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Private Label’s Coming Price Showdown

Will private label prices dip in November before taking their seasonal big rise in December, or will retailers again try to exercise some pricing muscle when it really counts?

November 6, 2013
Trans

For the four weeks ending September 8, 2013, the PLBuyer Index climbed to 101.6, up from last month’s rating of 99.7 (a score of 100.0 translates as a flat market). Overall, private label’s share of revenue has remained essentially flat, holding steady at 17.4 percent of total store revenue for both 2012 and 2013. Revenue was up 2.0 percent for national brands, but was up 2.2 percent for private brands. Overall prices increased by 1.6 percent vs. the same period last year, but private label made up a greater share of the increase, increasing by 2.0 percent vs. 1.5 percent for the national brands. Private label prices were 19.0 percent lower than national brands. Private label unit sales were up a mere 0.2 percent vs. the same period last year, while national brand unit sales rose 0.5 percent.

Both private label and national brands raised prices during the period, but private brands were able to capture a greater price increase than national brands—without as much of an impact on unit sales. So the rise of the PLBuyerIndex from 99.7 to 101.6 was driven primarily by private label’s larger price increase. Private label has done slightly better in revenue share compared to last year.

Private label revenue improvements have continued uneven gains across categories. The biggest category revenue movers were Bakery and Deli; both saw private label revenue growth greater than 6 percent vs. last year. Over the past 4 weeks compared to the same period last year, private label revenue growth for these two categories was greater than 12 percent. Bakery and Deli grew unit sales during the period at a faster rate than national brands, and private label Bakery grew unit sales, while overall unit sales fell in the category.

This is the second month in a row that Deli private label increased prices by $0.30 or more vs. the same period a year ago. General Merchandise private label achieved its unit sales increase by giving ground on price. Private label prices in the category were $0.24 lower than the 2012 period, while total store prices decreased by $0.01.

Private label made the biggest price increases in Non-Edible, Deli and Health and Beauty Care (HBC). These three categories saw unit prices rise by $0.08 or more vs. the same period last year—larger price increases than those brought by national brands. Deli private label prices were up by $0.31 in the period vs. a total store price increase of $0.11.

Private label prices for Non-Edible, Deli, and HBC were 18.3 percent lower than national brands during the 4-week period, a nice improvement over the 18.9 percent price differential in 2012. This improvement helped sustain the overall gain in private label share of revenue.

 

The Big Picture

There have been some interesting moves regarding private label pricing under the covers of the PLBuyer Index, contributing to both the faltering index over the summer months, as well as its recent comeback. And these moves are priming the index for its most-important challenge yet: fourth quarter 2013.

At the current 101.6, the PLBuyer Index for September reveals that private label’s share of revenue has improved during the 52-week rolling period that ended September 8, 2013 vs. the same period ending in September 2012. This has come primarily from price increases in private label that national brands—relative to the price differential that exists between private label and national brands—have not been able to match. Private label merchandise has been doing this all summer, but the resulting drop-off in unit sales has been significant enough for private label to end up giving back some share of revenue. In other words, the price increases weren’t large enough to offset the revenue loss through lower unit sales— at least over the summer.

However, in September that changed. Private label prices increased yet again, and unit volume still fell as a result—but not by nearly enough to wipe out the revenue gains that have come from higher pricing (see the “PL Monthly Price Differential vs. Unit Share, Year-Over-Year Difference (Basis Points)” chart).

In the four-week period ending February 24, 2013, private label merchandise increased prices by 48 basis points over the period ending February 26, 2012. At the same time, private label unit sales also increased by 27 basis points when comparing the same two periods. In the four-week period ending June 16, 2013, private label prices increased by 75 basis points vs. the year-ago period. However, unit sales decreased by 9 basis points over the same comparison period (see the “Monthly Average Prices, PL vs. Total Store” chart).

To keep all of this in perspective, private label prices are still not at parity to national brands. For the 52-week rolling comparison, the price differential began at 19.4 percent less than national brands in February, and is sitting at 18.9 percent below national brands in the 52-week period ending in September.

And pricing does not happen in a vacuum. As private label pricing strategies are revealed, national brands respond, and vice versa. There is also a degree of seasonality involved in average prices throughout the calendar year, and both national brands and private label march to relatively similar cadences (see the “Monthly Average Prices, PL vs. Total Store” chart).

Average prices across both private label and national brands (total store) have taken on four inflection points throughout the three years that we have available to examine. The first inflection point occurs right at the beginning of the calendar year. Prices end on a high note during the last four-week period of the year, but start the new year on a low note. They also dip at the second inflection point in the period ending in April, and dip again in August, before taking something of a rollercoaster ride at the tail end of November and the beginning of December—a sharp dip that includes Thanksgiving weekend in the data, before a big rise for the period that typically includes the bulk of the winter holidays.

For the most part, private label average prices have tracked closely against total store, albeit always with that price differential as the gap. However, in summer of 2013, that began to change.

 

Testing the Waters?

