Building a Controlled Label Program

Creating a private or controlled label program is one of the largest endeavors an organization or alliance of organizations can undertake. Such a program must be constructed within the context of the strategic plan formulated by those organizations. A private label is owned and used by one organization; a controlled label is used by many organizations.

The following will give the reader the context and process that most organizations go through to build a controlled label program. We will share the progress Northeast Cooperatives has achieved and some of the hard lessons we have learned in creating a controlled label program.

Industry overview

Natural food cooperatives exist within an increasingly competitive environment. Because of the increasing availability of natural products, cooperatives are forced to show a progressively better economic value to their owner/members. Cooperative production/manufacturing, wholesale and retail firms are challenged by their conventionally and generally much better capitalized and integrated counterparts.

The cooperative distribution channel must meet or exceed the performance of their conventionally owned competitors not only for new business from cross-over shoppers introduced to natural foods by their grocery supermarkets, but for the continued patronage of their owner/members. These members increasingly have opportunities to shop at other natural foods stores and purchase heavily discounted supplements and HBC products via the internet.

Northeast Cooperatives is approaching the end of the first year of its regional label program.

Cooperatively-owned manufacturers and distributors share the cooperative values of their retail and buying club owners, but all cooperatives must translate those into equal if not superior performance on core competencies one expects of a conventionally-structured business. In addition, each cooperative must distinguish itself by providing value-added services or attributes.

Whatever growth model cooperatives elect to use through the cooperative distributor they own, they will be challenged by the train wreck that is coming: the natural products distribution channel. For many years, distributors generated the consolidating volume that created economy of scale for the natural products industry and in particular for many small producers and retailers. The distributor became the banker for both the store and the marketing activities of manufacturers. The distributor assembled promotional opportunities into programs of varying effectiveness. Many distributors assumed (sometimes erroneously) that their promotional vehicles drove the business. Meanwhile, the aging baby-boomer public was acquiring an increasing taste for healthy foods and other alternative consumer products.

In the last ten years, the conventional grocery business sector became attracted to the natural foods business. Overall sales volume and, more importantly, consumer interest and shifting preferences encouraged conventional manufacturers, distributors and retailers to pay serious attention to this growing niche of the grocery business. These entities already have a very low cost of doing business due to their integration and huge economy of scale. Natural products represent highly lucrative, incremental sales added to their already fully developed, ruthlessly efficient delivery systems for the consumer. Did you know that Kroger's has an operational cost of 17% of sales to procure, warehouse, distribute and retail groceries? Wal Mart does the same for 11% of sales.

The niche reality

Why should co-ops worry? It is 1999, and a majority of consumers in the U.S. have purchased a Health Valley soup, a Hain rice cake, a Mother's hot cereal or a Fantastic Foods cup soup. They probably did not buy that product through a co-op. In the late 1970s, co-op retails and buying clubs had retail market share in excess of 50% of the total natural foods market. This has shrunk now to less than 7%.

The best selling natural products are now available in many retail formats. The fastest growing segment of the natural products business is through supermarkets and pharmacies. The overall food business is close to understanding the values that natural products ought to express. Did you know that the majority of consumers define natural foods by their perceived "freshness" vs. ingredients as in the 1980s? A recent and extensive survey, the Hartman Report, found that 75% of consumers who already purchase natural products would prefer to buy them through their local supermarket.

If that is not enough cause for alarm, what is worse is that co-ops have failed to arrive at a shared strategy and exert a common voice in the market. Co-ops, once the guardians of the standards of natural products, now are in danger of becoming such a small portion of overall natural products business as to lose any ability to influence the direction of the industry.

Niche problem and opportunity

Distributors are finding that as the natural food business becomes increasingly popular, a variety of cost-diverters and marketing groups have sprung up. These organizations may offer one to twenty brands of products. Since most of these marketers do not own or manage their production facilities (they use co-packers), they divert much of the cost burden for their brands to the natural product distributor. Due to a variety of factors, suggested retail prices for these recognized brand names have become insupportably high. These brands are then offered at large discount percentages to encourage the distributor to serve as the inventory-carrying branch of the marketer. As long as these organizations can keep their products on end caps and keep the distributor and store filled with their product, they feel successful.

