Analyst: Let's start with the number everybody quotes. Private label gross margin against national brand gross margin, in your categories, what was the real spread?
Expert: On the slide it was about a thousand basis points. Call it 34, 35 percent on own brand against 24, 25 on the branded equivalent. Blended center store. Moved around a lot by category. And that thousand points got read out in every steering meeting for five years and it's probably the most misleading number in the business.
Analyst: Misleading how?
Expert: Because reported branded gross margin doesn't capture most of what the brand actually pays you. Off-invoice allowances hit cost, fine, those are in there. But scan-downs, bill-backs, ad allowances, display fees, slotting on new items, the year-end volume rebate — a lot of that never touched the category P&L. It went to a vendor income line that sat with finance. Different owner, different meeting. So the merchant's margin report is comparing a fully loaded own brand cost against a branded cost with a third of the economics stripped out.
Analyst: How big is that in points of cost?
Expert: Center store, six to eleven points. Paper and cleaning at the top of that. Beverage much lower, because the price is basically set at the truck. Don't hold me to a decimal.
Analyst: Before you go further — how do you know that? A supply chain director doesn't normally see vendor income line by line.
Expert: I sat on the trade fund review. Quarterly. Sourcing, finance, the category leads. We went through accrual versus claimed, by vendor, and I had to sign off the sourcing side of it. That's how I know. And what surprised me in that room wasn't the size of it —
Analyst: Go on.
Expert: — it was how much of it never got claimed at all. Different conversation.
Analyst: So the thousand basis points is really four or five hundred?
Expert: Hang on. Worse than that, because the other side of the ledger doesn't get counted either. When you buy a brand you're renting their QA, their R&D, their recall liability, their consumer affairs line. On own brand you own all of it. At peak our own brand team was 180 people. Sorry, 180 is after we folded packaging in. Before that it was more like 140, 145. Either way it's headcount, not an allocation game.
Analyst: Did anyone load it back properly?
Expert: Not until year four.
Analyst: And?
Expert: Finance built a fully loaded own brand P&L, back half of that year I think, and it was not a popular document. The chief merchant asked whether we had to write it down.
Analyst: I want the number. Both directions, loaded.
Expert: You'll be disappointed.
Analyst: Try me.
Expert: I'll give it to you. But it changed how I thought about every decision we'd made before it, so know what it does to the thesis.