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This article was originally published in The Tan Sheet

Executive Summary

OTC BRAND MANUFACTURERS' ENTRANCE INTO PRIVATE LABELS is worthy of "in-depth study," SmithKline Beecham Consumer Brands" Director of Marketing Lisa Mason suggested at an Oct. 18-19 conference in New York City sponsored by the Institute for International Research. Mason stated that "a number of companies are already starting to form task forces to deal with [private label] issues because they are very broad and far reaching and you may wish to do so." Mason, who directs SB's new Three Rivers Group aimed at reviving older brands, is also responsible for the company's private label strategy. In a presentation on possible industry responses to private label competition, Mason said that "the whole private label issue can potentially require a mind-set change." While devoting most of her presentation to strategies for countering private label competition, Mason acknowledged the "other side of the coin" -- the possibility of moving into private labels as a manufacturer. "That's a subject probably all of us are looking into," she said, "[with] management some days cringing at the thought of it, other days wringing their hands [and] saying: 'But if [we] don't do it somebody else will.'" Oppenheimer analyst Gabe Lowy strongly advised OTC manufacturers to begin producing private label "store brands." He predicted that "if your company is not producing a store brand equivalent to the national brand that you're producing today, then you will be doing it within the next three years." Pointing to marketshare trends, Lowy predicted that private label OTCs "are going to capture anywhere from one-third to 40% of the category inside of five years." Lowy suggested in his presentation that volume and service are the important factors in considering the future of OTC products. The "primary customer" of OTC manufacturers "is the retailer" and not the consumer, he contended, and "your primary responsibility is to give that retailer what they want." By not producing a store brand for a retailer like Wal-Mart, Lowy asserted, "you're walking away from potential service opportunities, not to mention the fact that you're walking away from volume because Wal-Mart is going to do that volume anyway and if they don't go to you they're going to go to one of your competitors." Manufacturers, he proposed, must become "full service providers of products." Manufacturing costs are also a consideration, Lowy maintained. Contending that "pricing is a not a factor any more than . . . inflation," he told the audience that "you can't look for the double-digit type of pricing because the consumers won't pay it and, more importantly, your customers won't pay it, and your customer is not the consumer -- your customer is the retailer." Lowy suggested that "all new strategies" for OTC manufacturers "are cost-driven strategies: coming down the cost curve, controlling SG&A spending and being more efficient in your marketing spending." Key to the cost equation, Lowy said, is volume. The low-cost producer, he observed, is "usually the guy [with] the #1 or #2 brand because [that company] has the volume, which means they have the cost efficiencies." Lowy maintained that a company with the #4 brand in a category is "not going to become #2 . . . because of marketing. You are going to become #2 in a category because of your volume and the impact your volume has on the cost structure and vice versa." While the brand leaders are very probably the low cost producers "by virtue of sheer volume," the Oppenheimer analyst asserted that private label manufacturer Perrigo "can make any product in your line at the same or lower cost than the #4, #5, and #6 branded player in a category." Those companies, he suggested, should consider taking a look at private label manufacturing to reduce their cost structure and to get a better return on their capital investment. Companies in the prescription side of the business already have a model -- the movement of traditional branded pharmaceutical companies into the generic drug business. In the past year, Merck, Syntex, SmithKline Beecham, Upjohn and Marion Merrell Dow have established generic drug divisions, while MMD and Hoechst-Roussel have even acquired generic companies.

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