempt from consideration? According to a recent Wall Street Journal article, the nation’s largest retailers are expected to decrease the assortment of items in their stores by 15% on average over the next year. Even big box stores such as Walmart are putting the pressure on manufacturers to simplify their offerings—in some cases, by as much as 30–40%. A question that manufacturers are afraid to ask is: how do store brand items fit in to this new vision of de-cluttering the store?
Industry experts are finding that using one universal assortment strategy when managing store brands across all categories is not as productive as setting a strategy by category. Within certain categories, the assortment of store brand items could be exempt, expanded, or even contracted in the pursuit to simplify the shelf while simultaneously growing sales.
Room to grow
Historically, store brand items were considered lower quality compared to their brand name counterparts and were sold at a lower price point. However, companies have started to market higher quality store brand products in order to boost in-store presence and consumer awareness. As Paco Underhill notes in his book, Why We Buy: The Science of Shopping, “Today we have the contradiction of generic brand names, store-owned brands that are packaged to look as luxurious as anything else on the shelves.”
In a typical U.S. pantry, there are 20 or more store branded items. Compared to many European countries where store brands make up 20–30% of dollar value share per store, store brands in the U.S. have significant room to grow. The development of store branded items in the U.S. has consistently outpaced branded items in growth rate. In the past year, store brands have grown by approximately 10% in dollar sales, compared to only 2% for branded items, suggesting that consumers are switching over to a store brand alternative.
To expand or not to expand
Traditionally, the three primary drivers of store brand growth have included:
- Increased brand equity and product quality
- Price advantages over national brands
- Expanding selection and offerings in an increasing number of categories
While expanding selection is a valuable growth driver, it is important to note that assortment expansion can have unseen opportunity costs that negatively affect consumers and their desire for selection. In some cases, assortment growth obtained through acquisition of branded item shelf presence can lead to an overall decrease in category sales. Retailers can grow their store brands, but if they push their selection too far, research has shown that consumers will buy less of a category and they will seek their branded equivalents elsewhere. This is especially true when manufacturers have created significant brand equity and product differentiation.
Less is more
While store brand items make up roughly 10% of the assortment on shelf, they achieve over 20% of the dollar sales of the store, on average. They are turning at a rate that is well over two-to-one. Consumers don’t necessarily require a wide selection of store brand items to satisfy their needs. And in some instances, growing store brand items further could actually cannibalize branded items on shelf and hurt sales.
Retailers have historically targeted the medium- to high-marketed categories—such as cookies, cereal, tooth paste, etc.—for expanding their assortment of items. These larger, multi-billion dollar categories typically represent the best opportunity for retailers to capture share and drive the growth of their store. However, a Nielsen assortment benchmark study reveled that consumers desire more choice within national brands than store brands for most categories. While it is true that consumers do want store brands, they just don’t require every flavor or size iteration that exists in the branded equivalence.
Retailers should focus more on ensuring they have the correct out-of-stock requirements for their top items instead of launching many additional store brand SKUs. The key to growing store brand sales is being strategic and hitting the right categories.
A store brand’s strength has been linked to manufacturers’ shortfall of marketing investment. Instead of expanding store brand assortment aggressively across all categories, retailers should increase the selection of store brand items in parts of the store where manufactures have eroded brand equity. Within low-marketed categories like milk, flour, tissue, foil, bottled water and tea, demand for store brand selection has increased. These categories offer retailers the immediate opportunity to capitalize on marketers who haven’t invested in attracting consumer’s attention to their brands.
Achieve more with less
While this may seem counter intuitive, retailers should consider cutting their own selection in favor of national brands in some categories to bring consumers to their stores. Having the appropriate balance of store brand items in each category not only satisfies consumer demand for store brand and branded items, but allows production costs/profits to remain manageable for the retailer.
As a cost-saving measure, consumers will typically trade down to an economy or store brand item. However, when there is a high level of manufacturer marketing support, a wide selection of store brand items are not needed to fill consumer needs—retailers should be aware of this potential trap. When it comes to increasing category conversion and driving consumer traffic, knowing where to offer a limited selection of store branded items is just as important as knowing where to expand store brand offerings.
Future growth drivers
Store brands are going to be hugely important and significant drivers of growth for retailers in the foreseeable future—especially within the low-marketed categories as the chart below indicates. One reason why store brands will have continued success—even as the economy improves—is likely due to Walmart’s renewed focus around their Great Value brand.
Undeniably, there is increased value for a retailer to carry store branded products on their shelf. However, knowing what consumers desire and deciding how to manage assortment and variety of offerings will ultimately determine the success of a “less is more” strategy.
- Do expand the selection of store brand SKUs in categories where manufacturers have eroded brand equity.
- Do select credible suppliers and hold them to a high standard. The growing consumer perception is that some store branded items are as high quality as branded items.
- Don’t expand the selection of store brand products in categories where manufacturers have very strong brand equity.
- Don’t push wide store brand portfolios in categories where many marketers have really differentiated brands.
- Don’t de-list niche national brand items or high-penetration items, driving consumers to another retailer who carries them.
- Don’t let price gaps get so large that category sales decline.