Marketing Memo: Safeway's Challenge: Going From Store Brand Marketer to Consumer Brand Marketer With its O' Organics and Eating Right Brands

Pleasanton, California USA-based Safeway Stores, Inc. is preparing to roll out its popular O' Organics organic foods and Eating Right healthy foods store brands to a wider audience-- competing food retailers in the U.S.--along with to grocers globally, as we reported and wrote about in this April 28 piece: Marketing Memo: Safeway Stores, Inc. to Market its 'O' Organics' and 'Eating Right' Organic and Healthy Brands to Other Retailers in U.S. and Globally.

The supermarket retailer's target date to begin selling the brands (they won't be store brands anymore) to other U.S. food retailers and wholesalers is sometime this fall, just a few short months away.

Natural~Specialty Foods Memo was the first publication of any kind to report in this piece in December, 2007 and in others that Safeway Stores, Inc. was already selling some items in its O' Organics organic food and grocery product brand in Asia and South America through a distribution deal with the giant French supermarket chain Carrefour, which is the second largest retailer in the world after Wal-Mart, Inc.

Safeway plans to extend international sales of both its O' Organics and Eating Right brands to other international retailers and to other parts of the world. Plans call for the increased international marketing also to begin this fall in conjunction with the launch to various U.S. supermarket chains and wholesalers at home.

Today's Advertising Age, the trade publication for the marketing and advertising industry in the U.S., has a story about Safeway's plans to launch the two brands into the stores of many of its competitors this fall, as we've previously detailed in Natural~Specialty Foods Memo.

Safeway's O' Organics brand--which currently consists of an impressive 300 items in over 30 product categories, including dry grocery, perishables, fresh meats, dairy and fresh produce--did about $150 million in gross sales in its first year, 2005. Last year the brand did about $300 million in annual sales. Safeway is projecting sales of $400 million for the brand this year in its 1,750 stores in the U.S. and Canada. That's impressive by any score card.

Safeway CEO Steve Burd told Natural~Specialty Foods Memo earlier this year that the Eating Right healthy foods brand was on track to do even more the O' Organics' $150 million in its first year, which won't be until a bit later this year. Safeway is projecting annual sales of about $200 million for Eating Right this year. That would surpass first year sales of the O' Organics brand by about $50 million. Even more impressive.

In our earlier pieces we've projected that with the rollout to competing retailers in the U.S. beginning this fall, along with the expanded international marketing program, O' Organics and Eating Right have the potential to become the leading brands/product lines in their respective categories--organics and healthy foods--in the U.S. By this we mean not the leading store brands--but the leading brands period in those respective categories.

Safeway is banking on this as well, as it makes its unique for a U.S. supermarket chain transition from store brand marketer to consumer brand marketer.

In fact, in today's Ad Age article, James White, president of Safeway's Lucerne Foods division, which is handling the marketing for the two brands, and Safeway corporate vice president for consumer brands, says he believes the organic food and grocery market particularly is strong enough in the U.S. and internationally that Safeway will neither see a drop in sales in its own stores, or have a problem gaining distribution and sales to its competitors, with the O' Organics brand.

The O' Organics brand is "democratizing the organics market by making organics available for everyone." He (James White) said both lines represent a "great-tasting, highest-quality, more-affordable option [than established organic brands], which allows for the mainstreaming of market," White is quoted as saying in the Ad Age story.

Further, the Ad Age piece quotes Mr. White as saying: "The economy isn't affecting the organic segment's pricing power. "There is a significant consumer market for organics, and I don't think that will slow down."

We disagree with Mr. White on these two counts, despite being fans of both O' Organics and Eating Right, as well as being very impressed with the two brands' performance.

First, in terms of O' Organics' democratizing the organics category, we think that's yet to be seen. In fact, when it comes to price, O' Organics products are far from being all that reasonably priced. For example, in its current weekly advertising circular, Safeway is promoting O' Organics Boneless,-Skinless Chicken Breasts for $8.99 pound in its California, Nevada and Arizona stores. Natural~Specialty Foods Memo has seen independent natural foods stores selling organic boneless-skinless chicken breasts for $2 less per pound everyday.

This pricing scenario plays itself out on many of the O' Organics brand products vis-a-vis other supermarkets' and natural and specialty foods retailer's house brands. For example, overall Trader Joe's, Kroger divisions, Costco and Tesco's new Fresh & Easy Neighborhood Market stores in California and elsewhere in the Western USA have considerably lower everyday and promoted prices on organics than Safeway offers with its O' Organics brand.

Safeway does offer some good deals on a variety of O' Organics brand items--but its far from a pricing policy one could call a democratizing of the organics category in our analysis. The Safeway O' Organics' marketers' pricing pencils need to be sharpened a bit to achieve that.

