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ike all successful companies, retailing giant Wal-Mart faces the dilemma of trying to find opportunities significant enough to sustain high growth rates. After all, the company is already the largest company in the United States with $183 billion in domestic sales in 2001. In recent years, however, the Arkansas-based retail behemoth has seen same-store sales growth settle in at 5 percent to 6 percent, faced stiffer retail competition, found fewer rural locations in which to open new stores, and reported mixed success in international markets. In response, Wal-Mart has aggressively embraced a newer strategy: private labeling. Private labels are essentially brands that are owned or licensed by retailers and often manufactured by private label manufacturers. The push for private labels is a move typical of Wal-Mart founder Sam Walton, providing customers with more options at lower prices. But the gambit requires a delicate balancing act by Wal-Mart and the branded manufacturers that supply Wal-Mart, for the strategy pits these allies against one another. To aggravate matters, Wal-Mart has extended its private labels beyond conventional store brands like Sam’s Choice cola. Indeed, its newer private labels are nearly indistinguishable from nationally branded competitors: White Cloud toilet tissue and diapers, GE Small Appliances, and Ever Active batteries. These Wal-Mart private labels spend little on advertising and research but offer nearly the same quality as their branded competitors. Since they allow Wal-Mart to create and capture value that has traditionally gone to branded manufacturers, those manufacturers must now dream up new ways to create value for the consumer. Wal-Mart: Past, Present, and Future Since its founding in 1962 – the
same year that Target and Kmart were founded – Sam Walton’s
brainchild has grown to dominate the discount shopping sector (Chart
1). Just 13 years after it started offering food, Wal-Mart is
now America’s largest grocery retailer with an 11 percent share.
It has surpassed Toys “R” Us to grab a 19 percent share
and become the largest toy retailer. So powerful is the 3,244-store
chain that the most prominent consumer packaged goods firm, Procter
& Gamble (P&G), now tallies 15 percent of its sales –
about $6 billion annually – in Wal-Mart’s aisles. P&G,
however, accounts for only 3 percent of Wal-Mart’s sales. Most
other branded manufacturers similarly rely on Wal-Mart. As recently as 1989, Wal-Mart was second to Kmart in discount retail sales. However, Wal-Mart’s lower-cost rural locations and its highly efficient distribution and inventory management system allowed it to achieve enormous economies of scale and purchasing power. These competitive advantages allowed Wal-Mart to pass cost savings to the consumer. Thus, Sam Walton was able to capture value by offering a variety of nationally branded products at the lowest prices in order to satisfy United States consumers’ love affair with branded products. Over time, Wal-Mart’s managerial and technological innovations have diffused into the competitive marketplace. As a result, discount retail competitors have increasingly closed the pricing gap on similar products. In response, Wal-Mart is now leveraging its significant penetration – an estimated 60 percent of U.S. households shop at Wal-Mart – to make an aggressive push into private label products. Changing Tides in Branding War Wal-Mart’s push coincides with an increased willingness of consumers to choose among several different brands. As innovation has become less significant, particularly in low involvement purchase categories such as paper towels and baby wipes, formerly second-tier competitors have caught up to the innovators. In many instances, consumers have traded brand loyalty – buying Lysol, and only Lysol, again and again – for the concept of brand repertoire. Brand repertoire is the set of acceptable competing brands in a category for a given consumer – Lysol, Formula 409, or Clorox, for example. Often the final purchase decision is made from this set based on availability, price, or occasion.