But how successful is this for the store? The retailer holds large quantities of the marketers' product in their back room or display space. The artificially high retail price "normally" charged is discounted by the store, showing their competence in making a sharp deal. This practice over time will destroy the regular price point of the product in both the minds of the retail buyer and consumer.

If a product is often on deal at a lower price, consumers tend to identify the sale price as the "fair" price and will not buy it when off deal. This destroys brand loyalty and makes the consumer even more price sensitive. It also creates a poor price image in the mind of the shopper for the store when it does not always have the product on deal. It tends to focus the consumers' attention to price on most items and away from quality, nutrition, tastiness, freshness, packaging and sustainability issues.

The wholesaler tends to buy the product from these marketing organizations only when on deal; they need to achieve an everyday low price that the marketing firm is unable or unwilling to support. This leads to wide swings in production runs and consumption of raw materials.

Branded product marketers operating in the above way pretend to offer value. What they offer is high prices, poor service, stale product, and/or poor value. Natural product retailers will be better served with lower regular prices with more reasonable (smaller) discounts to encourage incremental consumer trial, through distributors whose incentive is to be the most efficient and effective channel of distribution between the producer and consumer. Properly managed cooperative distributors can be one of the most effective parts of the channel. They can aggregate volume, creating and managing programs in a cost effective manner due to their economy of scale that are too expensive for retails and buying clubs to manage alone. Frankly, if the cooperatively owned distribution system is going to be the bank and warehouse for these products from the marketers, the cooperative system might as well own and manage corresponding controlled labels for consumer members' benefit. But we must emphasize again that such a cooperatively controlled label is not managed for the wholesaler's, the retailer's or anyone else's benefit other than the consumer members that you are specifically aiming to please.

The need for strategy

Creation of private label products is a tactic used once an organization or alliance has an overall strategy. That strategy is derived from a process that includes careful analysis of past and current trends as well as consideration of future trends and what will be needed for an organization to compete successfully in ten to twenty years. You must then decide what niche you will be able to occupy given constraints on access to capital, expertise and the systems and infrastructure you have or have not built. Once you decide on the niche you will be able to afford and are likely to occupy, you formulate the strategic approach on how you will "brand" your store or store to reposition yourself in the emerging marketplace and please your customers.

Private label is one of the tactics derived from the strategy for branding the store or system. The brand you choose, the attributes you will incorporate into your private label, must support the overall strategy of positioning of the store and appeal to your members/customers. They must be mutually supportive and synergistic with other tactics such as customer service, store decor, pricing, promotions, items and categories of product carried. The goal is to enhance the "branding" of the store and create value for its shoppers. This is essentially the process that Northeast Cooperatives underwent on a wholesale level, thinking through our stores' and buying clubs' members' needs.

Controlled label manufacturing is among the most expensive, complex, time and resource consuming tactics one could possibly decide to undetake. It demands expertise. Brand and product development managers are generally some of the highest paid and skilled folks in manufacturing. At Northeast, we have assembled a team to plan and manage this tactic, in conjunction with the cooperative's overall strategic plan: Mark Novak, Director of Purchasing, is the former President and COO of Arrowhead Mills(TM), including the Deboles Pasta, Garden of Eatin' and Terra Chips brands. Mary Carol Skinner, Director of Sales and Marketing, was formerly with Bread & Circus and Rainbow Light. George Southworth, CEO, was formerly with Nutra Source, Nature's Fresh NW, and Kettle Foods. Each of the upper management team at Northeast, including our CFO and Director of Operations, has experience in most segments of manufacturing, distribution and retail.

Controlled labeling often demands a huge financial commitment ($225,000 for the packaging film for a minimum run of 3 SKUs of aseptic soymilk) an economy of scale (multi-year contacting for raw materials and production runs to assure continued access to those materials and production facilities). One also must think through how the last set of items introduced will fund the introduction of the next set of items.

Large production runs and subsequent pull through on the sales side can be prohibitive barriers. Many manufacturers have discontinued product that one might think is a good moving item at the store level, but because the production runs needed to price product properly are very large, the runs happen only two or three times per year. This makes the product prohibitively expensive to inventory or susceptible to quality concerns -- despite sales through all channels of distribution internationally, let alone through co-ops. This probably limits the number the number of items and categories a national co-op label could occupy. Northeast Cooperatives recognizes that we have limited resources and opportunities to execute our labels on a regional level. For the individual co-ops (with the exception of Puget Consumers Co-op retail chain of 7, soon 8) which attempt to do this on their own, the execution of their private label tactic may possibly begin and end with their private label vitamin brand and perhaps the local egg producer.

