- What are the current brand and pricing strategies H.E.B is using for (a) its overall brands (Own Brands (HEB, HCF and National) in general and (b) its water brands in particular?
Based on the information of the case study, the following points can be noted for HEB’s brand and pricing strategies for its own brands and national brands.
Strategy for HEB Own Brands Basket
HEB currently has three principal categories of own brands – HEB, Hill Country Fare (HCF) and the generic brands.
HEB: this is positioned as a premium private label brand and is used as the flagship brand for the retail chain. HEB uses this brand to promote the store variety that it offers, as well as showcasing the level of innovation that it undertakes. The HEB brand products are positioned as premium products with non-premium pricing that is 25-30 per cent lower than that of the premium national brands. The idea is to put these brands in a space where they are more likely to attract buyers of premium products. These brands primarily help the retail chain bring in customers more frequently to the store, as well as increase the size of the basket for each visit. Since a significant proportion of the HEB products are manufactured by HEB, the margins on these products are much higher in spite of their lower price. This helps raise the profitability of the store and ensures healthy margins on the overall purchases by customers, to offset the price competition from larger retail chains like Wal-Mart in the national brands.
HCF: this is positioned as the standard private label brand of the chain, comparable to the private label products of other competing chains like Wal-Mart. These products are seen to be marginally lower in quality than the national brands, but on par with competing private label offerings. The pricing strategy for these products is to be lower than the standard national brands but on par with the other private label brands.
These products are used to ensure that customers who buy private label are more likely to buy from HEB than from the competition, thereby retaining customers. This pricing strategy is supported by the level of service and customer focus set as a standard by the management, thereby ensuring that customers are more likely to continue buying from HEB.
Generic: these are products that are largely commoditized and have no value differentiation over any other products in the category. Their only selling point is the price, and they are supposed to be the lowest priced items in the segment, below any other private label or national brand. The only purpose of these brands is to push volumes and to bring in customers for promotional deals.
Strategy for National Brands
HEB promotes an everyday low price (EDLP) strategy, meaning that it will have the lowest price for any product that is stocked with it as well as competitors, viz. the national brands. Therefore, in this segment, HEB has to ensure that its pricing matches that of the competition. This in many cases can result in the product bringing in lower realizations for HEB than competitors like Wal-Mart, which have a much larger volume of purchases and can therefore negotiate lower cost of purchase from the manufacturers directly. The only way to support this position is to ensure that the customers buy other products with higher gross margins that will offset the loss of margin in matching prices on national brands. To achieve this objective HEB promotes the Own Brand products to customers.
The retail chain relies to a large extent on vendors’ procurement revenue to generate the margins necessary to sustain the low prices of national brands in comparison to its competitors. This makes the pricing of products a complex problem, since the status quo for the various categories of products has to be maintained as follows:
- National Brands – on par with lowest prices offered by competitors
- HEB Products – 25-30 per cent lower than comparable premium national brands, but higher than competition’s private label products. Wherever, possible, create unique products with no competition, based on local tastes and preferences.
- HCF Products – on par with competing standard private label products.
- Generics – lowest price point in the segment.
Strategy for HEB Water Brands
The packaged water market is one of the fastest growing categories with a 20 per cent increase annually. The product segment has sales of over $36 million for the chain across all categories.
The product categories are as follows:
- Imported spring water: the premium segment among packaged drinking water, this has the products with the highest price points. International brands like Evian dominate this segment. The costs for this segment are also higher due to the cost of shipping, import duties and packaging. Gross margin per unit are high, but volumes as a percentage of the overall segment are low.
- Domestic spring water: the mid-range segment is one step below the premium, and accounts for a large portion of the volumes. This is locally procured hence the cost is lower and contributes the most gross margin in total.
- Packaged Drinking Water: this is the low end of the segment, but is increasing in volumes. The price point for this segment is higher than the private labels, but gross margins are comparable.
As the tables show, Ozarka contributed to 73 per cent of the total volumes in the category sales, primarily due to its pricing which was set below even that of Aquafina, a packaged drinking water. After the launch of Glacia, which is at a price point lower than Ozarka, the former brand has cannibalized the sales of the latter, due to its pricing. While HEB has been trying to project the Glacia brand as being premium, due to the fact that it is packaged and imported from Canada, the pricing does not support this positioning.
The pricing and positioning strategy of HEB in the case of the category is radically different from that used by the chain in the case of its other Own Brands like HEB and HCF. Even though Ozarka is domestic spring water, it is priced lower than Aquafina, a repackaged municipal supply. With Glacia priced even lower, the perception of the brand takes a significant hit, resulting in the lower profit margins. While the cost of the products supports the lower pricing, it goes against the positioning of the products that the company is trying to achieve in the minds of the customers. While Glacia is being positioned as a premium product comparable to Evian, it has a pricing that is less than a third of the Evian pricing. This needs to change if the retail chain wishes to build its margins in the segment.
The customer research surveys also indicate that the pricing of Glacia gives customers the perception that it is a local product. This needs to be changed, and the pricing of the products – both Glacia and Ozarka - as well as packaging needs to reflect the respective positioning of the products. This will ensure that the two products do not cannibalize sales from each other, and instead help grow the category.
- What overall brand portfolio, pricing strategy and tactics do you recommend for H.E.B across (a) its Own Brands and National brands in general and (b) its Water Brands in particular? Why? (25 points)
Own Brands and National Brands in general
In order to remain competitive with the larger retail chains like Wal-Mart which pose a challenge to HEB, a few steps need to be taken by the retail chain in terms of realigning its products in the private label segment as well as refining its pricing strategy for its own and national brands.