It will be very interesting to see the retails on the O' Organics brand items in competing retailers' stores, since they should be higher priced than what they currently are selling for in Safeway stores since the company has to take a margin on the items as a brand marketer and distributor, along with building some margin into the cost of goods to retailers and wholesalers for marketing and promotional brand building expenses.

Further, if Safeway doesn't sell the O' Organics brand items for less than competitors' stores do, it could lose substantial sales in the brand. Conversely, if Safeway sells the brand's items for too much less than its competitor's are, it will create a disincentive for those retailers to carry the brand. A fine balancing act it will be indeed.

We happen to know Safeway makes a very healthy gross margin, based on its current retails, on the O' Organics brand items. Therefore, it has some room to get more value-centered with the brand in its stores if it wants to--and might have to because of the current poor U.S. economy--and lower the retail prices across the brand.

Safeway itself is seeing its customers move from higher priced national brands to value-based store brands like its Safeway, Lucerne and other economy branded food and grocery product lines, as company CEO Steve Burd himself said in this April 28 story in the blog. Within the store brand organics category this has helped O' Organics in part since Safeway makes sure the items in the brand are about 10 -to-15% cheaper overall than similar national and regional organic branded items in its stores, thus tapping into the consumer store brand trend within the organic category to take sales away from those national and regional brands and drive shoppers to buy O' Organics over the national and regional brands.

But in this poor U.S. economy, average consumers just can't afford $8.99 per-pound organic chicken breasts or $7 per gallon organic milk. Not when they can buy conventionally-raised boneless-skinless chicken breasts at the very same Safeway store on sale for $2.19 pound; or Lucerne non-organic milk for less than half the price of the O' Organics organic milk next to it in the dairy case. For most shoppers the discretionary money for organics just isn't there right now.

Whole Foods Market, Inc's poor quarterly sales performance this week demonstrates how even organic-loving shoppers are trading down in the poor U.S. economy out of need rather than choice.

Safeway shoppers are no different, nor are customers of those competitor stores Safeway plans to sell O' Organics to. We are going to see organics take a considerable sales hit until the U.S. economy turns around. Retailer scan data already is showing lower organic category sales across the U.S. Sales numbers for 2008 category sales don't come out until next year--and we bet they show a drop in overall category sales.

It's also important to note that once O' Organics is marketed by Safeway to competing retailers, it no longer becomes a store brand. This means no favored shelf placement, no special treatment by those retailers in terms of end-cap display space, no "free" weekly ad circular feature ad placement, and the like. The brand will have to be marketed as and compete equally without the advantages Safeway is able to give it as a store brand. Those home court advantages after all are part of the reasons we call them store brands.

As a result, Safeway will have to compete with its organics brand just like all of the national and regional organic products' brand marketers are in this down economy--along with suffering the lower sales fate most category marketers are currently suffering ,which has as a key feature soaring food price inflation--because the average (and many above average) U.S. consumers just can't afford to buy that $8.99 pound organic chicken, even if the breasts are boneless and skinless. Just ask the Whole Foods guys. They are seeing organic category sales dropping across the board--from fresh produce and meats to dry grocery.

However, while we disagree with Mr. White regarding his view that the poor U.S. economy won't hurt organic sales in general and O' Organics' sales specifically, we understand and appreciate his marketers' optimism. We also think the O' Organics and Eating Right brands have the potential to do very well at competing supermarkets, as well as continue to sell well and grow in Safeway's stores.

One important note is that sales of the O' Organics brand in Asia have been at best mediocre. A regular reader who lives on the island of Taiwan has reported to use that since our piece about the brand being sold in Carrefour stores there, she has seen many of the O' Organics brand items discontinued in the Carrefour hypermarts on the island. She has been told by store managers it is for lack of sales performance. (Well, that's what happens to non store brands.)

Of course that's Taiwan, not the U.S. or Western Europe. But it does illustrate that Safeway will need to market the brand in ways other than just using price promotions--which has been the case in the Carrefour stores--if it hopes to build the brand in stores other than those owned by Safeway.

Food and grocery retailers can use push marketing to build a store brand and grow sales in their own stores, using the techniques we mentioned above, but it's much more difficult to do so in competitor's stores when its just a brand and not that particular retailer's store brand.

Despite these concerns, we see a bright future inside of and outside Safeway stores for O' Organics and Eating Right. Of course, in the competitors' stores it will all come down to distribution, marketing, merchandising and promotion, along with allocating the budget to achieve all four.

And, of course, Safeway will get a taste of being on the other end of those slotting fee, ad space and display space fees in its role as a consumer brands marketer. Our advice: Better build in plenty of extra margin on the O' Organics items as brand marketers have learned to do with the brands they sell to Safeway Stores, Inc.