HEB “Own Brand” or Private

Labels in Retail
 Private Labels
• When the brand is owned by the store, it is
called a private label or a private brand.
– Manufacturer Brand (national brand)
• Taj Mahal Tea; Lee Jeans
– Private label (store) brand
• Reliance Tea; DJ & C jeans
– Only Private Brands (BB)
– A mix of Private and Manufacturer Brands (SS)
 Why Manufacturer Brands
• Consumer Demand It.
• Promotional Costs shared
• Quicker sales
• Inventory Replenishment (principle of
masses reserves)
• Quality Control
• Prestige
• Price Maintenance
 Why Private Brands
• Loyalty of the customer base for private brands
• More freedom in merchandising
• Price sensitivity low
• Lower Price Comparison
• More customization
• Profits Higher (Due to elimination of middlemen)
• Lower costs due to promotional expenditure not
being a part of the cost
 HEB “Own Brands”
• The business so far has been good, 11th
largest supermarket and 65% Market
Share in its core markets, however
– Competition from Walmart
– Sprucing up its “Own Brand” (OB) Strategy is
one way of guarding its turf.
 HEB “Own Brands”
• Two categories
– H-E-B: A premium private label with a quality above
or equal to the national brands
– Hill Country Fare (HCF): A lower priced product with
quality approaching the national brands.
– Current situation: 19% of sales and double the gross
margins than national brands
– Target: 30% of Sales
– Focus: A H-E-B brand of bottled water “Glacia”
• Tactical: Economics of Glacia
• Strategy: Own Brand Strategy and positioning
 Economics
• Is Glacia (Premium water imported from
Canada) contributing to HEB?
 Pre- Launch Post Launch

Profit
Profit Contribu
Share Profit Contributio Profit tion Per
(%) per Unit n Per unit Share per Unit unit
Ozarka 73% 0.4 0.292 52% 0.4 0.208
Glacia 0% 0.56   22% 0.56 0.126
Evian 12% 1.26 0.151 6% 1.26 0.076
Aquafina 15% 0.49 0.074 20% 0.49 0.098
Total 100%   0.517 100%   0.508

Therefore, Glacia Has actually reduced the profit contribution from the
product category, because while Ozarka has moved so also has Evian. You
have replaced a higher profitability product with a lower one!
 Customer Issues
• “Canadian” Connection not perceived.
– 64% thought it to be sourced from Texas
– 80% perceived no advantage of imported water.
– Premium customers did prefer Canadian waters than French,
but taste differential not substantial and price difference between
Galcia (1.79) and Evian (5.49) made Glacia an inferior product to
Evian.
• Data shows that people are preferring Glacia over
Ozorka since it is cheaper and Glacia is placed next to it.
• Imported water drinkers are also shifting, to detrimental
effect on HEB
• Problem with HEB’s EDLP pricing strategy  Will it be
able to get a “premium” store brand?
 So, wither Glacia?
• Is Glacia falling a victim of the CEO’s Fancy?
– Change Glacia and position it directly against Ozarka
• Source from Texas—lower sourcing cost
• Evian buyers will not buy it, but is good for HEB
• Price it lower or same or slightly higher than
Ozarka
– Position it against Evian
• Price it slightly lower than Evian
• Introduce a HCF Texas sourced brand to compete
against Ozarka
 The pricing Confusion
• There seems to be a great deal of
confusion regarding prices
– When Ozarka is on a special it is priced at
1.50 i.e. even lower than Glacia (page 14)
– Sometimes H-E-B Vegetables is priced lower
than the HCF brand (2 for .88 against 1 for
0.57 –page 23)
– This is dangerous and since all the controls
on own brands is with the retailer, this should
not occur.
 Why?
• HEB is positioned on value—low cost and
high quality, and with Walmart almost
there, HEB cannot afford these glitches.
• However, there would be situations where
the national brand will be cheaper than the
HEB brand due to “procurement income”.
 Procurement Income
• It is income that comes to HEB from
National Brand Manufacturers and is due
to negotiations on shelf space, promotion,
and positioning on advertisement flyers.
• Is it important, lets see.
Sales 9.0 Case Fact p.5

