Managing Store Brand Product Development Risk

January 26, 2010

By Maureen Azzato

Editor's Note: This is the second of a two-part special report on the Store Brands Decisions Packaging and Design Roundtable held at the PLMA Show. Roundtable participants included Doug Palmer, A&P; Michael Kitz, OfficeMax; Wendy Sallak, Topco; Andy Johnson, united; Rob Wallace, Wallace Church; Maria Dubuc, Marketing by Design; and Susan Steinberg, Aisle 9 Design. John Failla, founder and president of Store Brands Decisions, moderated the roundtable. Last week's report, "Packaging & Design: Elevating the Store Brands Game," detailed why retailers need to use strong design and packaging as they move beyond national brand equivalents into new product innovation.

As retailers innovate new products and develop exclusive brands, there is little to no financial safety net beneath as they walk the tightrope of new product development. There is no markdown money. There is no one else to pick up the tab if a product fails.

That's why consumer research, strategic planning, and design and packaging execution are so critical, as is the need for a new perspective and corporate mindset, according to a panel of retailers and design experts who participated in the Store Brands Decisions Packaging and Design Roundtable.

Michael Kitz

"What we try to create on our own -- we used to rely on CPG and national brand manufacturer to do that," said Michael Kitz, vice president of OfficeMax brands, who formerly worked on the CPG and manufacturing side of the business. "You also relied on them to pay for their mistakes, so when a new product failed we'd go back and ask for markdowns, protection and all that. Internally now when we are creating innovation, we don't have that support from manufacturers."

This added risk places more margin pressure on store brands, which is typically used to cushion and protect retailers from the downside, Kitz added.

Retailers could mitigate risk and finance innovation by setting aside 10 percent of store brand revenue in an "innovation war chest," proposed Rob Wallace, managing partner of Wallace Church, a brand identity, strategy, and graphic and structural design firm. This is one way to "fund that buy-back experience. If God forbid it fails, you've already covered your tail in the development costs of that idea," he said.

Wendy Sallak

In some cases, suppliers subsidizes retailers' new product development costs, which is the case for retailers who are members of Topco, a broker that serves as a procurement and design house for its retail members. "We do our work based on the demand of the retailers and we're in a position to talk to product supplier and say, 'You know what, even if this fails you have to pay for this, this and this,'" said Wendy Sallak, vice president of creative services for Topco. "We put the onus on the suppliers because we are a procurement organization, so I guess we're in a bit of a better position to persuade suppliers into supporting a program."

Doug Palmer

A&P also solicits the support of its suppliers when it launches or redesigns its store brand portfolio as it did recently, but it's not easy getting all of them to understand the new strategic vision or the new way of doing business, said Doug Palmer, vice president of own brands for A&P.

I've always said we tend to focus on the product quality being national brand equivalent, but once we put it in the bottle we just write off the label and don't even think about it," Palmer said. "That's changing and I think a lot of suppliers understand that. [Product development] is built into the cost and there is an amortization schedule."

At OfficeMax, which recently launched its TUL brand of office supplies, most of the design and development work is a corporate investment and the company only relies on suppliers to help fund the manufacturing and execution. "On the creation side we've looked at doing more joint work and generally we're finding reluctance or questions about ownership or how long something will be exclusive," Kitz said. "We think that there is a co-creation approach that can work and we are actively trying to find people to work with that."

A Shifting Mindset

So what has to change and shift for retailers to attain their full store brands potential? What old habits should die hard and what new ones should be adopted to elevate execution and maximize success?

Maria Dubuc

For one, "Retailers have to have a really well thought out brand strategy, and then they have to raise the importance of that strategy across the entire organization," said Maria Dubuc, creative director for Marketing by Design, adding that vision and strategy often do not trickling down to the product developers and managers where the work gets done.

Retailers must apply all the principles and disciplines CPG companies do when they create brands, said Susan Steinberg, vice president of Aisle 9 Design. "It's looking at the market strategically, doing your homework, doing consumer research, segmenting the marketplace, determining what the unmet needs are and how to make an emotional connection with different target segments."

Andy Johnson, creative partner at design firm united*, which helped A&P design Via Roma (see product line photo below), said the process all starts with a strong store brand leader who can get the buy-in from above and the execution form the rank and file. This leader also must have the vision and strength to say no to stakeholders who try to pull the project off course or off strategy.

"It takes someone strong to say, 'No, this is what we're doing for the company. This is the visions for the company and we will all abide by that,'" Johnson said. "That's not traditionally how its been done at retail. You have these silos and people in ivory towers...if you're going to be successful moving forward you have to have one solid vision."

Building a strong financial plan and proving a return on investment is a critical discipline as well, said Church.

And while many roundtable participants said they felt that the vision and leadership should come from the retailer, Johnson argued that it should be a partnership between the retailers and the branding and design experts it hires.

Andy Johnson

"It's about creating a really good and cohesive partnership, a transparent partnership, because outside eyes can bring a lot to the table that inside eyes don't see," Johnson said, adding that you can't dictate to clients and you shouldn't pander to them, either. The creative process thrives when both parties are equal participants, he said.

Kitz of OfficeMax said a clear strategic vision, a strong brand steward and a sound financial plan are all critical to store brand success. The OfficeMax leader for TUL brand "is always fond of telling me that we're not doing all this branding stuff because it's fun to do. We're doing it because we make more money. So we have to have that part buttoned up - very buttoned up," Kitz said.

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