Take the label on a package of frozen peas. Most consumers stop reading after they’ve determined that the package does contain peas. A fewer number look at the weight to compare cost-per-ounce value. Even fewer read the caloric count, consider the nutritional RDA percentages or read the ingredients closely, looking for contents that could trigger an allergic reaction.
But every piece of information on a label is important to someone and so whoever is creating the label better get it right. And that’s where the cost comes in. Something as simple as the label on a package of peas could come under the scrutiny of the marketing department for look and logo approval, the legal department to make sure the RDA wording meets guidelines, nutritionists to make sure RDA and ingredients information is right and copywriters to ensure the label contains the right wording to prompt a purchase.
That’s just the label. Add to any new product the processes of formulation, manufacturing and package design and eventually scores of people in various departments are sending e-mails, returning phone calls and mailing or overnighting specs on a regular basis.
Enter the Internet. Retailers are using the Internet in ever more ways in their operations and now some have pushed the web about as far back into the process as they can—to the creation of house brand products. Before a product ever becomes part of the supply chain, the Internet is present as a midwife at its birth.
Right before your eyes
“Using Internet technology is a fantastic tool for collaboration on new products,” says John Padgett, general manager of b2b development for U.K. supermarket chain J. Sainsbury plc. “All the parties involved in product development can see one document that is being built up literally in front of their eyes.”
Sainsbury is one of the first retailers to use collaborative product development software to put the workflow of product design and creation into a web-based process. Since January, Sainsbury has been using the new Collaborative Product Development solution for internal product development from San Francisco-based retail trading exchange GlobalNetXchange LLC. Sainsbury expects that web collaboration, which is based on a workflow and specification management tool developed specifically with Sainsbury for private label grocery products, will cut 11 weeks out of a development process that takes 20 to 40 weeks. That will mean a 30% reduction in costs as well as a 20% increase in revenue because new products will have a longer life cycle, Padgett says. Sainsbury is so sure of the savings that it is planning to develop 3,000 products this year using the collaborative solution.
GlobalNetXchange and Sainsbury created software that allows all the parties in product development—which can range from food scientists to marketers—-to work together using the web in a real-time, collaborative environment. Instead of sending details, changes and suggestions back and forth via e-mail or paper documents, they work on one online document that gives each party access to certain areas to make updates and changes.
As Sainsbury and others prove the concept, more retailers are sure to adopt such web-based design and sourcing technology, analysts say, because they will be seeking ways to derive more profit from house brands. House brands have been a barometer of the fortunes of retailers, rising in importance as consumers look for deals and retailers need to squeeze more margin from their sales and falling as consumers become enamored of brand-label status symbols. Today, house brands are in the ascendancy again. “The biggest retailers of the world are moving more and more into private label products,” says Peter Abell, director of retail research at Boston-based AMR Research Inc.
House brands offer margins of about 27%, taking into account all manufacturing and marketing costs, while brand name products offer 15% or less, Abell says. In some cases, the private-label margin can reach 40%.
With the right approach, retailers can turn house brands into desirable brands, as J.C. Penney Co. Inc. has accomplished with its Arizona brand jeans, thus creating brand cachet with consumers. “Branding of the retailer and creating unique products with private label goods is as important as the profit margins,” Abell says.
Keep ‘em coming back
And rapid development of house brands can be a way to keep customers coming into stores, Abell says. U.S. retailers take up to eight months to execute new products, he says, which is not fast enough to capture new customers. “If consumers go into stores once every three months, how will retailers appear fresh in the consumer’s mind?” Abell says “That’s the real key area that especially apparel retailers have lacked.”
And while the early adopter in this case is a supermarket, analysts say other retail categories can easily adopt collaboration software for product development, especially in apparel. Several vendors, including Richmond, Calif.-based QRS Inc. and New Generation Computing Inc. of Miami are promoting solutions which are just now being implemented by undisclosed retailers in early testing modes. Wilsons the Leather Experts Inc. is using a New Generation Computing solution to help coordinate sourcing efforts (see accompanying story). And Schwab Inc., which owns and develops the Ralph Lauren line of children’s clothes, uses a QRS sourcing product to maintain quality control over the sourcing and product development process at factories around the world.
With margins thinner than other retailers, supermarkets have a greater dependence on house brands. Today, the grocery segment relies on 22% of sales to come from private label products. Increasing the margins on those products could show immediate results on the bottom line. And that is why Sainsbury has become an enthusiastic adopter of online collaboration for house-brand products.
Online collaboration connects up to 12 parties at three organizations involved in creating a new grocery product, including at Sainsbury, the suppliers and the manufacturers. About 900 suppliers are involved in the Sainsbury program for the development of such products as beer, skincare products and frozen foods—all of which center around the use of a recipe, which the CPD system is specially designed to handle.