Own Brand Sales 1.4 Case Fact p.9

Non Own Brand Own Brands do not have procurement
Sales 7.6 income

Procurement Income is only on Grocery

Grocery Sales 3.5 sales which is 46% of total p 7 table C

Procurement 175 to 3 million Procurement is 5 to 10% of total

Income USD Grocery sales , p 13

Total Sales 9  

Gross Margin 2.25 (20%-35%, assume 25% p 3

Operating Margin 360 Million (3% to 6%, assume 4% p 3

Net Income 180 million (0%to 3% of sales assume 2% p3

So Procurement income is almost 50 to 100% of the Operating Margin

 Symbiotic Relationships
• Why is National Brand Pay Procurement fees to H-E-B?
– Leader in its Area of operation!
– Counterweight for Walmart
• Why is National Brand important to H-E-B
– Procurement Income
– This income is independent of competition dynamics
– Gross Margins versus net margins
• Ad support
• Stocking
• Returns policy
– Therefore, it is perhaps overstreching when they want to
increase own brands to 30% of sales.
 Own Brand Positioning
• Two views
– H-E-B premium and HCF more baseline
• Execution is the issue here
• Brand Differentiation
– Do each product category need both?
• Brand rationalization
• To understand this issue, we need to do a
product review
 Product Review
The H-E-B (Creamy Creations) is a sure success (25% gross
margin and sales close to national brands). The case for HCF is
Ice Cream
not very clear. Perhaps catering to the family buyers. Maybe both
should be kept
A huge win. The convenience of the customer seems to offset
Beef Basket
the higher price per pound. No need for an HCF product here.
Problem area. H-E-B brands not performing well, and the HCF
Pasta Sauce brands are getting lower margins for higher sales. Study the
problem
The Problem is own brand proliferation. H-E-B brand is perhaps
Flour not very sound and needs to be removed since its margins are
low and prices are also lower than national brands.

H-E-B should be eliminated. HCF is perceived as superior in

Canned
packaging. And since this is a basic commodity, perhaps price
Vegetables
plays an important role

Frozen HCF is an outright winner. There is no H-E-B brand here. So

Vegetables perhaps that is a lesson for Canned.
 Challenges on Positioning
• Clearly define the positioning of H-E-B and HCF
and then execute appropriately
– Current focus is on attributes
– Change Focus to benefits and values
• Which product category should be attacked?
– Lower % of sales of own brands should be tackled
(Deli versus Basic Ingredients)
• At the end of the day is “premium own brand” an
Oxymoron? Therefore, can one view this
problem as eliminating all differentiation and
work on a single store brand.
 Own Brands and Corporate
Strategy
• Sales of USD 1.4 billion and USD 450 million as
gross margin is important
• Why does the CEO want an increase in sales
from 19% to 30% The margins generated by
Own Brands is 50% higher than national brand’s
– So, incremental margin from “Own brand” is USD 150
million
– Loss on account of loss of procurement income = 1.4
billion X .46 X 7.5 = USD 48 million
– Therefore, gain is 150 million – 48 million = 102
million
– The gains are significant.
 Competition
• Walmart: Very high penetration in Texas. While Walmart
has lower SKUs (70 to 75%), it is competing on price.
• HEB is unable to counterbalance non-performance in
one location by better performance elsewhere.
• So Own Brands can and should be used to
counterbalance the threat of Walmart by offering
products suitable to the region which Walmart is unable
to do.
• Of all the regional players, HEB has the strongest
financials and is best suited to counter Walmart’s
Juggernaut (page 3)
 Market Dynamics

