Month: June 2019

“We just said, ‘You know, that is not terribly appetizing, to have a range that covers everything.’ I’m not sure if I want my honey to come from my same brand as my windshield wiper fluid,” said Helayna Minsk, group vice president of Walgreens’ retail brands. 

Walgreens, like many other retailers today, is finding that it’s not enough to just private label a product, and assume customers will buy it because it’s a lower price. They also have to give greater prominence to these brands in-store and online. Target is launching private label lines more quickly than it has in the past, as it’s gone beyond essentials into more premium subcategories like organics in the baby care aisle. Kroger recently got into private label meal kits, that Walgreens has also started carrying. The idea is that, especially as retailers get better at analyzing customer data, and are rethinking ways to display products in-store, thanks to digitally native brands, they are proving more willing to get into new categories.

But unlike other retailers who are using their private-label lines to develop products that customers can’t find anywhere else, Walgreens is mainly focused on selling products in impulse purchase categories that customers will want to buy when they also go to pick up their medicine from a Walgreens store. During fiscal year 2018, 72% of Walgreens’ sales came from its pharmacy division.

Additionally, Walgreens’ same-store sales continue to fall, and were down 3.8% last quarter. Pushing Walgreens customers to buy more private-label products helps increase margins at a time when foot traffic is on the decline.

“Historically, if there was a new national product introduced, the company came out with an owned brand, whether it made sense or not,” Minsk said. Walgreens currently has 15 private label brands, and Minsk estimated that when she joined Walgreens in 2016, the company had private label products in 120 categories; today, she estimated that the number is closer to 85 to 90.

Minsk said that the company’s biggest area of focus right now is its Walgreens brand, the biggest of its owned brands, which includes health products like thermometers and cold and flu medicine. Before deciding what new products to add to its private label brands, Minsk said that the company analyzes customer data in aggregate to see what items customers are purchasing most frequently, before deciding what new products to sell through its private-label brand. The company also does focus group testing, as well as mock-ups of potential new displays in store aisles to see how customers respond to different packaging and branding.

Walgreens is also giving more attention to its brands online. In April, the company launched a new “sub-range” of its private label Finest Nutrition vitamins, called Free & Pure, which contain no artificial dyes or preservatives. The brand launched online before going into stores last month.

Minsk said that the company decided to do that for vitamins in particular because it’s a product that customers are more willing to buy online, and will look to do it the same in other categories when it makes sense. Data from Rakuten Intelligence earlier this year showed that online vitamin sales grew faster than the rest of e-commerce last year.

Within the last year, the company has also launched a dedicated web page for its owned brands, as well as a compare-and-save feature that shows customers how much money they save by buying a product from a Walgreens-owned brand versus a national brand.

“We have really upped the ante in terms of creating a very similar experience online that you get at the shelf,” Minsk said. 

Walgreens will continue to be intentional about its private-label expansion as it faces competition from Amazon — which has proven willing to quickly release new owned and exclusive product lines in a seemingly endless array of categories — as well as new direct-to-consumer companies, who are betting that their close relationships with customers can help them win against traditional retailers like Walgreens.

“They are leveraging Walgreens.com as almost a platform for discovery to decide what to scale in stores,” Brian Owens, senior vice president of retail insights for Kantar Consulting said. “They’re trying to tell a better story behind some of the brands they’re trying to gain traction on.”

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It’s Armstrong’s belief that everything, eventually, will be direct-to-consumer, and he sees the issues currently burdening the DTC category as symptomatic of a burgeoning industry trying to grow up. There will be a tech-like shakeout, yes, but the successful brands in the space are rewriting the rules of how consumer companies develop product and market to customers, because at their cores, they actually know who their customers are. Eventually, the ones that will make it will remake the P&Gs and Unilevers of the world in their image, and build up competitive holding companies as well.

At a live AMA at Betaworks Studios on Thursday night, Armstrong discussed how he compares the tech and consumer companies, the right problems founders should have, and why he stresses the importance of unit economics to every entrepreneur he meets. Responses have been edited for clarity.

