CATEGORY DRIVER, OR CATEGORY CANNIBAL?

Dear Reefer:*

  When reps pitch a new product to me, how can I tell if it will give me incremental gains or just cannibalize the category?  
— Rhonda Retailer

By Kevin Janiga

Dear Rhonda:
Sounds like you’ve been stuck doing “the incrementality dance” a few times. The rep warms up the dance floor by walking you through a thick Power Point deck full of research showing you the “opportunity gap,” then the tango begins with a look at the packaging and a quick taste. The dance comes to a sudden end when you decide whether the product will be an incremental gainer, or a cannibal.

According to a 2006 study done by McKinsey Consulting, the average new product launch increased the underlying category growth rate by only 0.7%. Breakthrough, new-to-the world products drove category growth the most, increasing underlying growth rates by 2.7%. Line extensions were less accretive to the category, increasing growth rates by only 0.5%. When value pricing was the sole differentiator of a new offering, it had almost no effect, increasing category growth by a miniscule 0.05%.

So how do you decide whether a new product is a category driver or a category cannibal? Here are six fundamentals of incremental growth you should consider when evaluating any new product:

1. Is this new product relevant to your core consumers? For example, if you cater to older, more affluent clientele, health & wellness and portion control items should drive incremental sales. If you have a Hispanic customer base, consider more flavorful, fresh items.
2. Classify the new product line into one of three categories. Is the product line new to the world, a line extension, or a reformulation/cost reduction. New-to-the world items, although rare, usually offer the best chance for significant category growth. Avoid redundant flavors and ingredient offerings by different brands. These rarely drive incremental category growth.
3. Does this product create a new usage occasion or attract a new consumer to your stores? If a product creates a whole new usage occasion or attracts a completely new consumer to your store, it definitely should be given a shot. A good example was teeth whitening strip products introduced a few years ago. This created a whole new, at-home usage occasion.
4. How strong is the introductory consumer marketing program? Does the introductory consumer support include strong vehicles to generate brand awareness, trial, and repeat? In addition to broadcast media, there should be sampling, interactive media, as well as account-specific marketing components.
5. Consider the sales and profit per square foot implications of stocking the item. All else being equal, innovative products that come in space-efficient, easy-to-stock packaging should get priority over bulky, cumbersome products. 
6. Procurement income vs. category growth income. It is important to consider the incremental gross margin a breakthrough product line can generate. For example, let’s assume that grocery chain Z is reviewing a breakthrough, new product line in the frozen appetizers & snacks category, which does $20 million in annual sales for them. If this product delivers 2.7% incremental growth, it would deliver an extra $540,000 in sales and $189,000 in added profit (@35% gross margin) annually. Given this scenario, it would make more sense to stock this three-item product line than taking the slotting fees of a non-innovative product line at $50,000 per SKU or $150,000 total.

The next time you go to dance with one of your vendors, make sure to choreograph your steps beforehand. It will ensure that you take the lead and come up with the best product assortment to drive incremental category growth.

Kevin Janiga is president of Winsights Marketing, LLC, a marketing & sales consultancy in Tampa, Fla. He can be reached at kevin@winsightsmktg.com or 813-635-6013.

 *”Reefer” is a pet name by which many readers know this magazine. We assume it’s a reference to refrigerated trucks.

ARE YOU IN FAVOR OF IN-STORE EXECUTION?

Go to www.instoreimplementation.com

BY WARREN THAYER

It may be just urban legend, but supposedly when a (badly) losing football coach was asked what he thought of his team’s execution, he replied “I’m in favor of it.”

If that’s how you feel about execution at your stores, you’re far from alone. But a share group has sprung up, hoping to find solutions. Among other things, it is focusing on out-of-stocks, speed to shelf, in-store support and re-sets.

You can download this year-old group’s initial report, but we warn you it has some pretty grisly parts. For example:

—The industry average on out-of-stocks remains at 8.3% on regular items at the shelf.
—Out-of-stock rates are double for promoted items.
—86% of shelf inventory has more than seven days of supply.
—Stockers and inventory do not accommodate needs based on movement.
—Space management is not addressing the issue with packout and blocks.
—Retailers do not consistently adjust facings on best-selling and slowest-moving items.
—Variety vs. duplication is not really part of the evaluation of individual SKUs.
—Slotting money is paid for non-performing SKUs.
—There is too much variety without real differentiation.

Sound familiar? Of course it does. “At-retail performance of category management, shelf management, promotion and shopper marketing is limited by entrenched business behaviors in ways that cry out for change,” says the executive summary of the share group’s working paper, entitled “In-Store Implementation: Current Status and Future Solutions.”

Heavy hitters abound in the share group, including Giant Eagle, Schnucks, Procter & Gamble, General Mills, Anheuser-Busch, Pepsico, Nestlé Purina, The Partnering Group, Driveline, RetailTactics and VSN Strategies.

The group estimates that the total cost of sub-optimal merchandising performance (actual and opportunity costs) is about 1% of gross product sales, or about $10-$15 billion annually.

sidebar: EIGHT IDEAS TO FIX THIS MESS

We’ve paraphrased eight remedies the share group proposes to help get us out of the mess we’re in. They all sound good to us! 