Premium Low
National
Own Price Own
Brand
Brand Brand

Create Localized Price Image

Drive Traffic
Preference Lower Margins
Provide Procurement
Provide Premium Higher Volumes
Income
Margins
Role of CM and it’s
Effectiveness
 Best Performing Retailers :
• Offer Broader Assortments
• Have Strong Pvt Labels
• Charge Significantly Lower Prices
• Use Feature Advertising to drive store
traffic
• Displays to increase in store purchases
…. Despite high brand price elasticities
category sales might not change much if
promotions primarily lead to brand
switching and/or store switching……it is
possible that from a brand managers
perspective a promotional plan might be
very desirable but may in fact lead to a
reduction in sales value of the category if
much of the merchandise moves at the
promotional price …….
 CDI: Category Development Index

Retailer Unit Volume in Category Market Total Sales Value

CDI
Market Unit Volume in Category * Retailer Total Sales Value

CDI can be calculated using Value instead of Unit as well

 Comments about CDI
• An indicator of a retailers performance in a category relative to their
overall performance in the market.
• A manufacturer can determine if the retailer is over performing or
under ….vis a vis other retailers
• Cross category comparison will help the retailer identify where
opportunity gaps exist
• The CDI also provides valuable competitive information
• The CDI though cant tell the retailer which categories might provide
better return on investment.
• Can be misleading when comparing across various formats …as the
total sales generated by the various formats is over different kinds of
assortments.
• Aggressive action to achieve high CDI in all categories will be
counter productive as increase in one will come at the expense of
some other categories. (since the sum of all CDI’s for a retailer will
be 100)
 So then ….
• The idea for the retailer is to maximize the
CDI aggressively for those categories that
are more profitable getting a more than fair
share of the market.
• Holding constant the inherent potential of the
market
• Exact impact of marketing decision variable ; lower
prices, varied assortments, promotions may vary
depending on the role of the category
Frequency of Percent of Household Buying
Purchase
High Penetration Low Penetration

STAPLES NICHES
High
Frequency Milk Yogurt
Tea Macaroni and Cheese

VARIETY ENHANCERS FILL INS

Low
Frequency Cake Mix
Pickles / Ketchup
Rice Syrup
2 Ways of influencing category Volume

• Increase store traffic

• Increase the probability of category
purchases who are already in the store

Lets look at how Price, promotion and

assortment policies might affect the
category.
 Promotions influence on CDI
• Feature Advt are the most popular method used by the
retailers. These effect positively the category volumes in
staples and to a lesser extent variety enhancers and
niches as these categories are important to the
consumer and are purchased very frequently. The Fill In
categories are less impacted as these are not very
popular as well as lack the frequency.
• On the display activity front though it is the fill ins that
benefit the most, followed by the variety enhancers and
the niches. Staple have no impact as the shelf allocation
is significantly higher to begin with.
 Price influence on CDI
• Lower Prices, whether regular or promotional, almost
always have a positive impact on the category volume.
But as per the heavy user effect, the price sensitivity is
greater in categories where more consumers purchase
more often. Hence staples followed by Variety Enhancer
and niches have a positive impact of lower prices. Fill ins
are least impacted by prices.
• Since TPR’s are communicated only in the stores hence
do not impact store traffic. Hence they impact positively,
Staples and Variety Enhancers where the customer is
likely to see the TPR and make a opportunistic buy.
Although price sensitivity is higher in Staples the price
maneuverability is low because of the floor effect.
 Assortment influence on CDI
• Both the Breadth and Depth of assortment offered in a
category helps to cater to the heterogeneous needs of
the consumers. Offering more depth and width attracts
more customers to come to the store and induces them
to buy more. Hence the it has a positive impact on the
category volume of a retailer.
• If the brand variation is less (i.e the sales of the category
are split more evenly across brands), the effective
number of brands (and hence width) that a consumer
perceives is greater, giving the impression that the
retailer is better suited to meeting all the needs in the
category.
• In the staples the impact is lesser as the assortments are
already very wide for the retailers.
 Private Label influence on CDI
• Has positive impact on all categories as
these help the retailer better meet the
needs of the heterogeneous customer.
Key Determinants Influence on CDI Category Specific
Price and Promotion
Regular Price - Fill Ins < Others

