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There's a torrid love affair going on in the aisles—with private label, that is. Product introductions in new categories, improved quality, better margins, and the state of the economy are all helping to build private label market share to record levels. That's leaving national brand manufacturers feeling a bit forlorn.
Private label unit share reached 20.7 percent this year, an increase of nearly a full point since 1997. Dollar share rose from 15.4 percent to 16.2 percent over this same period. The surge in store brand popularity runs higher in some regions of the country than in others. Dollar share of private label products saw full share-point rises over the last year alone in Plains states, the Great Lakes regions, and California.
Once relegated to more mundane categories like canned peas and aluminum foil, private labels today are appearing on everything from salads and rotisserie chickens to wine and spirits. "All of the growth in store brands over the last 15 years has been in value-added categories, including premium, fresh foods, and housewares," says Brian Sharoff, president of the Private Label Manufacturers Association, the New York-based trade group that represents the industry.
"Private label is growing out of center store and is now a factor in peripheral departments," Sharoff says. "The growth is in areas like fresh fruits and vegetables, meat and fish, and in premium private label and gourmet products. Now we're seeing that the growth is going to be in categories like wine and spirits, because those are categories which don't have strong national brand orientation and at the same time have tremendous profit potential for the retailer."
Private label is still going strong in center store. "The retailers are the ones who determine which national brands survive on the shelf—thank you, category management—and they are delisting and eliminating those brands that don't carry their own weight," Sharoff says. "But the group that gets knocked out does not include the retailer's own brand."
Many find the current recession benefits store brands, as consumers look to pinch pennies where they can without giving up quality. "The recession is definitely having an impact on private label," says Jim Roth, senior customer development manager for Raskas Foods, Inc. in St. Louis. With more than 80 percent of the business, Raskas is by far the nation's largest supplier of private label cream cheese. "Over the past year private label is starting to significantly outpace the Kraft Philadelphia Brand," says Roth, adding that historically Kraft controlled about 62 percent of the cream cheese business, but it's now down to around 52 percent. "This year Kraft is off about 2 percent, while private label is up 2 percent," he says. "Cream cheese pricing is based on the commodity markets, but the difference between Kraft and private label is that when the commodities drop so does the private label price—Kraft doesn't. There is more aggressive pricing out there, and due to the economy people might be switching over to private label products."
"The recession timing was very, very interesting from the standpoint of 9/11," notes Dick Bordwell, v.p., sales, for Related Brands, the private label division at Parmalat Bakery Group, in Bolingbrook, Ill. "We saw a major increase in business after 9/11, all the way through the end of 2001. Fiscal 2002 started in January and it was almost like a new set of dynamics. We saw a renewed spending thrust by Nabisco. This year has been a struggle as much as last year was a boon. But as the year progresses, we're starting to see private label come back again."
"The most recent downturn in the economy has simply helped retailers to fuel what has been an ongoing interest and move into private label as part of their overall branding strategy," says Chris Fink, v.p. at Euro RSCG Meridian, the Westport, Conn.-based consulting firm.
PLMA's Sharoff begs to differ. "Recession and generics are not related to the growth of store brands," he emphatically states. "This is just a misconception that has lived on for two decades."
One thing everyone agrees on is that private label is becoming an increasingly complicated animal. "Retailers in all classes of trade are finding private label is a great way to differentiate their store—their brand—from other competing stores because it is something the consumer can only get there," says Fink. "Retailers are developing private label not to simply differentiate on price, but to offer a variety of quality features. It can be packaging or performance promises, or an indulgent product that offers some kind of feature and benefit the retailer believes is unique from the branded products available."
Still, strong national brands are key to the growth of the business. "Private label prospers when there is a good brand leader in the category, because it brings in more consumers to the category," says an official with one leading manufacturer of private label packaged goods.
The growth of mega-chains has been another boon to the private label business. "As the trend continues to fewer, larger retailers, then the opportunity increases for their differentiating based on private label," says Fink. "Look at Safeway versus some of the regional food companies. Here is a company that has the scale to economically make private label work. They are trying to have a consistent brand delivery, market to market, throughout the country. They are very aggressive with their private label, whereas a regional company may be less inclined because they don't have the scale to make it economically viable, or feel that competing on service or providing a good regional product representation may be smarter than trying to do their own brand."
One of those behind the growth of Safeway's private label program was Terry Lee, who served as v.p., corporate brands from 1996 to 2000. Last January, when Lee joined Albertsons in the same capacity, the Boise, Idaho-based chain said the appointment reflected its "intensive focus on the development and introduction of innovative private brand programs."
Burt Flickinger III, president of Strategic Resource Group, a New York City-based retail consultancy, calls the hiring of Lee "a strategic master stroke for Albertsons." At Safeway, he says, Lee was a key architect "of what's arguably the finest food and drug private label program in the U.S."
Flickinger notes that Lee rationalized a number of underperforming national brands out of Safeway's product mix, in many cases reducing categories to the two leading national brands and private label. He says Albertsons has always had a good private brand program and that Lee is moving it up to very good. Over time, Flickinger predicts, Lee will raise Albertsons' program to the level of great.
