We were discussing pricing this week, and I wanted to add some dialog on private-label to the discussion.
What is happening is that the supermarket and drug chains are starting to make their own private label goods now (instead of buying them from contract canners, etc.). I don’t know if any of you have ever driven by a big supermarket chain warehouse, but if you have, you undoubtedly noticed production facilities on the grounds. The big chains are making all sorts of items now: breakfast cereal, canned veggies, dairy stuff (in particular, ice cream). This completely eliminates the middleman, and of course, there’s no need to advertise private label, so by pricing the private label right below the leading national brand, the retailer can reap enormous profit margins. 50% and up is the rule.
This raises some interesting questions from both the marketer’s and consumer’s perspectives. From the marketer’s viewpoint, it means private label will hold the dominant share in a given category, and slowly suck the life out of the branded goods. As marketers of national branded items, we’ll be chasing diminishing market share. The only way we can dominate a category is to have the leading national brand, and make the retailer’s private label product (at a loss). Thus, our share of shelf is larger than any other brand, but the retailer is taking all of the profit on the private label stuff.
From the consumer’s perspective (you have permission to put your consumer’s hat back on now): how do you feel about not having any choices in a given category? That’s the future the supermarket chains are pushing towards – one brand: private label, and possibly one ultra-premium offering. Cuts the supermarket’s inventory, cuts down on the number of invoices and vendors that have to be processed, and spreads margin.
Recently I went into a Kroger supermarket (Ralph’s) and found no national brands of some items. Beets for example. I’ve always bought Del Monte. Can’t get ‘em at Ralph’s any more.
How do you feel about your supermarket cutting your selection down to the brass tacks while they double and triple their margins? How should consumers react?
2. INSTRUCTORS QUESTION: Small Business & Pricing (Min. 200 Word Count)
As you read through your assigned reading materials, keep in mind that the discussions are big-business oriented. The harsh reality is that if you are planning an entrepreneurial venture that would involve a product that competes with the big brands, you need to take a step back and swallow a stiff dose of reality. In the everyday categories of consumer goods, the major manufacturers have just about everything covered and it takes extraordinary amounts of capital to compete with them on any level. Best you look at niche products that you can get higher prices for and won't put you into direct rivalry with the big boys. I spend a significant part of every day dealing with niche and start-up products and have witnessed just about every possible way to lose money or fail in a marketing venture. Fortunately, I've seen enough successes to earn a living from them....
No matter whether we are a large or small concern, the pricing formula remains the same. I'll attach a copy of a spreadsheet I use for pricing - some of the formulas may still be in it. I used this several years ago for a new energy drink brand in a test market roll-out. The basic formula is the price we charge for the product, less the costs to buy it or make it, divided by the selling cost or the acquisition cost. Pretty simple.
What I have found in my lines is that the entrepreneurs who develop new distilled spirits, wines and energy drinks and so on usually raise sufficient capital to develop the product, secure production of the first 10,000 cases or so (that's the minimum production run most contract bottlers or canners will consider, and that's after you supply them with the containers, which must be paid for up front) and engage in the preliminary steps of entering a distribution channel. Oh, by the way (since we are approaching week 4 - promotion: Did I tell you that advertising has to be paid for up front as well?). Some start-ups run out of capital by the time they are ready to take the brand to the marketplace. That's a financial mistake you'll study in your small-business and entrepreneurship classes (I hope....), and we still see it all the time. A rule of thumb that I can give you is that it takes about a $1 million to put a product into limited distribution in the top 12 metro markets in the U.S. That process takes about 2 years to really nail down, and when it's over, you'd best have another $3 million on hand to drive the product for the next two years (sales personnel, brokers, distribution channel costs, samples, travel, entertainment, advertising and promotion. Licensing and fees if your product is regulated in any way). If your product is achieving any level of success in the marketplace, rivals will appear about the end of year one or early in year two, and you will then be splitting the pie more ways.
Read the break-even analysis (BEA) information in chapter 18 carefully. It's not complicated math (you can buy cheap software that will do the heavy lifting for you if you are a math-challenged person) and can save you from losing everything. If you are not incorporated and your new product fails, creditors are going to come for all of your assets. Where most people go wrong in this process isn't in the math. They feed unrealistic data into the equation. The key is that BEA will show you how long it will take to break even and begin to operate in the black. That result lets you know how many years of financing you must secure before starting the project.
Let's suppose you have an idea for a great niche product. You will need to assume that even if you protect the idea or concept, rivals will still be interested and if you are successful you'll have about a year before knock-offs begin to appear. It's a good idea to front-load your costs, and then pull in as much profit in the early phases of your roll-out as you can, before rivals appear. They will appear if your product appears to have even the slightest scintilla of a chance in the marketplace. For that reason, you need to look at your pricing very carefully and price as high as you can in order to amortize your development costs and get yourself into the product window.
I used to be more in favor of a longer-term strategy, but it's so easy to offshore production these days that the game plan has to change if we are manufacturing here in the U.S. I might add: many new products are developed specifically with the idea of selling the brand or product as soon as it achieves some benchmark of success in the markets. In my lines, that benchmark is usually the first year the brand achieves 10,000 cases sold to end-users by retailers. It varies by product, depending on how much investment taking it to the next level will require.
Bottom line: Do not make the mistake of underestimating how much money it takes to put a product into the distribution channel. I hate to sound pessimistic, but my view is that as an entrepreneur you need to be able to skim for a significant period of time, or have a strong pool of investors standing behind you, who don't expect a return on their investment for at least three years. Make them agree to that, or they'll make you miserable. If you think it takes a lot of money to develop a product,wait until you start buying advertising. That's a real E-ticket ride. The fun has just started.... we'll look into that aspect next week!
If you have experience launching entrepreneurial products and services, be sure and share them with us!
1.Super market’s own label are significant not only in U.S.A and U.K but also in many countries .In U.K″MENTEL ″brand has 20% of sale of total U.K food sale in 2000.Same is in U.S But this picture is not same everywhere. Customers have started complaining that now due to super markets brands on the selves they have less choice, those customers with of the prices of super markets brand thing they are being cheated they are thinking their pockets are being exploited by the super markets then there are loyal customers, who are in the opinion that super markets are not selling enough of their favorite brand. But after 1999 there