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Supermarkets Buy into 33 percent Store Brand Margins, FMI Says

November 17, 2010
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Private label products have become a major force in today’s supermarkets, one that stores are likely to keep pushing to distinguish themselves from their competitors, says the just-released Food Marketing Institute’s (FMI) report “The Food Retailing Industry Speaks.”

Private label products have become a major force in today’s supermarkets, one stores are likely to keep pushing to distinguish themselves from their competitors, says the just-released Food Marketing Institute’s (FMI) report “The Food Retailing Industry Speaks.”
 
A store brand will never be found on competitors’ shelves, yet it is able today to compete with national brands on image and meet value-shopper needs. Retailers believe private label loyalty fosters store loyalty and that store-loyal shoppers are more likely to purchase private brands, the report’s retailer survey reveals.
 
 “Shoppers’ overwhelming focus on price and value has led to fierce price competition among food retailers,” says Leslie G. Sarasin, FMI President and Chief Executive Officer. “As a result, supermarkets are focused on trying to distinguish themselves from the competition by fine tuning their private label strategies, SKU reduction and price differentiation.”
 
During the past five years, annual private label sales increased 34 percent to $55.5 billion in the U.S. supermarket segment, says the annual state-of-the-industry review and a virtual compendium of supermarket private label-related statistics.
 
More than 80 percent of grocery retailers intend to grow private label from its present near 10 percent of total items in stores and average near 16 percent of total sales, the report finds.
 
Moreover, retailers report the average gross margins on store brands, across categories, was nearly 33 percent in 2009, with a median of 35 percent. For national brands, margin averages 25.6 percent. Finally, retailers say they’re growing private label shelf space and promotions.
 
Given private label’s higher margins, FMI says it behooves retailers to broaden the appeal of store brands beyond simple price considerations. Many retailers and manufacturers are aggressively building their capabilities as developers and marketers of private brands. Rather than product emulation of national brands, they have moved to product innovation of their own, particularly in the area of health and wellness. By combining popular health claims and healthy product attributes with private brand products, retailers can put up impressive growth numbers in traditional and emerging areas.
 
Compared with 2009, about seven in 10 retailers have already increased display space and shelf space for their private-brand offerings in 2010. About the same proportion also increased the number of sales promotions surrounding private label, the FMI survey reports. At the same time, significantly fewer retailers allocated a greater percentage of their advertising budget to the promotion of private brands. For the most part, retailers kept the advertising budgets the same.
 
Overall, the FMI study indicates supermarket sales grew a meager 0.12 percent in 2009, and same-store sales decreased 0.82 percent, illustrating the complex and challenging marketplace in which food retailers operate every day. When adjusted for inflation, the industry lost ground for the second year in a row.
 

Data for the FMI annual review are based on surveys of 76 food retailers operating 24,075 stores, in addition to filings with the Securities and Exchange Commission, financial data from an additional 2,000 independent operators, information from the U.S. Bureau of Labor Statistics and the U.S. Census Bureau. The analysis is also based on other FMI research, including 2010 U.S. Grocery Shopper Trends and Annual Financial Review 2009.

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