Niche tactics

At Northeast Cooperatives, we have begun to take advantage of the brief marketplace opening left to us to develop a series of brands expressing real natural product values. This is a small part of the larger strategy that includes many other tactics to strengthen retail and buying club cooperatives: retail managers' meetings, CoCoFiSt, Cooperative Grocers' Association -- Northeast, manager on contract, an aggressive price and promotions strategy, and mergers with other cooperative wholesalers. All of these are constructed to promote store best practices, profitability, satisfaction for stores' members, category management, sharing and communication among the cooperatives.

We attempted to establish a national controlled label program 4 years ago. It was clear that though many were ready, we could not reach consensus on the goals and how to structure and run the program. Since then, Northeast has had several false starts that we learned from. We solicited proposals but subsequently decided not to go with outside consultants to run the program.

A controlled label program is embedded into all other programs an organization implements to satisfy members. Controlled labels are part of category management. That discipline and coordination will not come from outside the organization. The need to coordinate the marketing, purchasing, contracting, category management and integrate it with all operations is not a consultants's job.

We built a team of managers who can strategize and manage the program inside the organization, using outside consultants for specific pieces. That has been the path that, for Northeast Cooperatives, seems to be the route to success. It took one year to clearly define the goals and needs of the program and fit it into our strategy. It took six moths to trademark the brands we are using. It took another year to set up the mutually supporting infrastructures and select the appropriate partners to be our co-packer for the first and second categories. It took six more months to work out the details of the staged introduction of the first set (130 items) and then three more months of publications lead time.

Four years after the first try, at the end of the first full year of the program, we plan to have 350 items of Nature's Basics(TM) introduced. Northeast Cooperatives has begun to execute the controlled label program on a regional basis. With the merger of Northeast Cooperatives and FORC (Federation of Ohio River Cooperatives) in July, this service will expand to 18 states and over 1000 members, including buying clubs.

The first brand being introduced is Nature's Basics, the cooperative choice(TM). As the name implies, we are executing a deliberate strategy around brand management that aims at a particular set of brand attributes appealing to the co-op shopper. We aren't getting too fancy here. This is a branded line of vitamins and supplements (introduced last August), packaged grains, seeds, nuts, dried fruits and beans (introduced this March) and a short list of other value-added products cooperative consumers are likely to understand and appreciate. Six m months after introduction of a vitamin and supplement line, it represented 8% of total vitamin-supplement category sales at Northeast Cooperatives -- an amazing market share gain after only half a year. And we make 4 points more margin than the category average. This profit has been used to bring out the next set of products. We will be introducing Select Harvest, the cooperative choice(TM) for specifically identified products and categories with different brand attributes than Nature's Basics(TM).

This is not to say that the same timelines will be experienced by others. We had a great deal of other issues to deal with at Northeast during this period. But all the program pieces, organizational coordination and capabilities should be in place if you want to execute well and in a cost effective manner.

Last, it should be said that any private or controlled label program will encounter difficulties without multi-store discipline and a shared responsibility towards category management. The controlled label must "fit" within the category of products it is introduced into and merchandised within. Cooperative retails, small, medium and large, will have to agree upon core sets of product, basic pricing, merchandising and marketing strategies and together execute the derivative and agreed upon tactics at the store level. At Northeast Cooperatives, we have been fortunate in the support obtained both at the store and buying club level of the program.

To mention another important activity, we believe that the CoCoFiSt (common cooperative financial statements) is potentially the most powerful tool or process that the retail and wholesale cooperatives have ever developed, to potentially achieve the goals mentioned above. It should lead towards operational excellence and fiscal competence at a variety of levels within the cooperative system. A process like CoCoFiSt must be a part of the strategy of any successful co-op controlled label program.

At Northeast Cooperatives, we believe that if we, the co-ops, can get the strategy right, can agree upon and adopt that strategy, and then have the discipline to follow through on that strategy all the way to its logical and sometimes painful conclusions, the appropriate tactics that create success will follow. A carefully designed and thought out controlled label has a place as one of those tactics.

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