How we started to work with the products under the brand name of our private label, how we were developing this direction and what conclusions we’ve drawn. >>
This material includes, perhaps, a one fifth part of the story, so the full version is available to read in the blog.
We’re thanking the magazine “Trick of the trade”, which gave the opportunity to speak out on the important subject for us. Because the private label goods for hypermarkets and private label goods at the gas stations require a different technology to be applied, pursue different goals and objectives, have different pricing and so on and so forth. We’ve said it and we will repeat it for 100-500 times. Those who have already realized this, please, do not be offended.
In terms of shopping malls business, RusHOLTS is now among the five largest suppliers of automotive products for the relevant departments of the federal hypermarket chains. We started off developing our business in the 90s by supplying chemicals and auto cosmetics. In the Russian market we were the official representatives of world’s two huge brands – Holts and Redex. At that time in our country there was no hypermarket chains and gas stations chains have only been planned to start manage its shops on a unified and centralized basis. Then there was 1998 defaulted payments crisis.
The people stopped buying expensive imported car cosmetics, but no one refused from the use of the cars and their quantity only grew. Then we decided to create our own full-scale range of chemicals and auto cosmetics from fluids and fuel additives to polishes and air fresheners. So that niche of autochemistry saw import substitution by Russian-made goods as early as in 1998. Many well-known brands in this direction became the history since that time. Products created by us were unified under the umbrella brand EXPERT.
Where did your collaboration with retailers in the framework of the production of goods under your own brand had begun?
Every manufacturer wants to get on the shelves of the large hypermarkets, enticed by sales volumes. But not everyone knows that the retail networks – are “not a movie for everyone” so to speak.
Large chains are able to squeeze out of suppliers comfortable conditions, prescribing very large fines for each breach of contractual conditions and regulations of supply. It should be understood that the retail network earns less on the buyers, as they do on suppliers, that’s the technology.
Private label is one of the technologies of retail chains. For the Russian chains of hypermarkets, private labels are first of all the “lighthouse of low prices”, designed to actually prove to the customers the validity advertising slogans “low prices every day”, “savings on each purchase”, etc.
While creating a line of private label products, hypermarkets operate on a simple algorithm –they choose the brand-name products for which they want to make an analog under their private brand, then they start competitive procedures among suppliers or manufacturers. Traditionally, the contract for the supply of private label products is much stricter than for conventional products –since there are less opportunities to increase the delivery price for the private label goods by the supplier than working with the suppliers of branded goods. Incidentally, the retailers in Western markets learned how to see through the potential of successful private label goods: they release under their own name the goods that are not worse, and sometimes better than branded ones and do not seek to win market share at the expense of prices. Thus, they achieve customer loyalty and brand awareness.
According to the same Nilsen study, in the US some 75% of consumers are willing to buy the private label goods and the product quality is very important there. In autochemistry most popular items are glass-washing fluid (coolant) – in winter they make up to 30-40% of the sales volume of the entire range of automotive products department.
With what particular retailer you have started such cooperation? On what terms? How much time was spent on the preparation of the first contract? How long the conclusion of an agreement is taking now, when you already have the experience? And you are looking for new clients?
Our first partner in the business with the shopping malls was “Lenta” chain. Team of managers, that created this company had no intention to separate the range of automotive products from the household chemical goods and other household products. We helped them make the right decisions, citing the example of the two world leaders in the retail network – Walmart and Carrefour. Our cooperation began in the year of 2001 and continues to this day. As of today, section of automotive products in “Lenta” is one of the most effective among the non-food departments of the whole chain.
Sometimes it is important not only to get to the supermarket shelves, but also to successfully get out of a contract that ceases to be profitable for the supplier. As i have already said, the retail chain earns most of the profits from the work with suppliers. Return payment and other hidden fees are comparable to the trade margins, penalties for failure to comply with current orders sometimes make up 30%, the failure regarding promotional supply could amount to 100% of the cost of supply, those are the common things in this market. A sharp change in the ruble exchange rate leads to the fact that the supplier will break the contract either way. We have participated in 2008 in the negotiations with Russia’s largest network of suppliers which recognized that the optimal term of price changes is three months, and so far it is more profitable for them to fine us, than to purchase goods, for which demand has decreased because of the crisis.