1. Develop practices and tools that routinely allocate the greatest proportion of resources toward in-store activities that bring the greatest return.  
2. Design and use scorecards for all stages in the “plan-do-measure” sequence for in-store actions, as outlined in the report.
3. Redesign or replace present “home store” programs. These have a purpose, but they may tend to institutionalize ineffective practices that don’t help achieve merchandising goals.
4. Retailers need to assume more responsibility for in-store implementation work, work flow and communications. (This doesn’t mean manufacturers should contribute less to the effort, that DSD has to change or that third-party merchandising work will be slashed.)
5. Tasks should be assigned by priority, in a more predictable, consistent manner. Measurement and data capture on shelf actions should be captured in as near to real-time as possible.  
6. Retailers and marketers should say “no” to activities that should never see the light of day. This can only happen if the costs and ROI of in-store activities are clearly understood. Perhaps 30% of today’s workload goes to unproductive activities, and resources could be redeployed.
7. Identify and specify the most effective implementation actions. Systems should support measurement of implementation as it is performed.
8. Share. Development of new methods depends on broad collaboration across share groups, associations, vendors, consultants and other interested parties.

Which categories have had the biggest increases in sales with merchandising support lately, and how well did they perform while on promotion? As you can see, sometimes there’s a correlation, and sometimes there’s not. The charts should give you an idea of which categories may be more likely to offer support, and whether efforts are working.

In frozen foods, the most dramatic gap between promotional support and dollar sales was in pudding/mousse, with a 10.5% increase in dollars sold with merchandising support helping to bring about a sales gain of 81.1%. Most of this is heavily driven by new products, of course, although sometimes a category that’s failing gets extra support in a last-ditch effort to keep it afloat. There were some aberrations here, as with frozen muffins. Promo support in that segment dropped by 12.7%, while sales skyrocketed 76.3%.

Promotions seemed a little less hot on the dairy side. Fresh soup had the biggest increase in promotion, but also the highest level of promotion of all the categories. Private label drove this: it had the largest increase in promotion, and the highest level of promotion. Of course, private label sales are $27.4 million, completely dominating the category.

'NOT YOUR GRANDMOTHER'S PRIVATE LABEL'

Safeway revamps its private label program, keying in to consumers.

Our sister publication, Private Label Buyer, recently featured Safeway as its Retailer of the Year. The story on the chain’s private label evolution was discussed on Retailwire.com, the daily online forum.

Much credit for recent success goes to James White, the Nestlé Purina and Procter & Gamble alumnus who became Safeway’s senior vp of consumer brands late in 2005. “A major accomplishment during White’s tenure is Safeway’s rebranding of its entire private label portfolio — or what the company calls its consumer brands. Over the course of two years, the chain whittled a cumbersome assortment of 70 consumer brands down to 10 ‘power brands.’ The rebranding effort — which also entailed the development of attractive new packaging — encompasses approximately 3,000 product items,” according to the magazine.

“All are clearly positioned based on consumer and household insights,” White told PL Buyer. Such insights are critical to Safeway’s corporate brand program, and White stresses that they drive consumer solutions such as the company’s recently launched Eating Right and O Organics for Babies lines.

“Both (lines) are driven by deep consumer insights and deliver multi-category lifestyle solutions,” he said. “Overall, we are in the brand-building business, not traditional private label.”

To read all the comments on Retailwire, go to www.retailwire.com. Here are excerpted responses from Retailwire’s Braintrust panel of experts:

“The most striking thing about this development, in conjunction and harmony with the ‘Lifestyle’ store, is that Safeway looks like it may be the first major U.S.-based grocery chain to successfully implement a ‘consumer ownership’ strategy that has long been the hallmark of European chains like Marks & Spencer. That is to say, they are working to own not only the consumer retail shopping experience, but also the brands that complete that experience in the home… Safeway appears to be on the way to a strikingly successful reincarnation.”
— Ben Ball, senior vp, Dechert-Hampe

“All too often, private label is deployed strictly as a necessary “me-too,” component to a supermarket’s business model. Safeway has used private label to help establish a point of difference for itself which is a smart strategy.” — David Biernbaum, Senior Marketing and Business Development Consultant, David Biernbaum Associates

Safeway has done a great job in meeting consumer demands with their “O” and “Eating Right” P/L lines that dovetail the Life Style concept Brian Cornell and his team executed.
A&P has taken notice of Safeway’s success as they have hired several Safeway P/L executives to lead its P/L program in the past two years. Given the recessionary period we are in, I still believe the two tier P/L programs will see a much anticipated increase in both dollar and unit sales in the next 24 months. Let’s not forget Kroger and the power house P/L program they have in place as well.
— Kevin Hannan, President, The Hannan Group

Safeway deserves its status in private label. They have gone above and beyond in all operational aspects of their house brand program. In a recent visit to a store on the West Coast, I was thoroughly impressed with the merchandising and assortment. What really blew me away was the product knowledge the floor associate had when I asked questions about the O line. She was well versed and knew much about organic certification and content. Other chains can take a lesson from Safeway in regards to PL. Think margins! Think margins!  — Doron Levy, President, Captus Business Consulting