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This article was originally published in The Tan Sheet

Executive Summary

"EVERY DAY LOW PRICING" FORMULA COULD BENEFIT PRIVATE LABELS since one by-product of EDLP formulas is to reduce retailers' gross margins on national brands, Duane Reed Senior VP-Sales and Marketing Gary Charboneau suggested at the Private Label Manufacturers Association annual meeting on March 27. "At retail, EDLP will certainly limit or reduce gross margins on national brands," Charboneau predicted. The reduced gross margins, he added, "should lead retailers to push customers to store brands where margins are healthier, which undoubtedly opens up opportunities to the private label manufacturer." Charboneau maintained that Procter & Gamble has seen a "retail reduction" on their in profits since moving to an EDLP formula for a wide range of its products last spring. Charboneau suggested to the private label manufacturers that they "have the ability to influence retail pricing" and can thereby "help retailers have more effective store brand programs." He noted that some retailers still use their cost to determine retail price. The drug store exec suggested that private label manufacturers help their customers adapt their pricing policies to "the retail customer's view of pricing" by: (1) "understanding the pricing strategies in use at retail; (2) explaining these strategies to customers [and] helping them select the one that best fits their business; (3) structuring your pricing to help the retail customer execute his strategy; and (4) using your resources to monitor retail pricing activity [and] keeping retailers informed by benchmarking their pricing activity against others." Charboneau compared the retail pricing strategies of three large chains -- Wal-Mart, Walgreens and CVS -- to illustrate his point that sophisticated retailers pursue "a pricing strategy that uses the retail customers view of pricing as the determining factor for each item." Wal-Mart consistently uses low price points, he explained, and "is less concerned about [comparing the private label to] the national brand." He noted that "the savings in every case were significantly bigger than they needed [to be] to move the customer to the private label." Walgreens' pricing strategy, Charboneau said, "maximizes price points [by] appealing [to consumers] with savings of 25% to one- third on high-price-point items as sufficient to move the customer to the store purchase." With CVS, he observed, "the focus seems to be on savings, maintaining a big differential versus national brand at retail so that every time the customer chooses the store brand, the customer wins big and CVS wins big in gross dollars." According to Charboneau, Wal-Mart charges $ 6.79 for a bottle Advil and $ 4.78 for its comparable ibuprofen private label product. He maintained that Wal-Mart generates "probably $ 1.75 to $ 2 gross margin" on the store brand and "a few pennies" on the Advil bottle. Walgreens, he said, prices the same size Advil at $ 8.99 and charges $ 5.99 for its store brand -- for a gross margin of $ 4 to $ 5. He noted that Walgreens' pricing strategy presents "a very different picture . . . clearly the cost was a minor consideration in setting the $ 5.99 retail [price]." CVS, he said, charges $ 8.55 for the Advil and $ 4.99 for its private label ibuprofen, which represents "a much bigger savings in retail but they're still winning the gross margin dollar game every time the customer chooses the store brand product." Comparing the way the same retailers price Tylenol, Charboneau noted that Wal-Mart is charging $ 5.99 for the national item and $ 2.74 for the store brand, showing a differential of $ 3.25. Walgreens, on the other hand, prices Tylenol at $ 6.94 while charging $ 4.99 for its store brand, he said, which translates into a $ 1.95 difference. CVS prices the same size Tylenol at $ 7.39 and the retailer's own acetaminophen version at $ 3.99, representing a savings of $ 3.40. However, citing the example of Oil of Olay, he noted a "slightly different picture." Wal-Mart prices Oil of Olay at $ 4.57 and its store brand at $ 1.67 for a savings to consumers of $ 2.90. Charboneau suggested that the discount represents a "bigger [savings] than necessary to show value versus the national brand." This again illustrates Wal-Mart's "very low price points," he said. Walgreens prices a four ounce bottle of Oil of Olay at $ 5.99, according to Charboneau. The comparable store brand, which is two ounces larger with a pump, is $ 2.50 less, at $ 3.49. "The percent savings for the customer [is] over $ 4.00 when compared to the six ounce Olay," he noted. CVS, on the other hand, charges $ 6.55 for the same Oil of Olay and $ 3.99 for its private label item for a savings of $ 2.56 for the customer, and, like Walgreens, offers its store brand in a six ounce bottle with a pump. CVS again offers a large savings and, Charboneau pointed out, for "the first time gross margin of the store brand exceeded what Walgreens was getting." He suggested that "the same person at Walgreens didn't price [the H&BAs] as the lotion."

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