Special Report: Hot Stuff!

April 15, 2008
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As in years past, the non-foods Hot List is made up of categories with more than $10 million in annual sales that have posted double-digit dollar sales gains in U.S. food, drug and mass merchandise outlets over a 52-week period - all data are supplied by Chicago-based Information Resources Inc. (IRI). This year’s list, which consists of data ending on Jan. 27, 2008, includes a record 50 entries - six more than the 2007 register!

Although the increase isn’t as dramatic as last year’s - when the number of categories jumped from 29 to 44 after price increases kicked in following Hurricane Katrina -continued growth over the past 12 months suggests private label gains have more to do with growing consumer acceptance of store brand non-foods than across-the-board price increases. But the sluggish economy definitely played a key role in the performance of private label over the past year.

Although the United States isn’t technically in a recession (defined as two consecutive quarters of declining gross domestic product), no one can deny that times are tough.

“Our analyses have shown that private label share does, indeed, increase in recessions, but not necessarily during downturns,” reports Sheila McCusker, editor of Times & Trends, a newsletter produced by IRI. She adds, however, that the picture is muddled by price increases across many product categories, including staples such as milk and eggs. As consumers’ budgets get tighter, she continues, they often look for ways to save money in other parts of the store, especially among bigger-ticket non-foods.

So although the price of nasal strips, for example, didn’t jump significantly over the past year, shoppers looking to compensate for rising prices in other areas of the store might be more willing to purchase private label alternatives that can save them a couple of dollars instead of a few cents.

It’s no surprise, then, to see so many big-ticket items on this year’s non-foods Hot List. Although the average price of a Hot List non-food item is $6.36, many items cost considerably more, including anti-smoking/all other forms ($37.29); anti-smoking tablets ($31.23); hair-growth products ($23.32); humidifier/vaporizer/air purifier filters ($20.00); and facial anti-aging ($12.97). The latter products help illustrate the fact that, when money is tight, store brands can carve out a place for themselves even in categories once thought to be closed to private label.

"This trend proves that no category is impenetrable," McCusker says, adding that if the economy worsens or additional price increases are felt again this year, private label might make significant inroads in other high-ticket categories such as laundry detergent and over-the-counter medications.

Strong Growth off Small Bases

Analysts also expect store brands to continue to post strong gains in categories in which current private label penetration is low. This year, for example, store brand shares were in the single digits for 20 of the 50 categories on the list, including three in the top 10 - facial anti-aging (3.2 percent); dental accessories/tools (4.5 percent); and acne treatments (3.1 percent). And in more than half of the categories, private label penetration was less than the industry average of 16 percent.

“A lot of these are categories where retailers never had a private label presence before,” explains Pete Deeb, managing partner at Williamsburg, Va.-based Deeb MacDonald & Associates. “But consumer acceptance of private label is starting to transition from foods to non-foods, and retailers are beginning to take advantage of opportunities there.”

At the same time that they are entering into new non-food categories, many retailers - especially those in the drug and mass-merchandise channels - are carrying fewer national brands.

“And in smaller categories like shoe laces and disposable gloves,” Deeb adds, “retailers may well choose to carry just one national brand along with their private label.

Variety isn’t as important anymore,” he continues, “because brand loyalty has eroded so much over the past several years.”

This sort of brand erosion has affected those categories in which consumers would be hard-pressed to name a single national brand, let alone feel any loyalty to one - think pencils, potpourri/sachets and straws/swizzle sticks. As a result of this brand fickleness, some retailers have opted to offer only one brand: their own.

A decrease in the number of brands being offered at retail might explain why so many categories with already high private label shares registered such strong gains this year. Among those with shares in excess of 30 percent are tights (72.6 percent); disposable gloves (60.8 percent); cotton balls/cotton swabs (51.1 percent); anti-smoking, all other forms (44.3 percent); straws/swizzle sticks (40.3 percent); hand sanitizers (40.0 percent); household cleaning supply containers (38.6 percent); potpourri/sachets (37.8 percent); non-disposable gloves (35.8 percent); hair growth products (35.3 percent); shoe laces/accessories (32.7 percent); and sleeping aid tablets (30.4 percent).

In many cases, confirms Doron Levy, president of Toronto-based Captus Business Consulting, “It’s merchandising and shelf space that are impacting private label numbers more than anything. Retailers really do hold most of the cards. They don’t always realize how much control they have [over store brand penetration]. But as margins decrease in the brand name sector, it only makes sense for retailers to turn to private label to make up the profitability shortfall.”

Private Label Innovation

Private label’s success over the past year isn’t only the result of increased shelf space and a flagging economy. Many retailers also have developed unique, high-quality non-food products that speak to consumers’ needs.

“In skin care categories in particular, we’re seeing a lot of innovative private label lines that really resonate with consumers, especially in drug stores, many of which are attempting to position themselves as beauty care destinations,” McCusker reports. “Successful development of private label skin care may extend to other categories, such as cosmetics and hair care.”