More important, consumers’ brand loyalties have started to move from product loyalty to destination loyalty. And the Wal-Mart brand commands intense loyalty among its target. It is not unusual for a Wal-Mart store to pull customers from 30 to 40 miles away. For much of America, visiting Wal-Mart has become a ritual, akin to attending church on Sundays. In 2001, consumers averaged 5.66 trips to Wal-Mart in a given four-week span, and 7.13 trips per four weeks in December, according to one store manager. This change in consumer mindset has given Wal-Mart more power over branded manufacturers. After all, any brand removed from Wal-Mart shelves faces severe consequences. Wal-Mart’s Private Label Strategy As the technology and assets needed to manufacture consumer products such as paper towels, chocolate chip cookies, and trash bags become more easily accessible, the advantages afforded by having superior inputs, superior technology, and superior operations tend to disappear. Value then shifts to those who provide either superior access or superior segmentation, or to those who can continually provide substantial innovation. Clearly, Wal-Mart’s initial strategy has been to enter commodity-like categories and leverage its enormous access to consumers in order to create and capture value. As of the 2001 annual meeting, Wal-Mart offered 1,259 private label products – up 12 percent from the previous year. Wal-Mart’s website indicates that that number is now greater than 2,000 and that the company is actively recruiting brand marketers. A recent walk through Wal-Mart stores indicates that Wal-Mart is taking several approaches to its private label push. The majority of Wal-Mart’s private
label products are either value store brands or premium store brands.
Value store brands, such as Great Value food and beverages and Equate
pharmacy products nearly always represent the opening price point
in their respective categories and communicate this value to the consumer
through basic packaging and multiple category offerings. These brands
often look like and sit near their nationally branded competitors
in Wal-Mart stores. Wal-Mart’s premium store brand,
Sam’s Choice, also spans multiple food and beverage categories,
but often competes with a higher quality product in a premium category
or segment. Sam’s Choice usually represents the opening price
point of a premium segment of the category. The orange juice category
analysis (Chart 2)
demonstrates how Sam’s Choice and Wal-Mart’s value brands
often dictate the range between value and premium segments. The presence
of these private labels effectively caps the prices that branded alternatives
can command in each segment. These brands target the price-conscious
consumer who has low brand loyalty in specific categories. Wal-Mart has also developed high quality private labels that look, feel, and act like nationally branded products. These premium packer brands are typically placed on the shelf with little to no advertising, identifying price/quality gaps not necessarily at the opening price point. These brands typically compete in categories where branded manufacturers use minimal innovation in an attempt to keep prices high. The most prominent example is the White Cloud brand of toilet tissue and diapers, a brand that P&G abandoned in the early 1990s and Wal-Mart licensed in 1999. It now sits on the shelf competing against P&G’s Charmin and Pampers. Other examples are Wal-Mart’s line of Ever Active batteries and its purchase of the GE Small Appliances name. None of these brands displays the Wal-Mart name and each is virtually unrecognizable as a private label. A recent in-store promotion for White Cloud demonstrates the full power of Wal-Mart’s control over access to the consumer. Wal-Mart allowed consumers to touch, squeeze, and handle open rolls of Charmin, Cottonelle, and White Cloud toilet paper. This comparison brilliantly communicated to the target at the point of purchase decision that White Cloud is functionally equivalent to the category’s top two brands. Such efforts, which cost Wal-Mart virtually nothing, effectively undermine the value proposition for brands such as Angel Soft, which are more expensive, but less advertised. Therein lies the opportunity for Wal-Mart. As noted in Figure 2, a typical branded manufacturer achieves an operating profit of 11 to 19 cents on every sales dollar after spending between 10 and 17 cents of that dollar on advertising, promotion, and research and development. We can project from these figures that Wal-Mart has a cushion of 21 to 36 cents on the dollar, which it can share with the consumer in the form of lower prices. Plainly, Wal-Mart’s private labels are proving that consumers are willing to give up product brand loyalty to save money. The question now is how the various players will react to this new trend. Wal-Mart’s Next Moves Since Wal-Mart represents between 15 percent to 50 percent of many major branded manufacturers sales, it is often able to coerce branded manufacturers into handing over detailed data on new production introductions up to a year before these products hit the shelves. This has allowed Wal-Mart to bring quickly to market private label imitations that are of similar quality and lower cost. However, Wal-Mart likely does not have the culture or the research and development facilities to become a true innovator across thousands of categories.