In 2012, the difference between average private label prices and national brands was at its greatest over the summer—bottoming out at a -20.0 percent price difference in the four-week period ending in June and at a -20.1 percent difference in the four-week period ending in July (see the “PL Monthly Price Differential vs. Unit Share 2012–2013” chart).

However, while 2013 monthly average prices followed a similar pattern vs. 2012, in the first half of the year, average private label prices broke from the pattern in June and July—in fact, narrowing the price difference vs. national brands in both June and July vs. the current low point of the year, in the four-week period ending in May.

Most fascinating of all: While unit sales did drop as a result of these price increases that private label products were able to take on average against national brands, the resulting drop in private label unit share was approximately one-tenth of 1 percent. This translates into literally millions of units sold at an aggregate level, but it also works out to tens of millions of dollars in incremental revenue because of the narrowing price gap.

What explains private label’s resiliency—the industry’s ability to challenge national brands with stronger prices and still maintain their near-parity in share of revenue? Three major factors stand out:

• Private label’s greater focus on quality. Private label brands are moving “upscale” by going after product attributes that feature quality over lower price, for example, organic or gluten-free. These attributes can command a higher price over standard products in many categories, and also appeal to less price-sensitive customers. As retailers provide more private label depth in these categories, they’re able to flex their pricing power muscles a little more strongly—and the results have factored into private label’s success at driving higher prices over the last year.

• Private label’s greater focus on branding for lifestyle. Aside from targeting specific attributes that denote greater quality and appeal to less price-sensitive consumers, private label merchandise has also been undergoing a transformation in branding, sometimes to the point where it’s difficult to tell if a product is “private label” or “branded.” This investment in branding and appealing to lifestyle, as opposed to an exclusive focus on value, lets private label to take a stronger position on price. If the branding’s right, pricing closer to national brands can often become a must-do to avoid creating a perception of lesser quality among shoppers. Sometimes, if you don’t price specific types of private brands strongly enough, you create an impression of “cheapness” that turns off lifestyle-oriented shoppers.

• Private label’s carve-out strategy. One of the more fascinating approaches to private label is a niche approach to new products. Private label brands don’t need to be “billion dollar brands” or No. 1 or No. 2 in their categories in order gain profit and success. So retailers have started identifying underserved niches in their customer base and positioning products that meet those niche needs. Sometimes this is through flavors or line extensions that national manufacturers can’t justify, sometimes this is through package size options, and sometimes these are product categories where the customer base just isn’t large enough to attract national brand attention (allergen-free products, for example). These niche products, by their definition, don’t face a lot of national brand competition, so retailers can price these products with a lot more freedom than when a national brand with national marketing support has a direct competitor on the shelf.

 

The Crucial 4th Quarter

All of these private label trends lead us to the calendar year fourth quarter—what turns out to be a very important quarter for most grocery retailers. Every retail vertical has its “holiday period”—for jewelers, for example, it tends to be Valentine’s Day. For party stores, it’s Halloween. For grocery retailers in the United States, you would think it might be Thanksgiving. However, it appears that sales surge in the last month of the year for grocers almost as much as they do for fashion-focused retailers or mass merchandisers.

This means that private label is headed for its first real test in the next quarter. For the last two years, private label prices have taken a slight dip in the period ending the first week of October, and also in the period ending right after Thanksgiving, before rising sharply in the last four weeks of the year. This last price increase, unlike many others throughout the year, is also accompanied by a sharp rise in units sold (see the “PL Monthly Average Prices vs. Unit Volumes 2011–2013” chart).

Private label prices are coming into this final quarter having successfully avoided last year’s summer dip in prices—which leads to two big questions to consider as we enter this crucial quarter of the year:

• Will private label prices dip in November before taking the big rise in December, or will retailers again try to exercise some pricing muscle when it really counts? In other words, were retailers testing the waters over the summer as a practice run for their Q4 pricing strategy?

• Will unit volumes continue to be relatively unimpacted by the narrowing price differential between national brands and private label? In light of the three trends outlined above, retailers should be able to make some additional gains on price. However, if retailers aren’t hitting true to customer needs, then holding firm on price could backfire.

Only time will tell—and we’re excited at the opportunity to take a look at the results once the dust settles on yet another holiday season.


About Our Partners

About IRI

IRI (www.iriworldwide.com) is a leader in delivering powerful market and shopper information, predictive analysis and the foresight that leads to action. We go beyond the data to ignite extraordinary growth for our clients in the CPG, retail and over-the-counter healthcare industries by pinpointing what matters andilluminating how it can impact their businesses across sales and marketing.

About Retail Systems Research

Retail Systems Research (www.retailsystemsresearch.com) is the only research company run by retailers for the retail industry. RSR provides insight into business and technology challenges facing the retail industry ecosystem, and thought leadership and advice on navigating these challenges for specific companies and the industry at large. Collectively, RSR’s analysts have nearly 75 years of experience as retailers, spanning grocery, fashion, specialty and restaurant/hospitality. Our backgrounds encompass store operations and workforce management, supply chain, merchandising, marketing, and IT. We work with retailers and solution providers large and small. Our philosophy is simple: your success in the market is our success.

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