January, 1998

From the Editor

Selling One's Soul To A Brand

The store had just recently opened and was really quite impressive. A large regional chain developed the concept, and it contained features designed to address many of the hot spots in the food industry today: extensive HMR and fresh-cut produce offerings and more than a tip of the hat to the offerings of both warehouse clubs and natural foods-type markets.

The deli area was startling, though. Though extensive in scope, the signage made the department look as if a particular branded meat and cheese marketer had taken out a concession. In fairness, I must say that the actual products offered were not the exclusive province of this particular branded company. The deli case included many kosher lines, as well as reduced fat and specialty products not sold by the branded company. There were also a few brands of lesser quality being offered at cheaper prices.

Yet, the signage was so extensive, including awnings, signs in the cases, signage on the glass, even a large neon sign, that it would have been very easy for a consumer to forget exactly the name of the store.

The issue of using branded concepts in supermarkets and convenience stores has been controversial for years. Much of the criticism though has focused on branded foodservice concepts. The critique here has been that, by allowing an established foodservice company, such as a Subway or a Pizza Hut, to operate in-store, the retailer is allowing the “enemy” within.

This whole controversy always struck me as not amenable to universal solution. In the convenience store arena, for example, where much of this battle has been fought, the key factor really is a question: From what is the operator deriving his brand equity? If a big oil company operates a chain of convenience stores in line with its gas station operation, it is highly probable that the oil company sees its brand equity in gasoline, not in food. Put another way, Exxon wants to be known as a certain type of oil company; it has no strategic interest in having the brand also stand for a killer tuna salad sandwich. As such, partnering with a fast food chain for in-store foodservice offerings is eminently sensible.

Of course, for a non-gasoline convenience store, or a convenience-store chain looking to build its brand equity as a purveyor of food, the choice is more problematic. It certainly is problematic for a supermarket.

For many years, supermarkets have realized that abundant produce departments are important not only for the profits they generate but for the image boost they can give a whole store. The same logic, of course, goes for bakery, deli and the whole fresh foods arena. It really is tough for a supermarket to distinguish itself by how cleverly it merchandises national brands of soup or mayonnaise, but a retailer can gain a real competitive edge by virtue of its selection and presentation in areas such as deli.

This is, of course, why concern over branding a supermarket department needs to go beyond foodservice brands. Sure, retail brands can have a great deal of equity, and associating a store with high quality brands can positively reflect on a retailer. Product brands also don’t pose the difficulty of possibly helping the foodservice company attract people to its outlets.

Still, an excessive reliance on a branded product to banner a retail department can lead to its own class of problems. For one, since these same brands of products are generally available to all retailers, any given retailer gives up a potentially differentiating point by promoting too heavily a manufacturer’s branded identity for a department. A retailer who closely ties itself to one single manufacturer also runs the risk of being tarred by the same brush if that particular manufacturer winds up having food safety or other types of problems.

The biggest threat, however, may be what economists call “opportunity cost”. That is the cost incurred due to the opportunity foreclosed by the particular choice made. In this case, if a deli is covered by the signage of a branded manufacturer, that same space is not available to promote the retailer’s own identity. This is a substantial opportunity cost.

Which brings us to money and the nature of food retailing. Without a doubt, the branded manufacturer with its neon sign in that department I visited is paying a pretty price for its dominance of that department. That price is guaranteed and obvious, and there is a powerful incentive for a retailer to sell the space.

The costs, though less concrete, are no less real. First there is a distortion in product line. Instead of deli directors and buyers acting in their best judgment as to what to sell, they become constricted in their decision making. They start having obligation to someone other than the consumer. Inevitably, this will mean selling a less ideal product mix than might have been the case in the absence of the payments. This means food sales will be lower than they would have been, customer satisfaction will be lower than it could have been, and a certain number of customers will find retail alternatives.

The second problem is that, all too often, a reliance on promotional payments leads retailers to sell the crown jewels – the very things that a retailer needs to establish an identity and reputation in the mind of the consumer. If that deli does not instantaneously promote either the store itself or a proprietary store concept, the deli, the store and the supermarket chain have sold something more precious than money. They have sold the very core of their opportunity to appeal to consumers.

One day, when the chain will need the strength of a relationship and a reputation with its deli customers, the chain will find that such a relationship no longer exists.  DB