Ahold USA, another mega-chain placing a heavier emphasis on private label, is rolling out a new line of store-branded competitors to leading-brand carbonated soft drinks. The lineup features two varieties of cola: Rally, which the chain describes as having a classic all-American flavor, and Spin, with a "contemporary" taste. Other new offerings are Quist, which has a lemon-lime flavor; Ramp, with citrus flavor; and Dr. Bob, billed as an exciting flavor with a unique, vibrant aroma.
'A quality alternative'
Store logos, including Bi-Lo, Stop & Shop, and Giant, will appear above the private label brand names. "Our core flavors of about 30 SKUs are already set in the stores," says Barry F. Scher, v.p. of public affairs at Ahold USA in Chantilly, Va. "All of the other flavors, which is about 75 more SKUs, will roll out over the next three months. Our goal is having a total program in place in all Ahold USA stores by the first of the year."
Scher says Ahold has high hopes for the line, even though many supermarkets have cut back on private label soft drinks because Coca-Cola and Pepsi dominate the aisle and are very cutthroat with pricing. "Ahold wants to provide a quality alternative to customers that are looking for a private label product. By developing this Ahold USA-wide program, we feel we are developing some significant synergies among our operating companies and creating excitement in the marketplace for our customers," he says.
Some regional retailers are also doing outstanding jobs with private label. Fink cites Dorothy Lane Markets, Wegmans, and Schnucks as examples. "They have done so well figuring out the regional differences and then developing their own products and delivering them," he says. "Those products might be in prepared foods. A Wegmans prepared pizza might not be a private label product in the traditional sense, but it does compete against a frozen branded pizza," he says.
One of the first places smaller and regional chains seek to compete with private label is in the dairy case. "About 78 percent of dairy retailers have a store brand program, and about 62 percent of those say it includes premium brands," says Carol L. Christison, executive director of the International Dairy-Deli-Bakery Association in Madison, Wis. "Private label dairy is, for the most part, regional in nature. Many of these brands offer a larger number of options and at a very high quality. You can expect a new variety or line extension whenever a new food fad or flavor gains publicity."
"It's hard to differentiate between private label and national brand trends because they both steal ideas from the other. If it works, then everyone wants to be in on it," Christison says, citing the yogurt case as an example. "There's huge growth in the flavors being offered, the package sizes, the health benefits, and the crunch factor. There's plain yogurt, flavored yogurt, fruit-added yogurt, organic yogurt, probiotic yogurt, yogurt drinks, yogurt desserts, yogurt smoothies, tube yogurt, and cereal/grain crunchy yogurt. Then there's single servings, large containers, multi-packs, mini-packs, large economy packs, and we're still not done."
Even though retailers own their shelf space, they must often fit their private label products in around the national brands. "Private label is doing well in the paper category, but it is certainly affected by the strength of national brands," says Nick Marcalus, president and c.e.o. of Marcal Paper Mills in Elmwood Park, N.J. "National brands are very competitive, so that creates some lack of oxygen for private label. But that said, private label continues to grow in the paper category."
Organic hot button
It's the same story over in the cookie aisle. "Private label has always struggled for promotion and display volume, especially in the grocery segment," says Parmalat's Bordwell. "Commodity items, like two-pound creams, sugar wafers, saltines, and chocolate chips, sell well based upon price points, but a lot of other items in the segment, like fig bars and cheese crackers, need to be promoted and displayed or they get lost in the shuffle."
Bordwell contends that the cookie category suffers from a lack of true innovation. "We've got to find things as an industry to grow the category," he says. "We have customers who are looking for new ideas—things aimed at children, organics. We are getting more and more requests for organic products this year. Once it starts, you find more and more large customers looking for those types of products. This year's two hot buttons are what is new for children, and what do you have in organics."
An even hotter button is how private label products are sourced. Internet "reverse auctions," where a retailer will establish a bid and manufacturers vie to match it, have opened a Pandora's box. "It's a very sensitive issue," says Sharoff. "The retailers are looking for ways to reduce the cost of goods and have found an answer they like in the notion of going to auction. Manufacturers see it as a way to beat down the price, which it is, and that sometimes the winner of the auction is a company that may not in fact be able to make the goods at the price they bid, and perhaps not at the service level that they promised."
"Private label is becoming less a relationship between the manufacturer and the retailer as retailers move into Internet auctions for private label," says Marcalus. "It's not pervasive, but it is increasing, and it means that a supplier who has worked hard to develop a growth business in private label for the retailer may suddenly be at the crossroads of losing that business unless they are willing to bid the business at considerably less margin than what they might have enjoyed.
"There certainly is some benefit for the retailer, but it is a trapdoor as well. Private label success and profitability is oftentimes not just having a low cost. It is based on other factors. To what extent does a manufacturer support programs that build private label sales, and what is the ability of that manufacturer to service?" Marcalus asks.
Despite some obstacles, the road of private label may be paved with gold. "Private label seems to have a growth of a percentage point a year," says PLMA's Sharoff. "That is going to mean hundreds and hundreds of millions of dollars in profits for the retailers."
However, Flickinger cautions that retailers' own short-sightedness could leave them stuck on the side of the road. Except for Safeway and Kroger, he says, most supermarket chains are undermarketing their private brands, dropping money that used to go for marketing and advertising them into operating profit instead.
Making the proper investment in a private label program returns "a tremendous advantage" to retailers in terms of efficiencies, product cost, and customer loyalty, he says.