The financial equation of the distributor’s brand

In a competitive market, the distributor’brand is a logical stage in the growth of distributor. It satisfies the need to maintain ROI once all other approaches have been exhausted. Alternatively, it may have been the key differentiating component from the outset (as in the case of Ikea, Star bucks, Body Shop and so on).

Let us look again at the principle of ROI, in order to understand why the distributor’s brand is an advisable step at a certain stage Gina distributor’s growth.

Net margin = Gross margin – Costs Stock rotation = Sales per square met re/Investment per squaremetre ROI = Net margin × Stock rotation

What does a distributor do when it wants to increase ROI from 20 per cent to 22 per cent(an increase of 10 per cent of the current ROI)? Suppose that this is a major distributor with Janet margin of 2 per cent and a stock rotation of 10 per cent. Two possible options are available: either to increase sales by 10 percent per square met re (giving a rotation of 11), or to increase net margin from 2 per cent to 2. 2 per cent through selling private labels and demanding even more price concessions from brand producers, or a share of the profits from their advertising/promotional campaigns(which ultimately amounts to the same thing).

This second option – increasing the net margin – is a much easier way of increasing ROI: everyone knows how hard it is in armature market to increase turnover per quarreler. This is why all distributors are choosing, or will choose, the distributor’brand if they wish to make optimal profits. Infarct, the first lever for improving ROI arises from the fact that the margin on DOB's is better than that on national brands (Gaillardia Harlem, 2004).

The second reason for introducing distributor’s brand relates to the increase in negotiating power with the manufacturer. Not only does the distributor improve its margin son the DOB, it also receives better margins from makers of national brands, who wish to persuade it not to go further.

A third effect on distributor profitability induced by the introduction of DOB's relates to the increase in the number of innovations launched by the maker. Distributors receive listing fees on these products. Moreover, the yare rarely low-price innovations (Pawls handspring, 2004).

Finally, distributors hope that their distributor’sbrands will contribute to increasing loyalty to the store itself. In theory, these are products that can only be found there . Research carried out at HEC (by the author in1998) demonstrates that this effect has not yet been proven. Among the reasons for loyalty toga store, the distributor’s brand is almost never cited, except for stores that have developed distributor’s brands with strong added value(Mono prix, Tosco) and have acquired a reputation of their own.

Why will distributor’s brands increase still further in future?

Other parameters also explain why those distributors with distributor’s brands will promote them still further: the hard-discount circuit. This form of commerce, based on low-cost type of business model, saw remarkable growth between 1995 and 2006, offering prices 30 per cent lower than those of distributor’s brands, close to home, with anew store opening every day in the town or shopping Centrex.

It appears that the turnover per square met re of this form of distribution is now falling, or has at least stabilized since2006: this is due to the lowest-price products that the bigger stores have had to learn to introduce onto their aisles en masse, in order to keep clients in the store. Now their unitary margin is lower.

In France, this has been compensated for by the goldmine of the Gal land law: the backroom (deferred) margin of major brand products could not be passed on to the client –only the volume markdowns. This suppressed price wars among the brands, and even made it easier for prices to go up. This backroom margin, repaying the services of distribution, could amount to 40 per cent of the price charged.

Since 2006, a new circular has suppressed these negative effects of the Gal land law: the distributor may re inject what it gained in backroom margin (above a 20 per cent threshold) in order to bring down retail prices. Since stores can no longer protect these margins, it is up to the DOB to protect them. That haven of non-comparability, the distributor’s brand, is the only remaining path to recovering financial health. This is why the number of DOB references can only increase on all shelves.

How far can the distributor’s brand go?

What is the optimum distributor’s brand for as tore? What fraction of sales, of the aisle, and of the shelf should it represent? The answer depends largely on the store’s strategy – itself function of the competitive situation and the margin provided by the producers of branded articles, in comparison with that offered by the distributor’s brand.

Take Decathlon, for example. This store began, like many others, as a simple distributor of brands. Over time, the store’mission (to allow access to the pleasure of sport for the maximum number of people)proved easier to carry out through a greater control over product design and production planning, even purchasing the raw materials, although production is still subcontracted .

Little by little, the Decathlon brand took control of aisles where brands were weak. However, it is forced to cohabit with Wilkinson in sections such as running, tennis, skiing, and golf. Having become aware that a single, uniform brand harmed the desirability of the store itself and therefore the number of visitors, Decathlon abandoned its single brand in 1998 and exchanged it for portfolio of passion brands. Today these brands represent more than 50 per cent of turnover.

The store’s deep desire is to become major producer of sports brands, and therefore to always push its specialized brands through sport. Decathlon still needs major brands in certain sections, but less so in others. If its brands become genuine brands, it will have reached its objectives, following the example of Gap, which passed from the status of a simple store to that of a store brand and finally to that of a pure brand with its own stores. This change was itself the consequence of an evaluation of the future profitability of the textile market for a brand distributor, at the moment of the opening of discount textile stores in the United States.

The part devolved to DOB's is therefore not the result of an optimization, but the fruit of voluntary strategy. Research has nevertheless the impact of the increase in throb’s share of the offer on the frequency(measured as the average number of purchases per week in relation to the number of references offered) (Ileac, April 2006). For a small supermarket, the frequentation index is continually decreasing:

it is 140 when the DOB offer is situated between 8 and 18 percent of the overall offer, and 79 per cent when it reaches the segment between 47 per cent and 57 per cent of the offer. For a large supermarket, the same is true. For a small hypermarket(under 6, 000 square metes), the frequentation index also falls as the share dodos increases, but over 20 per cent of DOB's, the frequentation index rises once more: it increases from 87 per cent to 99 per cent for aD OB offer rate of 22 to 29 per cent.

For large hypermarkets, the frequentation index rises with the DOB range! The best frequentation(index 125) is found with an average DOB rate of 19 per cent, then the frequentation index falls again for any increment in the presence of DOB's.

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