Dropping the Floor, Raising the Roof, and Recalibrating the Brand Continuum

Posted by Carol Spieckerman on December 07, 2011

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In a presentation in Bentonville last month, Walmart’s EVP and chief merchandising officer Duncan MacNaughton reiterated Walmart’s plan to apply a “broad application of price investments” that will amount to a $2 billion everyday low price insurance policy.

Tough markets call for tough measures and everything is a race to the bottom, right? Not so fast. As Walmart takes pains to buttress its low price floor, it is simultaneously raising the roof by adding a tier of higher-priced items that push historic limits in select categories. MacNaughton noted that cash-strapped consumers don’t always favor a steady stream of cheap, throw-away stuff, and in fact often prefer to make select investments in high-quality, durable goods.

On the heels of its first quarterly comp store sales drop in the UK in 20 years, last month Tesco announced its “Big Price Drop” initiative as a component of its strategy to get the retailer “back on the front foot.” A contrasting component of Tesco’s seven-part strategy, unveiled in May of this year, is to increase the global retailer’s appeal to aspirational shoppers, even as it makes unprecedented cuts. This is because, according to Tesco chief executive Philip Clarke, “as people develop higher levels of disposable income, they want to treat themselves.”

The business and retail media has been all over the sometimes baffling bifurcation in retail that has luxury brands such as Burberry and Prada thriving along with deep discounters like Aldi and Lidl, while middle-of-the-road players like J.C. Penney struggle. In response, retailers are building bigger gulfs between “good” and “best” within their widening “good, better, best” continuums in order to capitalize on contrast and skim from both ends of the spectrum. This expansion doesn’t stop at price, however. Retailers are exercising new brand options as well. Private brands are no longer retailers’ default choice at the lower end, and the fate of national and licensed brands is no longer determined by price alone.

Although Walmart manages some of the most recognized private brands in the world, including George and Great Value, MacNaughton says that Walmart considers itself a “house of brands,” and again sees national brands such as Levi’s as critical to establishing authority in key categories. In his presentation, MacNaughton cited a licensed program with Hello Kitty as an opening price point back-to-school stand-out, proving that private brands aren’t the only value option, even for a mass retailer like Walmart.

In my recent LIMA interview with Iconix Brand Group’s CFO Yehuda Shmidman, he revealed that Iconix sees its brands as a logical replacement for private brands, since retailers can leverage their own sourcing and more or less make Iconix’s high-equity brands, such as Candie’s, Mossimo, Peanuts, and many others, their own. Retailers such as Kohl’s, J.C. Penney and India’s Arvind obviously agree. Iconix has quietly grown to become the world’s second largest licensor, generating over $12 billion in annual retail sales, primarily by licensing its brands directly to retailers (most of whom have already developed sophisticated private brand capabilities).

At 7% and growing, India’s private brand penetration dwarfs China’s 1%. India’s largest retailer, Future Group, sees private brands as an ongoing growth opportunity, so much so that it hasn’t been afraid to play hardball with international brands that it believes are not delivering mega-margins. Confident that its stable of private brands would make fine substitutes, Future Group boycotted chocolate maker Cadbury in 2008, and cereal maker Kellogg’s the following year, over their inability to meet its margin demands. Future Group also decided earlier this year that its brands might benefit from a bit of adornment, even if that meant paying royalties, and inked a co-branded licensing agreement with Marvel that has characters such as Snow White and Spiderman appearing on its select Caremate private-brand products.

As retailers attempt to push the limits of both floor and ceiling, their brand houses are becoming bigger and more diverse than ever before. Which rooms will your brands occupy?

Bottom line:

  • Retailers continue to be focused on value, and in many cases, the pendulum is swinging back to national and licensed brands as a means of introducing real value that goes beyond price.
  • Private brands will continue to play roles across retailers’ expanding brand continuums. Positioning licensed brands as category-building complements or exploring co-branding opportunities will continue to give licensing companies a seat at the global brand table.
  • The demise of national and licensed brands has been greatly exaggerated and brand diversity is the name of the game across all price points. The brand space has evolved from “either/or” to “and.”

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