Where do DTC companies go from here, especially ones that have raised a lot of money?
I would break these companies down into different categories: The DTC brands that know their metrics and unit economics, the ones that don’t know their unit economics, and then companies that have either raised the right amount of money or the wrong amount of money. When brands pitch us, they typically fit into one or two of those areas.

The companies that know their unit economics and are drilled into those economics with consumers, those are the ones that are going to be successful. And I don’t know if they’re going to be $50 million, $100 million, $1 billion or multi-billion dollar companies. But if you take a snapshot of today’s environment, you have massive corporations that have sucked up a lot of the consumer power in the world online and offline, and then you have the DTC industry, which looks like a ton of small companies across different categories. If you fast forward 15 years from now, you’re going to see the emergence of new holding companies that have aggregated a bunch of those [DTC brands], and then some of the companies from what I’ll call the old economy bridge into buying a lot of these DTCs.

Those issues around over-raising money are out there, but underlying that is a new way of doing business and companies that are fundamentally better at understanding their consumers. If you made me bet between the old economy and the DTC economy, I would put all my chips into DTC. Because they’re closer to consumers, they have better product development and they understand their business on a molecular level, which will over time allow them to scale.

When you have these brands with a DTC DNA, based on customer relationships that traditional brands didn’t have, how do you maintain that as you scale, especially if you’re getting picked up by a company like Unilever?
When you have a successful business, you should have problems. They key is to have the right problems. DTC companies that are successful start by solving a consumer need. Then they have a great story behind it. Then they scale up production as they see success. Then their supply chain breaks, and they have to redo their supply chain. Then they run out of customers in whatever channel they’ve been awesome at, and they have to go omnichannel, then when they go omnichannel, they have to expand their product portfolio, but that product portfolio doesn’t necessarily fit the original story. People get very worried about those problems, but they’re excellent problems to have. I’m pretty bullish on the fact that the problems coming out of DTC right now are the right problems. The people who have had success will continue to do so as long as they push really hard.

Coming from a tech background, what parallels do you see between what we’ve seen happen in that industry — big shakeouts, a push toward direct connections — to what’s happening in the consumer category?
There will be a shakeout like what happened in tech. But the form of the shakeout will change. I think you’ll have a lot of successful brands and companies that will replicate more of what a P&G looks like, rather than giant, monopolistic, one-brand digital companies that own every piece of data on the planet. That’s unlikely in DTC.

What brought me to this category is that I have a fundamental belief that one day 15 years from now, we won’t wake up and see 10 companies that own every single piece of consumer data. At the same time, running a super big company where you’re not connected to the end consumer and you don’t understand them, that won’t be possible either. So a combination of those things leads me to see that DTC has a real shot at being successful over a longer period of time. People sort of laugh at DTC like, ‘Oh, it’s a bunch of small companies that aren’t going to amount to anything. No one’s ever going to scale.’ The reality of what they’re missing is the product development cycle, and how close they are to the consumer — that’s what’s going to allow them to eat the big elephants one bite at a time, and that’s why I went into the space.

How do you make sense of the dependence, at least up until now, that these DTC companies have had on Facebook and Google for growth and access to new customers?
Those companies are natural partners to DTC, because DTC founders are so data-centric in understanding their consumers, and those companies offer a lot of data. The further you go away from those platforms and to other places where you can market to consumers, in some cases there’s almost no data. There might be brand value, but brand value for the data-centric people who are unit economic-focused, it’s really hard. You may like what’s happening [offline], but without the data, it’s harder to make that investment there.

At the same time, people are starting to realize the value in [other channels]. The retail space, in general, is not super data-centric, which is surprising. And DTC companies are. So with the combination of being data-centric and customer-focused, these companies are naturally going to gravitate toward the data platforms, before eventually bleeding out into other spaces. And there’s a lot of opportunity in those other spaces for DTC.

