Progressive Growth in Depth for a Hypothetical Category

• Begins with a single brand• Depth can only be added if there is growth in

the category’s gross margin.• Assumes matching of wholesale price to

retailer with second brand.• Price brand will “appear” as the third brand• Private label items will have the best gross

margins.

Frothy only, 6.7 oz

FrothyFrothyFrothyFrothyFrothyFrothyFrothyFrothy

1.23

“One-brand” or One-supplier Categories

• Likely has too much shelf-space allocated to the category.

• Is a candidate for direct-store delivery, questionable efficiency of bring the item through the retailer’s distribution system.

• Likely a condition for monopoly-pricing from the supplier.

• What is the need for a “buyer?”

Frothy and Foamy

FrothyFrothyFrothy FoamyFrothy FoamyFoamy Foamy

1.23 1.23

What are some requirements for the category for “Foamy” to receive display?

Two Suppliers: Duopoly

• Supplier apprehension to price increases— “Will my competitor follow my price increase?”

• Suppliers will match prices, not likely engage in a cycle of price-cutting, price matching. “Sticky price declines”

• Two supplier ‘stability’ is not the best situation for a retailer.

Foamy introduces 9.2 oz size

FrothyFrothyFrothy FoamyFrothy

moreFoamy

Foamy

moreFoamy

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What would the “Foamy” people need to show to get “more Foamy” displayed?

Larger Sized SKUs

• Why not smaller sized SKUs?• “Growing the Category”• Larger gross margin dollars—not percents.• In a two-supplier scenario, how will the unit

pricing (costs) on the larger-sized SKU compare to the existing SKUs?

• What would happen to purchasing of the existing SKU if larger SKU had a lower (wholesale) unit cost.

FrothyFrothy Foamy

FrothyXtra

moreFoamy

Foamy

moreFoamy

FrothyXtra

1.56 1.23 1.561.23

FrothyFrothy Foamy

FrothyXtra

moreFoamy

Foamy

moreFoamy

FrothyXtra

diet

Frothydiet

FrothyFoamy

liteFoamy

lite

diet

FrothyXtra

diet

FrothyXtra

moreFoamy

lite

moreFoamy

lite

1.56 1.23 1.561.23

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“Diet line” doubles display space

Changes in Display Space in the “Category Age”

• Chains have fairly standardized fixtures• Shelving dimensions are in standardized

increments (4’) for determination of linear feet of display.

• Buyers would be reluctant to submit ‘fractions’ of increments to be adopted by different stores for the categories.

• Additional space requires additional gross margins, and more competitors.

FrothyFrothy Foamy

FrothyXtra

moreFoamy

Foamy

moreFoamy

FrothyXtra

diet

FrothyFoamy

lite

diet

FrothyXtra

moreFoamy

lite dietFrug’l

Frug’lFrug’lFrug’lvalue

Price brand enters

1.56

1.23 1.561.231.56

1.231.56 1.23 1.191.19 1.45

What can a “price-brand” create?

• Offers an item with a higher gross margin—and potentially higher volume.

• May not use a “pull” strategy, may be heavily dependent on “deal.”

• May initiate initial competitors to introduce their own price brands, or initiate dealing in a category that had none.

What about a private label’s costs and gross margins?

• “We need to sell about 10 or more units of the national brand to gross the same amount as when we sell one unit of our private label.”

• “National brand manufacturers begrudgingly will manufacture a private label item for a retailer rather than let it’s competitor have the business.

• Private label business is determined through a competitive bidding process.

Frothy OurBrand

FrothyXtra

moreFoamy

Foamy

moreFoamy

FrothyXtra

diet

FrothyFoamy

lite

diet

FrothyXtra

moreFoamy

lite dietFrug’l

Frug’lFrug’lFrug’lvalue

Even more

OurBrand

1.56 1.231.56 1.23 1.191.19 1.45

1.56 1.561.23 1.23.99 1.24

What are the gross margin requirements for private label?

Assumptions

• Second brand provides category growth in sales and margins.

• Larger sizes increases the gross margin amount per sale.

• Price brand enters as a lower cost, higher margin alternative for the retailer.

• Private labels must offer the higher gross margin than a “price brand”