February/March, 2007

From the Editor

Sleeping With The Enemy

Smithfield Deli Group, a division of Smithfield Foods, has entered into a licensing agreement and launched a one-year test of Subway-branded deli meat and cheese. The program kicked off at 150 Pathmark stores in the New York/New Jersey area including south to Pennsylvania and Delaware. The plan is to expand the test to other stores through the first half of the year.

It is an intriguing concept that raises real issues. It is easy enough to see why Smithfield would elect to produce the line. To them it is another brand and another opportunity to partner with retailers. It is unclear how the line will be positioned but the Smithfield Web site refers to it as “Subway-branded premium deli meats and cheeses to be offered within the full-service deli counter at mass retailers and grocery stores nationwide.”

An opportunity to market a product such as this should be carefully considered by every retailer.

For many the instinct is to recoil — “Subway? Isn’t that the enemy?” — and resist the idea of giving any publicity to a competitor. And, indeed, there is a substantial benefit to Subway in having its label displayed in deli cases across the country. Consumer impressions matter and every deli case window provides lots of impressions. Plus, it is something of a zero-sum game.

The impressions given to Subway are impressions that can’t be gathered by a retailer’s other branded partners or by its own private-label line. And since few private-label lines have much in the way of advertising budgets, it is consumer impressions that build these private label brands.

Though supermarkets selling product with a restaurant name on it is nothing new, this is a little different. It is common for retailers to capitalize on locally popular restaurants by selling some well-known restaurant brand of barbeque sauce or pasta sauce as a specialty item. In South Florida, for example, there is a popular Italian restaurant from south Philadelphia named Café Martorano, and in the Publix near Deli Business headquarters you can find Café Martorano Spicy Sicilian tomato sauce. Of course, Publix deli doesn’t sell any fresh sauce and very little ready-to-eat Italian food.

Same goes with other items such as frozen White Castle brand hamburgers or refrigerated Nathan’s Famous hot dogs. Although we might consider all restaurants competitors to deli departments, in fact, few delis sell many cooked hamburgers and hot dogs and, in any case, a frozen or refrigerated product is a different animal than a fresh, ready-to-eat product.

What makes this situation different is that many delis today have sandwich programs that are direct competitors to Subway and similar chains. It seems to argue for pushing back and resisting giving any publicity to competitors.

There is, however, always another side. In this case, one could argue that restaurant chains have spent billions to develop brands and retailers should ride that star. In the case of Pathmark, it might be a smart decision. It has a private label known as ChefMark but it is no Kirkland or President’s Choice — and if Pathmark can have an exclusive in its market on Subway brand, it might substitute for a high-end private-label brand.

It is not clear that the NY Metro area is really the place to test this brand. New York, New Jersey and Philadelphia probably have the densest assortment of Jewish and Italian delis in the nation and, whereas Subway may be perceived as a quality brand in much of the country, in NY Metro, it is perceived as a cheap alternative to a sandwich at a good deli.

The decision hinges on what the retailer is looking to accomplish. If the long-term goal is to develop credence for the store itself and the store brand, then it really makes no sense to give credence to brands identified with competitors for the consumer dollar. But for many retailers, that is too ambitious a goal. They want to have some shelf space that costs them X a foot and sell product that returns the retailer 5X a foot, and the one-year test is really to determine if consumers value the Subway brand sufficiently to pay a high enough price and buy in sufficient volume so that the store will be able to do that.

In fact, some stores have gone further than selling meat and cheese under a restaurant brand. Some have brought the whole restaurant into the store and operated food courts. Boston Market, the sworn enemy of supermarket deli operations and whose presence launched the HMR movement, now has chilled ready-to-eat product in over 1,300 supermarkets, hot rotisserie items in over 90 stores and hot soup bars in over 75 stores, not counting a frozen food line put out by H.J. Heinz.

A willingness to adopt restaurant brands is probably not the right way for everyone. Once again, it depends what one is looking to accomplish. If a chain is looking to build a store name into a quality brand itself, then bringing in a food court of fast-food restaurants won’t help with that strategic goal. But it might boost sales and profits right away. To know the right tactics, you first have to know the right strategy.

Editor’s Note: One issue that makes this particular Subway venture unusual is that Smithfield doesn’t actually make the meat and cheese used at Subway restaurants. Although the Smithfield product will probably be better quality, it could cause consumer confusion as consumers might encounter different flavor profiles, nutrition information and even different product. Those trying to duplicate their favorite Subway Restaurant sandwich at home may be frustrated.  DB