Considering the experience of companies like Blue Apron, would you say there’s a bad precedent for companies in the DTC space who are thinking of going public?
No, I don’t think so. The bottom line is, for a company that you want to grow and expand, the public markets are an amazing efficient capital machine, if they’re working properly. So getting to a point where there’s liquidity and you can raise money over time, I don’t think that’s a mistake. It’s a mistake to go public if you truly don’t have the unit economics you need to have because at some point, you’re going to have to pay the piper. So I would say the question isn’t should you go public, it’s do you have the unit economics? I hammer on this to all entrepreneurs: Unit economics are the single most important thing. I wouldn’t go public if I didn’t know those.

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The upcoming AR lens, one of Snapchat’s portal lenses, is the latest Gatorade experiment with Snapchat, where the brand has found success with games like Serena Williams’ Match Point and filters.” Gatorade has long been a leader in utilizing Snap AR for creative launches,” said Christina Kavalauskas, creative strategy lead at Snap, adding that the lens celebrates the Women’s World Cup. “This portal Lens experience lets Snapchatters get into the game and score the winning goal — all in augmented reality.”

It’s also just one example of how Gatorade is leaning further into its “video everywhere” marketing strategy, according Abbott, who said the brand had pivoted away from thinking about video in terms of linear, online and premium channels to instead be wherever its athlete audience will be.

“Our video everywhere mindset has delivered the opportunity for us to break through our own historical barriers about planning from a channel to channel perspective and think more about how to be medium-agnostic,” said Abbott.

That’s why the PepsiCo beverage brand is planning to spend 45% of its media budget on digital this year, an increase of 11% from 2018’s 34% on digital, with the majority of that spend focused on mobile. In 2018, Gatorade spent $143.5 million in media, up from $133.3 million in 2017, per Kantar Media, which also reported that Gatorade spent $32.6 million in media in the first quarter of 2019. Gatorade declined to break out percentages of where it spends per platform or how much it spent on mobile versus desktop or laptop.

“[Mobile] is where all the eyeballs are,” said Abbott, adding that video is typically consumed on multiple platforms, often at the same time. “That’s where the engagement is. We’ve seen really strong success, which is what gives us the opportunity to continue to test, evolve and build year-over-year. I don’t see a world where we will ever be myopically focused on one platform.”

Per the App Annie’s The State of Mobile 2019 report, 10 minutes of every hour people spend in 2019 consuming media via TV and internet will be through streaming video on mobile. With that being the case, the “video everywhere” strategy and mobile focus makes sense for the brand, said Anthony Cospito, head of strategy at digital agency Moving Image & Content, especially since Gatorade typically goes after a younger demographic.

Focusing on video, like last June’s Leo Messi animated short, “Heart of a Lio,” has driven strong engagement for the brand, said Abbott. Gatorade did not respond to a request for success metrics. According to Rival IQ stats, that film earned Gatorade a 113% engagement rate on YouTube.

“Of course, they’re spending more money on digital,” said David Srere, co-CEO of brand consulting firm Siegel + Gale. “That’s where increasingly consumers are experiencing brands these days. Doubling down on digital to promote their products makes sense and they’ll continue to do so.”

Gatorade declined to share if it is experimenting with new platforms, such as Tik-Tok, and did not respond to a request for further information in how it measures the success of a campaign.

For “Sisters in Sweat,” which features soccer stars Mia Hamm and Mallory Pugh, Gatorade has focused on YouTube and Twitter in particular. On YouTube, which is the primary distribution channel for the short film, it has garnered more than 6.1 million views since it was released on June 4.

YouTube has recently come under fire for brand safety issues, once again. But Gatorade isn’t pulling back from the platform. “There’s been times that we’ve had to be really reactive and proactive on how we ensure that our brand maintains the guardrails that we put forward,” said Abbott. “Anytime that we have flagged a challenge or a question or an issue with them they’ve worked with us to help address it.”

Abbott continued: “I think brand safety will be an issue across multiple platforms. I don’t think this is a YouTube specific issue. It’s on the brands to make sure that we’re continuing to challenge our media partners to figure out how to address in a way that feels right for each individual brands.”

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