TPR + Staples, Variety

enhancers > Others
Feature Advertising + Fill Ins < Others

Display Activity + Fill Ins > Others

Assortment
Depth of Assortment + Staples < Others

Breadth of Assortment + Staples < Others

Brand Share Variance - Variety Enhancers <

Others
Private Label Program + On All
 Analysis
• Merchandising variable play a significant role in
increasing the CDI. SKU reduction needs to
carefully undertaken in all categories except the
staples.
• Strong Store brand leads to higher Volume and
Value CDI. These help in increasing the primary
demand in the categories.
• A lower category price spurs volume but for in
Staple where TPR’s seem to work more.
• Feature advt is most effective for staples,
followed by Niches and Value Enhancers. The
Display works best for Fill Ins.
Category Management

Relationship between the

supplier and the retailer
 Distributive Approach
(Adversarial and Confrontational)
2 Parties negotiate to share a fixed amount of benefit

Integrative Approach
(Collaborative and Partnership)
Parties co-operate to increase the total amount of
benefit to be shared.
 Power
Conflict
Trust
Commitment
Relationship between 2 people
is defined by what they provide
to each other,
the resources they distribute
and the
exchange that takes place.
Hence in the light of the relationship that is
the driving force behind category
management ……
Category Management aims to
establish inter organizational infrastructure
to optimize new product introductions,
optimize assortments and optimize
promotions.
 The Relationship
• Dependence
• The Firm with a greater relative dependence has the greater
interest in sustaining the relationship
• Inter Dependence
– Total Interdependence
• Refers to the sum of both firm’s dependence. The more the
firms facilitate each others goals the higher the exit barriers
become.
– Interdependence Asymmetry
• Refers to the difference between channel members
dependence on the partner and the dependence of the
partner on his organization.
 The Relationship
• Power
• Power is a feature of relationships and is important to the
effective management and realization of goals.
• Power can be defined as the ability of one channel member
to control the decisions of the other channel member.
• Unusual resource endowment can affect the power balance.
• These resources/assets for us can be access to scarce
space, strong brands, large market share, specialized skills,
unique proprietary products.
• Where there is imbalance the weaker party is likely to take
steps to limit its vulnerability which is detrimental to the
alliance.
 The Relationship
• Commitment and Trust
• Commitment is one of the key factors that determine trust
• Trust is perceived as an antecedent to trust.
• Trust has two essential factors Honesty and benevolence.
• Honesty is the belief that that the other party will not
renegade on its word
• Benevolence relates to ones’ belief on the other that it will
not indulge in behavior which will result in negative
consequences for the trusting party.
• Reciprocal commitments can lead to stable long term
relationships.
 The Benefits of Category
Management
• Retailer
– Financial
• Increased Sales
• Increased Margins
• Reduced Costs
• Improved Efficiency
• Increased Market Share

– Non Financial
• Organizational Learning
• More Effective Strategy implementation
• Better Customer Service
• Improved Customer Knowledge
• Understanding Cost Structures
• More Open Communication with Suppliers
• Improved Personal Relationships
• Stability of Business Practice
 The Benefits of Category
Management
• Supplier
• Increased Profitability
• Increased Business Knowledge
• Improved relationship with retailers
• Consumer
• Reduced Consumer Confusion
• Product Ranges reflect consumer wants
• Greater Product variety
• Increased Product Availability
• Product Information
• New Facilities
• Lower Prices
 Merchandising and within the store
communication
• Why?
– Knowledge at store level is minimal
– Have no time to deal with changes
– Focus on operations
– Buyer can keep the store personnel updated
about their products
 Techniques of communication
• Store Visits
• Telephone/Fax/ Email
• Bulletin Boards
 Recipients of Communication
• Store Managers
• Department Manager
• Sales Associates
• Visual Merchandisers
• Advertising Managers
• Off-Site Representatives
 What Information
• Fashion Merchandise
– Styles
– Colour
– Fabrics and Fibres
– Care
– Quality
• Non Fashion Merchandise
– Operating techniques
– Servicing
– Warranties and Guarantees
– Special Requirements
– Adaptability