She adds that those are two of the most notoriously difficult segments for store brands to crack.

Innovative new products on the national brand side also helped spur private label sales in a handful of categories, although store brand shares sometimes suffered. For example, Johnson & Johnson’s introduction of Rogaine Foam in the fall of 2006 brought renewed excitement to the entire hair-growth products category. As a result, store brand sales shot up 17.6 percent to reach more than $23.1 million, according to IRI. Not surprisingly, however, sales of Rogaine jumped even more - 30.4 percent - shifting 2.3 share points from private label’s side of the ledger to its own.

A similar scenario played out in the dandruff shampoo category, Levy notes, where branded leader Head and Shoulders revamped its entire line, adding several new formulations specially designed for different hair types. In that case, however, store brands actually outperformed the category as a whole, and a result, in part, of supply chain issues during the transition. These issues helped private label pad its share by 0.63 points, according to IRI data.

Interestingly, private label dandruff shampoo is one of only two categories to make the non-foods Hot List even though it had a loss in unit sales throughout the past 52 weeks. According to Levy, prices in the segment increased with the addition of new active ingredients and specialty formulations.

In the other Hot List category that posted a loss - potpourri/ sachets - retailers simply began offering a more upscale private label product; therefore, the category saw a dollar sale increase, but actually lost in unit sales.

Although price increases tied to rising fuel and commodity costs played a significant role, McCusker notes that IRI is seeing more development of premium private label. She cites the fact that dollar sales gains outpaced unit sales gains in 42 of the 50 non-foods Hot List categories.

“The trend is more pronounced in food and beverage, but [upscale store brands are] beginning to take hold in non-food categories as well, most notably in skin care,” she says.

Mirroring Branded Growth

In 33 of the 50 categories on this year’s non-foods Hot List, private label gained - and in a few cases, lost - less than two share points, suggesting that, in many cases, store brands simply mirrored national brand growth. Such categories include suntan lotion & oil, weight control/nutritional liquids/powders and dental accessories/tools. As a result, the Hot List tends to reflect what’s going on in the marketplace as a whole.

Because of private label’s tendency to mirror the national brands in many categories, it’s no surprise that products aimed at the graying baby boomer demographic have seen gains in private label. Some of the more “mature” products to experience gains in the non-foods category include muscle/body support devices, facial anti-aging, heat/ice packs, foot care devices, first aid-tape/bandages/gauze/cotton, hair growth products, external analgesic rubs, etc.

But these products aren’t only being targeted to boomers. They also appeal to the generation ahead of them.

“Because they’re often on fixed incomes, older consumers, in particular, are always looking for value pricing, especially when it comes to products they need to maintain a healthy lifestyle,” Levy explains. “So, [buying private label] is more of an economic decision for them.

“Most of these categories don’t have quality perception problems; i.e., consumers don’t think twice about picking up a private label versus the national brand. So it’s really all about price,” he adds.

The Take-Away

How can retail chains use the non-foods Hot List to pump up sales of their own private label non-foods?

“Retailers ought to scour the list for categories they don’t already participate in and do whatever’s necessary to make sure they’re getting their fair share,” says Dan Raftery, president of Antioch, Ill.-based Raftery Resource Network.

If they’re concerned about certain products’ staying power, he adds, they should start with the 24 categories making their second consecutive appearance on the list - or the eight making their third - heat/ice packs, baby formula-powder, hand sanitizers, facial cleansers, liquid body wash/all other soap, first-aid tape/ bandages/gauze/cotton, nasal spray/drops/inhalers and liquid laundry detergent.

“Those are the super-heated, really hot categories,” Raftery explains. “They haven’t flamed out after showing a huge spike [over the course of] one year. So if you’re not in them, those are the ones to get into first. And if you are, be sure you have all the right items.”

Another factor to consider when determining where to focus private label development efforts is category size. Although most categories on this year’s list are relatively small, a handful have eclipsed the $50 million mark, including first-aid tape/bandages/ gauze/cotton ($149.3 million); cotton balls/cotton swabs ($121.5 million); nasal spray/drops/ inhalers ($101.9 million); liquid laundry detergent ($88.7 million); suntan lotion & oil ($62.7 million); pet food, non-dog/cat ($62.3 million); tights ($59.8 million); cough/sore throat drops ($58.3 million); internal analgesic liquids ($58.0 million); liquid hand soap ($51.3 million). Note that three of the $50-million-plus categories also appear on the list of “three-peaters.”

Average price per unit represents another important consideration, Raftery says. For example, although retailers might not miss the 30 cents they could make on a pack of private label pencils or cough drops, they don’t want to give up the chance to pocket a couple of dollars every time they sell a package of Zinc air batteries, which sell for around $8.50, or humidifier/vaporizer/air purifier filters, which go for $20 a pop.

“These are the kinds of non-traditional categories retailers can very easily miss out on,” he explains. “But consumers are generally very receptive to private label in these segments.”

Given the current economic situation, McCusker adds, “The timing may be right for stepped-up private label marketing and product development.”

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