The Revenge of the Generic

Copying Target's model, chains such as Office Max and Costco are developing more upscale, store-brand productsand customers are buying them

It used to be that few people would admit to buying generic. You remember, those almost comically minimalist packages of food, starkly decorated with text indicating the contents—"Spaghetti" or "Frozen Peas"—produced and sold by grocery-store chains, such as Star Markets (one of the first to offer such products in the U.S.) or the Canadian chain Loblaws, in the 1980s?

With no need to pay for product marketing or ad campaigns, the stores could price their offerings low to compete with name-brand products on price. But the no-frills packaging became associated with the perceived blandness and low quality of non-brand-name goods. In the last 15 or so years, however, there's been a dramatic shift: more and more consumers are buying store brands.

Surveys conducted by industry group Private Label Manufacturers Assn. and reported in a study released in November, 2006, show that—for a number of reasons—such in-house brands have dramatically gained respect in the marketplace. And big-box stores from Costco (COST) to Office Max (OMX) are realizing that launching higher-end, private-label goods can boost a store's revenues—and image.

The Target Effect

In 1991, just 12% of U.S. consumers would admit to being "frequent" buyers of any such store brand, according to the PMLA. By 2001, though, that percentage had jumped to 36%. Fast-forward to 2006 and 41% of consumers admit to frequently purchasing store brands.

One catalyst of the private label trend: the so-called Target (TGT) effect. In the mid to late 1990s, the discount department store started to develop exclusive, well-designed, in-house products that sold at competitive prices alongside nationally known, established brands. The company famously recruited design-world luminaries such as architect Michael Graves and fashion designer Isaac Mizrahi to create inexpensive product lines, and aggressively promoted the collaborations. As a result, Target's brand recognition rose, along with overall sales, as new buyers discovered the discount emporium.

But there are other reasons stores spend time and money to develop private-label products. Such in-house offerings give a retailer "leverage against vendors, driving its [wholesale] prices down," explains Bob Nelson, vice-president of finance and investor relations at Costco. "Plus, private labels threaten to take the shelf away from [vendors' products]." A survey of 1,048 consumers conducted by Bellevue (Wash.) market researcher Hartman Group, published in August, 2006, indicates that 82% of consumers polled believe store brands generally match the quality of national brands. The data indicate that most shoppers now see private-label goods as on par with any other product.

From Tires to Package Tours

Costco, which saw $60 billion in 2006 sales (up 13.6% from the previous year) and is currently the nation's largest wholesale club, has promoted its private label, Kirkland Signature, for 15 years. The brand encompasses a staggering—and curiously broad—array of offerings. "It started out with only a few labels, then gained steam and momentum to range from soda to food to tires to camera film," Nelson says, adding that the line's name refers to the city in Washington where Costco's headquarters once were based. Costco executives decide what private-label categories to pursue on a case-by-case basis.

"It really depends on the quality of the product, and how competitive we can be in terms of offering a lower price and driving volume," he says. Today, Costco customers can buy anything from Kirkland Signature roasted chickens to a $100 Kirkland Signature ballistic-nylon rolling briefcase to a $6,330-per-person, 10-day package vacation to South Africa promising "luxury" accommodations.

Just as Costco is pushing its private-label offerings in unexpected, upscale directions, OfficeMax recently launched a new, store brand of pen in an effort to become "the Target of office supplies," says Mike Kitz, vice-president of product development at OfficeMax. The company, which saw $9 billion in 2006 sales, is currently the third largest office-products retailer, behind $16-billion-a-year Staples (SPLS) and $14-billion-a-year Office Depot (ODP).

Reinventing the Pen

OfficeMax followed Target's design-for-all strategy rather than a more Costco-style, anything-goes approach. The company hired Chicago design firm Gravity Tank to develop the new pens that it hoped would boost sales and increase market share in the realm of everyday writing instruments.

"OfficeMax didn't want to reinvent the pen," says Michael Winnick, managing director of Gravity Tank, which has worked with such blue-chip companies as Motorola and Unilever. "The goal was to create a pen with outstanding performance and clean, sophisticated design, a precision, high-end instrument offered at an everyday price." Disposable pens, after all, are an office-supply staple, one that companies and individuals buy in bulk and must replace often. The category seemed a logical place for OfficeMax to launch its private-label effort.

While Office Max already sells an in-house branded pen, a standard black or blue ballpoint with the OfficeMax logo stamped on it in white, the company wanted to develop a separate brand name "to help drive customer familiarity with the new products" and build brand loyalty for the new line, explains Winnick. They christened the brand Tul, which evokes the word "tool," as in instrument, and is spelled in an exotic, faux-European way.

Ethnographic Office Research

The idea is to first offer customers a fresh alternative to other pens in the $1.49 range, including OfficeMax branded pens, which the company still sells alongside Tul pens, and then roll out more Tul products by mid-2007. Emphasizing the "newness" of the Tul line offered the company a safe way to experiment with designing and selling slicker office products, which don't jibe with the existing utilitarian look of the OfficeMax store brand. If the Tul pens didn't sell, the company could simply let the Tul line die quietly.

Gravity Tank conducted ethnographic research observing a variety of external office workers, talking with office managers who bought stationery supplies in bulk, and speaking to store clerks and customers alike.

"We noticed that people had two kinds of pens, one set of inexpensive pens for sharing, and also a personal stash of better writing instruments," says Kitz. "We learned how personal and powerful a pen can be. The 'nicer' pens were an expression of personality." The goal that both Gravity Tank and OfficeMax agreed upon was to bring the personal attachment that people felt toward the higher-end pens to lower-end rollerball pens. In other words, OfficeMax wanted to create the office-supply equivalent of Isaac Mizrahi's $50 "budget" cashmere sweaters for Target.

Bargains Aren't Enough

In the design of the pens, Gravity Tank borrowed elements from high-end writing instruments. "We made the tip cone at the end of each pen either all metal-plated or metallic colored," says Winnick. "We created a thicker profile and weighted each pen so it felt heavier, because our research showed that customers associated more heft with a 'better' pen." The designers used straight lines for a clean, elegant look applied to five initial products launched in 870 Office Max stores, online, and via business-to-business in July, 2006 (after a soft launch in May).

These included four pens (gel, roller-ball, retractable ballpoint, and stick ballpoint) and a set of whiteboard markers, which doesn't feature the metallic colors but carries over design elements such as bold, simple silhouettes. While Kitz won't disclose sales figures, he says that the supply of four-packs of the gel and roller ball pens sold out quickly and were subsequently restocked.

If OfficeMax can successfully apply the Target effect to other product categories, the No. 3 source for office products may have a shot at the No. 2 or No. 1 slot. But the products have to reflect high quality and design values, at prices comparable to those of other nationally recognized and established brand-name items. After all, lower prices aren't enough to guarantee sales. As recent consumer surveys show, shoppers also want top quality and good design.