Private Label and what it means for the BGM Market
This past Tuesday Information Resources released a report entitled “2009 Private Label Report”, which should be required reading for everyone in the blood glucose monitoring space. According to the report:
“Four out of five shoppers are now “sold” on private label quality indicating that product marketing during the current recession is successfully expanding the positive reputation and reach of these products.
Consumers’ perception of private label quality is consistently high across U.S. regions and channels”
Years ago Diabetic Investor predicted that patients with diabetes would move towards non-branded or private label glucose monitors. While we were ahead of the curve with this prediction a combination of factors are now tilting the bar in favor of non-branded monitors.
1. Co-Payments are rising. In the past patients would almost always use the monitor that was covered by the health insurance. While this still holds true insurers focused on lowering costs have been raising co-payments for test strips making the non-branded option more attractive. In some cases it is actually cheaper for the patient to pay the retail cost of a store branded monitor and test strips.
2. Rising Unemployment and a tough economy. With unemployment rates approaching 10% nationally many patients have not only lost their jobs but their insurance. Additionally patients with diabetes are no different than anyone else as they watch every dollar they spend.
3. No quality or performance gap. In the past there was a clear quality and performance gap between the branded and non-branded monitors. This is no longer the case as non-branded monitoring systems now match the branded offering in terms of both quality and performance. Patients can now find non-branded monitoring systems that offer alternate site testing, fast test results and no-coding.
4. Retailers make more money with their own brands. Looking for strategies that differentiate themselves from the competition retailers, who earn higher margins on their store branded systems, have begun to actively promote their store branded offerings. Besides making more money on the product, the store-branded system more closely binds the consumer to the retailer. Keep in mind the patient with diabetes is the most coveted consumer a retailer can have generating nearly $4,500 per year in revenue.
5. Pricing pressure from all sides. Retailers aren’t the only ones who are looking for lower cost, higher margin systems. As Diabetic Investor has been reporting for some time BGM companies are facing increasing price pressure. Unlike companies like Home Diagnostics (NASDAQ:HDIX) and AgaMatrix, LifeScan- A unit of Johnson and Johnson (NYSE:JNJ), Roche, Bayer and Abbott (NYSE:ABT) all carry higher SG&A costs making it more difficult to compete on price. It’s no accident that every member of the big four has recently trimmed their sales teams and more cuts are on the horizon.
One bright spot for the branded products that came out of the report was; “In personal care categories, branded manufacturers have successfully differentiated themselves in the minds of shoppers, which has made it difficult for retailers to successfully penetrate these categories with private label.” Diabetic Investor suspects it’s only a matter of time before retailers, who are now more aggressively promoting their store brands, will narrow this gap.
The fact of the matter when it comes to the BGM market is something Diabetic Investor has been saying for years, this is no longer a medical device market and has fully transformed into a consumer product, commodity market. As we have seen with the recent earnings reports from the Big Four, these are tough times for branded systems. The good news for companies like LifeScan and Bayer is their competition in the branded space is doing a great job of running their companies into the ground. Abbott is in serious danger of becoming a non-factor in the branded space while Roche continues to struggle to come up with a clear strategy.
It won’t be long before another Diabetic Investor prediction to come true as the Big Four will soon be the little Three, or perhaps the Big Two.