Gas stations chains are more appreciative market in this regard. For us, the key was the transition to the establishment of the broad lines of private label products for gas stations chains. Such products in retail chains and gas stations chains are only called the same, but they work differently. If in hypermarkets they are “the indicator of low prices” whereas in gas stations its presence means a customer-oriented company that tends to sell high-quality products under private label, also it’s a “beacon of company’s allegiance to the standards of premium class”.
Another little known but very important aspect – the private label goods for the gas station chains of federal scale is a business technology that allows you to streamline the product range of hundreds of stations throughout Russia, to manage this range of products and to supply the goods. This is the only way to get so the store at the gas station would look the same in Moscow and in Siberia, and all products would be of high quality. It is for this reason that the “advanced” chain of gas stations aim to achieve a 50% share in Food segment of private label goods and 80% – in the non-food segment.
When we come to the formation of the assortment matrix, we recommend that the most popular products would be transferred into the category of the private label goods. Usually it’s coolant-cutting fluids, wipes, car interior fragrances, gloves, wood coal for picnics, etc., according to the ABC-analysis of the standard range of customer sales.
The key moment for us was the conclusion of a contract to manufacture coolant fluid under “Neste” brand. Firstly, it was the western company, and secondly, it was the market’s player who set the quality standards in the North-West region, thirdly, the needed to go through an audit of production and quality processes, which the Finnish side carried out exclusively by their own specialists, not finding it possible to entrust this process to Russian certification authorities. In 2015, we created a customer’s private label coffee blend of Russian roasting, once again proving that it was possible to produce under private label all (!) items important for the business processes of the company.
Sometimes the chains create temporary private labels for a transitional period. For us, this process is clear – it happens when the company’s management wants private label products being present “starting from yesterday” and marketing structures do not have time to develop the desired image and strategy. In this case, the management orders the creation of so-called “temporary private label”, in fact, these are “No Name” goods, packaging of which is designed in such a way that customers can not help but associating the goods with a chain in which sold it to them.
How many chains are you working with now? Under how many private label brands do you produce the goods at the moment? What percentage of the total volume of production takes the production of such goods?
After done weighing all the risks and responsibilities coming from hypermarkets chains in order to preserve the price of delivery of private label goods in season 2015-16’s unchanged, RusHOLTS stopped the program of cooperation with hypermarkets on the supply of such goods due to the instability of the ruble exchange rate against the major foreign currencies.
In the supply matrix are kept only the products of RusHOLTS’ own brands and trademarks distributed by us.
In the current period we manage the production of private label products for such gas station chains as “Gazproneft” (about 200 items), “Surgutneftegaz” (20 items), “Statoil” (up to 20), “Neste” (up to 20) in the total turnover of the group of companies RusHOLTS private label goods occupy 60-70% of the turnover of supplies depending on the season of sales.
Why did you choose this form of cooperation? What makes it good for business? When businesses should start such cooperation?
For stations to create their own brands is an effective way to organize and manage stores’ product range excluding insoluble contradictions between the interests of “local” and “federal” procurement departments, which allows the federal governance structures to achieve a unified range for all the stations regardless of their location.
To control the quality of goods from Moscow, given that they are bought for hundreds of thousands of gas stations scattered across the country, whether it’s coffee, pastries or coolant is only possible through a variety of technologies among which private label goods are not in the last place.
What future do you see for the products under private labels? Won’t these products crowd out your company’s products from the market? How are you planning to struggle?
In fact, RusHOLTS’ business is one of a 4PL logistics company specializing in supply chain management of goods and services to its key customers among which, as a rule, are the gas station chains. Gas station chains do not have their logistic structures, warehouses, transport. That is why the chains of gas stations cooperate with 4PL logistics companies, outsourcing a number of key business processes, especially in its non-fuel businesses. Creation of a wide product range of private labels on a turnkey basis is a one of those business processes carried out by the collective forces of RusHOLTS and is one of our difficult to replicate competencies.
In our view, branded and private label products are different retail technologies which should be used according to the situation and needs of customers. Today private label goods are hottest trend for most of our key partners. One of the basic tenets of the market is “demand determines supply”. Ignoring the laws of the market is simply unreasonable so we are considering our own brands at the gas stations as a support to create an additional supply of goods to those private label goods which we are entrusted to manage.