Sunday, August 19, 2001

P&G, Kroger in brand battle




By James McNair
The Cincinnati Enquirer

        Their headquarters are just a few blocks apart in downtown Cincinnati, their employees cross paths regularly, and their top executives belong to the same organizations. Yet when it comes to the subject of brand cloning, Kroger Co. and Procter & Gamble Co. couldn't be further apart.

        Private-labeled products accounted for almost a quarter of Kroger's grocery sales and helped the company rack up a record profit last year. P&G, meanwhile, sprinkled its Aug. 7 announcement of its first quarterly loss in eight years with acknowledgment of further private-label intrusions.

        It's an irony worth noting because, in addition to being rooted in Cincinnati, both companies are stalwarts in their fields — Kroger in food retailing, P&G as a maker of consumer products. And perhaps as well as any players, they symbolize the struggle between supermarkets and packaged-goods makers over the private-label issue.

        “There's no question that they are in conflict on this issue — and it's going to get worse,” said Chris Hoyt, a Scottsdale, Ariz., marketing consultant to manufacturers. “It's a very strategic issue to Kroger and a very threatening issue to P&G.”

        Supermarkets have carried private-label products throughout their history, and Kroger's in-house baking and butchery operations are a century old. Not all private-label goods are self-produced, though. Many are made by vendors, often by the makers of branded products themselves, one notable exception being P&G.

        But Kroger — P&G's sixth-biggest customer — has refined the art of producing and promoting its own items. The company owns 41 manufacturing plants that make more than 3,500 products. It has also launched a high-end label, Private Selection, that is sold not only in Kroger stores, but in its other 14 supermarket chains.

        A walk through any Kroger store reveals the fertility of the company's private-label brain trust. For many P&G items in the Kroger aisles, Kroger offers a counterpart of its own. It's true for coffee, peanut butter, paper towels, diapers, cough syrup, soap, fabric softener sheets, dishwashing liquid, toothpaste, shampoo and skin cream.

        Many of those Kroger items bear an uncanny resemblance to the P&G brand.

        Kroger's Vitamin Shampoo Plus Conditioner comes in a pearly white 13-ounce container — just as P&G's Pantene Pro-V does. Its Kroger Skin Cream comes in a dark blue, 10.5-ounce pump, just like the P&G Noxzema container next to it. And although Kroger Dandruff Shampoo comes in a slightly larger flask than P&G's Head & Shoulders, they both contain 1 percent of the active ingredient pyrithione zinc.

        The differences are on the price tags. The Pantene sells for $3.99, the Kroger look-alike for $2.57. Head & Shoulders sells for $3.50, the Kroger Dandruff Shampoo for $1.99. And so on throughout the store.

Profitable products

        For Kroger, the strategy has paid off with steady bump-ups in sales. But what Kroger really slavers over are the 10 percent improvements in average profit margins from the sale of a captive product.

        The private-label program has been especially rewarding for Geoffrey Covert, Kroger's president of manufacturing. Last year, while Kroger's other executives earned 80 percent of their bonus potential, Mr. Covert raked in 118 percent.

        Mr. Covert is a former P&G exec. He joined Kroger in 1996.

        Kroger spokeswoman Lynn Marmer said the company doesn't introduce new products merely to copy P&G or any other vendor.

        “We consider numerous factors in deciding what areas to pursue in private label, including the size of the category, whether it's a growing category and if there are multiple players in the field,” Ms. Marmer said. “If it's dominated by one player, we might not go into that area.”

        Kroger chief executive Joseph Pichler and P&G chief executive A.G. Lafley both belong to the Business Council in Cincinnati. Mr. Pichler and P&G chairman John Pepper both serve on Cincinnati Community Action Now, a task force formed by Mayor Charlie Luken after the April riots.

        Ms. Marmer said the two companies also have a close relationship in business.

        “We will feature and promote Procter products very heavily,” she said. “Sure, we're growing our private-label share. That's our mission, but we grow branded product sales, too.”

        P&G wouldn't touch the topic.

        “We respect our competitors, and we respect their products,” P&G spokeswoman Vicky Mayer said.

Kroger owns the shelves

        For all the civility at the top, relations are being tested in store aisles, where jockeying for shelf space generates never-ending strife. Tom Vierhile, executive editor of Productscan Online, a market research firm in Naples, N.Y., said brand makers such as P&G have little leeway in voicing their displeasure with retailers.

        “What would they threaten them with? It's the retailers' shelves,” Mr. Vierhile said.

        “The balance of power has shifted. P&G is no longer the 800-pound gorilla. It's now across the street at Kroger.”

        Mr. Hoyt, a P&G employee for seven years, said consolidation in the supermarket industry has tilted the playing field in favor of retailers. Brands must now differentiate themselves on counts other than price, just as P&G is doing with new products such as its Crest White Strips and Swiffer floor cleaner, he said.

        “The strategy must be to strengthen the brand with the consumer and not to pander to the retail business,” Mr. Hoyt said. “Develop a strategy that forces the competition — and Kroger is as much a competitor as Unilever and Colgate — to react to them.”

        Pressed for a strategy, Mr. Hoyt was stumped.

        “That's a tough proposition,” he said. “I don't have any answers. If I did, I'd be on a beach in Hawaii counting my money.”

Products earn their keep

        fConsumers appear to enjoy having the choice between brand names and house brands.

        Karla Huey, shopping at a Kroger in Cold Spring, gave a thumbs-up to private labels.

        “Everything I buy is generic if it's available,” Ms. Huey, a Fort Thomas resident, said. “I try them, and if they're not the same, I go back to the brand.”

        Dawn, a dishwashing liquid made by P&G, is one of those brands that have won her loyalty. Karen Schofield, also of Fort Thomas, said she buys Kroger brands on occasion, but more often sticks with P&G brands like Jif, the peanut butter preferred by her children.

        “My husband is just a Charmin user,” Ms. Schofield said. “He says everything else is like sandpaper.”

        Those words must certainly sing across the river at P&G. The consumer products company has its hands full with Kroger and other supermarket chains, but a bigger battle is shaping up with the world's top dog in retailing, Wal-Mart.

        The discount chain bought the White Cloud toilet tissue brand from P&G in 1999. Now, the company offers 1,259 private-label products, including a good many items directly in contention with P&G's.

        P&G and other packaged goods makers are clearly stymied by the private labels, Mr. Vierhile said.

        “They're having a very difficult time coming out with products that are superior enough to make people forget about private labels,” he said. “I don't see an easy way out for these companies.”

       



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