Apr 8, 2009

Not Our Problem? Better Think Again if Private Label

The FDA is clamping down on pistachios. Just another sourcing problem in a (more frequent these days?) string of supply chains gone awry?

A single processing plant, a supplier to Kraft Foods, is the focal point of investigation and the object of repeated citations. Kraft apparently is not to blame. It alerted the FDA in the first place and has been on top of its supply chain.

Now, imagine a different situation: Instead of Kraft, the name on the pistachio products belongs to a supermarket chain. It’s a private label or "house brand" as the trade likes to call it now lest it be confused with something "generic".

Consumers might ask: "Did the retailer perform adequate levels of inspection and oversight? Was the retailer adequately screening and supervising its contract nut processors? Was the retailer spending as much on supplier quality control as independent national brands typically do? Was the retailer allowing corners to be cut to make a price point? Was the consumer bearing the real cost of those corners being cut?"

Retailers might worry as well: How would the consumer perceive that retailers' broader line of "house brands" now? Would the recall affect the line in other categories?

When retailers go into private label it’s often with euphoria – We can brand what we sell, make it our own, merchandise exactly as we want to on our store shelves, and reap a fatter margin too.

Investing in costly quality control is often short-changed, and what thought it does get is on the order of, ‘That’s our contract processor’s responsibility (even when they're thousands of miles away on another continent?) ...see my earlier post on quality control and trust here.

Well again, maybe it is, or maybe not. Certainly when safety problems are uncovered, the local contract processor gets hit hardest. But the consumer brand does not escape entirely. If subsequent investigation suggests lax or negligent oversight, brands get burned. Remember Mattel and lead paint?

Here’s the real concern for private-label retailers. How far will the collateral damage spread? Will the public think, ‘Oh, it’s just a pistachio problem; we’ll stop buying Safeway's house branded nuts’? Will the retailer's label itself become suspect, and people turn away from private label cereal, salad dressing, paper towels, the whole line for fear of inadequate downstream accountability?

Or worst case, will the store itself be implicated, fairly or not, and might people just stop shopping there altogether? Maybe not. Or maybe.

With private label, there’s a lot on the line. Defending it in advance, through supply chain vigilance across widely varied outsourced products – soup to nuts – is a lot of work. Expat salaries for overseas quality control is very expensive and complex. Risks are high and not always avoidable. National ad campaigns like Jif ran to reassure their peanut butter consumers are very expensive.

Here's the point of all this: for a retailer who might have to reassure consumers about a recall, Jif's ad costs are certainly more expensive if they have to run a campaign for their house brands. In the past they simply told consumers: "we've pulled the offending brand from our shelves - tsk tsk on them" (remember the contact lense solution problems and the speed with which retailers distanced themselves from the brands by very publicly yanking them off the shelf?)

When the retailer's CFO looks more fully at ALL the costs of house brands - not just sexy Gross Margins, -do those independent national brands look more attractive? I'll bet they will to more and more retailers in the next few years.

In the end, Branding is a lot more than pricing and Gross Margin...

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