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First, one-pound cans shrank to 14.25 ounces. Now, the private label industry itself is undergoing a contraction. A report from Deloitte & Touche Corporate Finance predicts the private label food industry will implode by 2012, with a reduction from more than 1,500 companies today to 20 or fewer manufacturers with "any meaningful" market share. Although many in the industry doubt that figure, there is no doubt that there will be far fewer private label manufacturers a decade from now. It remains to be seen what impact the smaller number of suppliers will have on pricing, selection, product development, and innovation.
The contraction is being fueled by the retail consolidation that took place mostly in the late 1990s and by the growth of Wal-Mart as a food-retailing powerhouse, says Deloitte & Touche. "By working with fewer, but larger, manufacturers, food retailing mega-chains can leverage their purchasing power, logistics networks, merchandising programs, and their other investments and resources, while reducing costs through streamlined, simplified transactions," says Brad Akason, a managing director in Deloitte & Touche's Chicago office. "Also, as retailers become more national, they want vendors that can service their entire geographic reach with consistent products, packaging, and pricing, as well as efficiently provide many categories to each store."
Deloitte & Touche expects consolidation to begin in related categories first. "There will be consolidation within the manufacturers of cookies, the manufacturers of vinegar, etc.," says Dan Ruhl a managing director in Deloitte & Touche's Chicago office. "Then it will move over to the categories that are close to one another in the store."
The result will be a new breed of conglomerate. Deloitte & Touche cites Ralcorp Holdings, the St. Louis company that was once the private label breakfast cereal division of Ralston Purina, as an example. Within the last five years Ralcorp has branched out and acquired a host of other companies, including Cascade Cookie Co., Ripon Foods, and Sugar Kake Cookie, along with Martin Gillet & Co. and the Red Wing Co., two firms that make mayonnaise, salad dressing, jams, and jellies. Other Ralcorp buys were Nutcracker Brands, the leading private label supplier of snack nuts, and James P. Linette, which makes chocolate products.
"Ralcorp is clearly taking the lead in the expected consolidation, and it is only a matter of time before other manufacturers follow suit," says Akason.
Consolidation is also being driven by the uncertainty surrounding the stock market. "There has been a flight to quality, and the food industry, both branded and unbranded, is the place where investment is going right now," says Ruhl. "In times like this, first and foremost, food is very popular and access to capital is pretty good. Private label tends to excel in a down economy even more than the general food industry, so you've got an awful lot of interest. The private label businesses most attractive to investors are those categories that are growing faster than average. Within private label that includes organic, ethnic, and ready-to-eat meals."
"The private equity firms that are out there in food are hunting around for private label companies," Ruhl says, adding that representatives of several such firms were prowling the aisles of November's PLMA show in Chicago.
Officials at the Private Label Manufacturers Association, the New York-based trade organization, had no comment. But several suppliers were eager to express their views.
Tough on tomatoes
Consolidation has already hit some sectors of the private label industry hard. Take canned tomatoes, for example. "About two years ago Tri Valley Growers went out of business, and along with them about eight other small canners," says Cynthia Timmer, sales manager at Tip Top Canning Co., a fourth-generation, family-owned tomato processor in Tipp City, Ohio that generates about 90 percent of its sales from private label. "Right now there are probably only about nine private label tomato canners left in the entire country. It's an eroding business, and all of us left are still family-owned businesses. But a lot of the smaller guys don't have generations that want to take over, because it is a tough business and it is not high margin," she says.
"I think consolidation will continue, and within five years probably 25 to 50 percent of the manufacturers will either be out of business or merged with somebody else," says Bruce M. Spurlock, national sales & marketing manager for Mrs. Clark's Foods of Ankeny, Iowa. In 2002, Mrs. Clark's, which manufactures dressings, sauces, and juices, acquired Alljuice Food & Beverage Corp., a Hendersonville, N.C., maker of juices and drinks. "Manufacturers are going to get bigger and more efficient, and have more capacities and capabilities. Retailers will have better quality assurance and fewer manufacturers to talk to, which is a good thing for them because they don't want to deal with 50 companies," Spurlock says.
But as those companies disappear, so do jobs. "Only a few of us will be getting job offers," says one sales rep whose packaged goods company was recently acquired. "When companies are acquired like this, not everybody gets to keep their job, and there is a loss of talent."
Dog eat dog
Some expect consolidation to occur across all product categories, including pet food. "A couple of years ago Doane Pet Care [Brentwood, Tenn.] bought up a lot of different companies and they consolidated under Doane," says an executive of one leading private label pet food manufacturer. However, private label pet food sales continue to grow, even though the number of suppliers has noticeably declined. "Today private label pet foods are growing by leaps and bounds, while the branded is basically staying flat," the executive says.
A lot of that growth is coming because the larger firms are able to reduce margins by their sheer size and power, but that may come back to bite them further down the road. "If current trends and margins continue, there is not going to be a lot of room for innovation because nobody will have the money to invest in innovative products, concepts, and packaging," says Spurlock of Mrs. Clark's. "They are going to shrink the pie, and for the ultimate consumer I don't think that fewer is necessarily better."
Spurlock believes that globalism is also driving consolidation, as multinational retailers become the norm. "If you can't supply every corner of the U.S., Canada, or Mexico with a NAFTA brand, and you can't reach the E.U., Middle East, or Pacific Rim, then you won't be here five years from now," he predicts. "That doesn't mean you have to be all of those things, but you have to be moving in that direction, and at least at a minimum you have to align with your retailer."
Another problem is that small and mid-sized supermarket chains may be squeezed out of the process. "Smaller chains aren't able to commit to the same quantities as the larger chains, so there is the question if they will be able to offer up the same kinds of values at the same margins. Probably not," says Pat Turpin, managing director at USBX Advisory Services in Santa Monica, Calif. "To counteract that, some of them might belong to a co-op buying group. These co-op buying groups might try to cut their own deals with private label manufacturers. Co-op buying groups have been springing up right and left to do just that."
Turpin expects the private label industry to contract, but not to the extent predicted by Deloitte & Touche. "It is interesting that the private label industry is now beginning to attract a lot of private capital that wants to invest in and buy these private label manufacturers," he says.
Not everyone is predicting dire consequences for private label's smaller players. "Private label is going to continue to grow and survive, probably at the expense of the brands," says Jack Painter, director, sales & marketing at Archer Daniels Midland Co., Packaged Oils, Retail Division, in Decatur, Ill. "Will the suppliers who make private label diminish?" he asks. "As that business grows you may actually see more suppliers come in and try it, and I suspect a number of those will survive."
More competition is coming from branded manufacturers turning to private label to better utilize their plants during slow periods. That will hurt the smaller players.