Indeed, Wal-Mart has little incentive to immediately undermine the top brands. Premium brands innovate to create the newest product offerings, and Wal-Mart needs to offer these new products in order to continue providing the consumer with a superior choice. Perhaps more important, premium brands at higher price points establish a reference point for consumers against which Wal-Mart brands are evaluated. In low involvement categories where innovation is minimal, however, Wal-Mart may act more aggressively. It can use its access to and special relationship with consumers to induce trial for its private brands at critical life change points such as the purchase of a new home or the birth of a child. Reaching consumers at these critical junctures often translates into greater brand loyalty, which results in significantly greater sales and profitability per customer. The Branded Response Branded manufacturers must find some way to minimize the impact of Wal-Mart’s enormous control over access to the consumer. Since Wal-Mart’s private label activities are already moving outside the store (mothers of newborns receive samples of White Cloud diapers in some hospitals), branded manufacturers have to move quickly to continue investing in new product innovations and new methods of reaching consumers. By successfully offering consumers services outside retail stores, branded manufacturers may avoid their enormous reliance on Wal-Mart to sell products. Is the Tide brand limited to a laundry detergent or can it be extended to provide solutions for the millions of consumers who drag their dirty laundry to the laundromat every week? Can Lysol extend its brand to include a home maid service? Some branded manufacturers may leave manufacturing altogether, and instead focus on building and licensing their brands and designs as Martha Stewart does. Since only some mega brands will be able to pull off a strategy that combines products and services, branded manufacturers will need to reallocate resources to their top brands and either eliminate or drastically change their smaller brands. Who Will Win? It is difficult not to believe that Wal-Mart has the upper hand. Wal-Mart may use its competitive advantages to dominate with private labels in the low involvement, low innovation categories. Similarly, it can use its influence over branded manufacturers to gain access to new product innovations and penetrate the market in higher involvement, higher innovation categories.
Collectively, however, branded manufacturers may have to look only at the penetration of private labels in the U.K. market to anticipate their fate. Private label shares in U.K. supermarkets approach 60%. Of course, U.K. consumers do not share the same obsession with individual expression, as manifested through the widespread use of brands. However, the increased growth of private labels in the U.S. – private labels now account for 20% unit volume in the three major retail channels – indicates that at some level individualism is no longer threatened by using private label paper towels instead of Brawny. Of course, there are risks for Wal-Mart. The entire Wal-Mart brand may be threatened by a private label manufacturer’s failure to maintain an acceptable quality, or worse, produce a defective product, as was the case with a batch of Ol’ Roy dog food that made dogs ill. In addition, Wal-Mart’s tactics have angered some branded manufacturers and have provoked claims of a monopoly stifling innovation. Most of these claims have been found to be baseless, but the recent bankruptcy filing by Kmart may prompt the Justice Department to take a closer look. Tim Condon received his MBA from NYU Stern in May 2002, and now works in the advertising department of The Washington Post. This article was written under the supervision of Professors Marco Protano and John Czepiel. |
hus,
Wal-Mart works with non-branded manufacturers like Paragon Brands
to create parity products at lower costs. Instead of plowing money
into advertising or new product innovation, Wal-Mart uses low-cost
additions such as flashy packaging and creative names to offer compelling
alternatives. 
ne
solution may be for Wal-Mart to purchase or to take significant equity
stakes in smaller, innovative branded manufacturers across a number
of categories. These companies, such as Dial or Pfizer’s Adams
unit, would benefit from Wal-Mart’s data on customers and competitors.
In exchange, they would effectively become Wal-Mart private labels,
relying on little to no advertising to enhance the value proposition
for consumers.
egardless
of the ultimate winner in the battle of the retail giants, there already
has been at least one clear winner in this struggle to provide branded
products at lower prices: the American consumer.