Safeway Moving Up The Value Chain

In February, CEO of Safeway Mr.Steve Burd expressed his dissatisfaction with the CPG brands over their price increases. Almost all major CPG companies increased their prices since last fall when the commodities and fuel prices shot up. Since then their costs have come down but prices stayed up.

As I wrote before, the price increases enabled companies like Cadburys, Nestle, Unilever, Del Monte  and others to deliver 10-14% increase in their quarterly income despite  very small growth and in some cases even fall in their revenues. The brands were able to grow their profits because of the change in customer mix. As more and more of their price sensitive consumers switch to cheaper and private labels all they are left with are the price insensitive and brand conscious loyal customers.

Safeway is a distribution channel with high fixed costs and low single digit operating margin (around 3%). It saw its gross margins fall over the past five years. It was not happy with price increases because for two main reasons, it further cuts into its gross margin as Safeway and relies on these brands to draw in customers to the stores that help drive its revenues. The single metric of retail is monthly same store sales growth. Any stagnation or fall in this number sends bad signal to the stock market.

Safeway then said that it “will chew up the brands” if they did not reduce prices. I questioned this claim then but I admit  Safeway has followed through with its claim by aggressively developing its private label brands.  CPG companies had not had much to worry about a single retailer pushing its private label as the labels are, until now, limited to just that retailer. Now Safeway is moving up the value chain by becoming a CPG company. As a clear competition to major CPG brands, Safeway has signed deals to distribute its O organics brand and Eating Right brand at other regional retailers and at Albertsons.

The additional channels are not much compared to the rest of the market but Safeway has clearly established that it has a clear strategy and can execute on the strategy. The next round of price negotiations between Safeway and CPG brands is going to be much different from the previous rounds.

Haagen Dazs and Ben and Jerry Pint

I was at Target yesterday and took a closer look at the ice cream display. The same freezer display had both HD and B&J. The containers looked almost same in size, but you an see a subtle difference if you looked longer. The difference is more obvious when you pick the containers up and read the size printed on the packaging, HD is 14 oz and B&J is 16 oz. The price, HD is $3.29, $0.20 more than B&J.

HD is making 12.5% more just from size reduction. Will a customer picking up the ice creams notice the per oz cost? Definitely Ben and Jerry noticed it and pointing this out to the rest of us.

It is not just HD, many other CPG products are now undergoing shrinkage as marketers reduce the size for the same price. The marketing speak for this is “price realization”. I for one tend to believe products are priced lower than what they should be and completely agree with price realization methods. A marketer should not make it part of their messaging to  go after shrinkage of their competitive offerings as this limits their own price realization methods in the future.

Some customers, like this blogger, may look at this as deceptive marketing tactics. There is nothing deceptive about this, the real size is still printed in big size on the packaging. In a typical supermarket a customer has many options, in fact way too many options and can easily choose other products. The stores are also actively pushing their private labels.  What the CPGs are doing is the right strategy, focusing on preserving profit and forgoing revenue and market share.

What do you think?