Brand Portfolio
Since HEB is committed to the EDLP strategy, it needs to retain national brands on its shelves which will allow customers to make one-to-one comparisons of its products with competitors. It will have to ensure that it has a range of products across the premium and standard national brand categories to provide customers with a credible comparison.
For its private label portfolio, HEB will have to rearrange the product positioning of its brands in some categories. For example, HCF in pasta sauce contributes less than 5 per cent of the gross sales in that segment with a gross margin of only 6 per cent. Therefore, it should be discontinued. This will ensure that the Own brand profit percentage coming from HEB in that product segment is above the category profit, which is the objective of having Own Brands. Currently that figure is the same for both, at 7 per cent, meaning that Own Brands is performing at par with the national brands. Similarly, in segments like Water, Baking Mixes, Canned vegetables, Flour, Ice cream and sports drinks, the positioning of the Own Brands needs to improve in order to bring in more volumes which will improve the profit percentage of these segments. This can be done through better product branding, packaging and in-store promotions, which will enhance the brand value without significant burden in the costs.
This specifically needs to be undertaken in the water segment, which along with canned vegetables and baking mixes, are the segments where the Own Brand profit percentage is lower than the category profit. In the flour segment, while the pricing set up for the Own brands are in line with the strategy, the differentiation of the product is not very clear. The consumer survey also indicates that customers are not able to distinguish between the two. It is recommended therefore that HEB close down the HEB branded products and retain only HCF. Since flour is a commodity segment product, HEB is not able to add a significant differentiator in terms of innovation or value, and therefore the two products compete against one another. Instead, by retaining the HCF branded product in this category, HEB will be able to generate higher gross margins and profit percentage from the single product due to its volumes. In canned vegetables, the positioning of HEB needs to improve my reviewing the product mix. Currently, HEB products have low volumes and good margins. However, the margins on HCF are lower than leading brands, in spite of local sourcing. So it is important that HEB promote the HEB range over the HCF range of canned products to improve the gross margins. To do so, exotic products and innovative approaches need to be taken. For example, providing prepared mix of vegetables with a recipe for a home cooked meal would yield higher revenues than simply providing canned vegetables. This is an option that can be evolved for various types of cuisine, both local and international. This would appeal more to the higher or premium segment of customers and generate better margins.
Pricing Strategy
For all segments indicated except the water segment, the pricing strategy of HEB has been clearly followed. This same pricing strategy needs to be retained keeping in mind the pricing categorization among the various brands. The highest price point should be for premium national brands, but it should be in line with the price of competing retail chains. The second price point should be for HEB products which will be priced lower than the premium national brands but due to their value addition, be priced above the standard segment national or regional brands. These will be the flagship products for HEB and generate both brand value as well as higher revenues. The third price point would be the standard national or regional brands, followed by the HCF range of products. The latter would be priced on par with other retail chains’ private labels and be of comparable quality to the standard national or regional brands. The last price point would be for the generic private label segment which is reserved for the price-conscious customers. These will be used only to draw customers into the store with low price “hooks”.
While competing with the other retail chains on maintaining a low price for the national brands, the chain needs to ensure that gross margins remain positive, by negotiating the procurement revenues accordingly. In certain segments such as soft drinks, canned vegetables and baby formula, the category profits are negative and cannot be sustained for long. Pricing corrections are necessary in these segments to ensure that customers buy more from the Own Brands range of products and improve the overall profit for the category.
Tactics to improve sales
Basic Ingredients (Canned Vegetables): the pricing of HCF is significantly below the national brands, and needs to be improved to ensure that the gross margins (presently 13%) are better than those of the national products (14%). While the gross margins of HEB in this segment are better than average, the volumes need to increase. This can be achieved by introducing exotic food products in this segment as well as creating innovative products such as pre-packaged vegetables needed to prepare a meal with the recipe for that dish enclosed. This will appeal to premium customers and the increased volumes will help improve gross margins for the segment as well.
Expandable Consumption Items (Soft Drinks): this segment has the lowest category gross margins and profitability. Creating new product offerings in this segment such as seasonal flavors under the HEB brand would add volumes and ensure better margins for the segment. This is also one of the largest selling volume items and therefore procurement revenues should be improved in this segment by negotiating with competing brands for shelf space and advertising/promotion revenue.
Shelf Stable commodities (Water and Pasta Sauce): this segment needs to be re-launched with new packaging to promote the premium HEB labels while looking to enhance revenues from the standard private labels. This can be done by promoting larger pack sizes in water and new flavors in the pasta sauce range.
Water Brands
As discussed in the previous section, the pricing of the HEB products is wrong, and needs to be corrected immediately. Correction of the pricing and improved packaging will help the chain differentiate Glacia as a premium product, and ensure that it generates higher gross margins as well as prevent it from cannibalizing sales from Ozarka. While the pricing of Ozarka is presently below Aquafina and can be maintained, the pricing of Glacia needs to be changed to reflect the fact that it is a premium product. In light of the pricing of Evian ($5.49 for a half-liter pack) the recommended pricing for Glacia should be at least $3.49, giving it a gross profit margin in excess of 100%. Even if the volumes for Glacia are reduced, it will be compensated by increasing volumes of Ozarka, and the higher gross margin will also add to the profits while creating the association of Glacia with the premium segment.
