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Good News, Bad News

April 13, 2009
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According to PL Buyer's Hot List: Non-Foods, 2008 is perhaps best described in Dickensian terms: “It was the best of times; it was the worst of times.”

For the private label non-foods segment, 2008 is perhaps best described in Dickensian terms: “It was the best of times; it was the worst of times.” On the plus side, the recession helped boost private label dollar share across outlets almost a whole point to an all-time high 17.1 percent, according to a year-end report from Chicago-based market research firm Information Resources Inc. (IRI). The bad news? Non-food departments posted some of the year’s worst results.

Despite across-the-board price increases that drove a 3 percent jump in overall consumer packaged goods (CPG) dollar sales, IRI’s “Times & Trends: 2008 CPG Year in Review” indicates dollar sales of general merchandise slid 6.9 percent across formats over the 52 weeks ending Nov. 30, while sales of beauty/personal care products remained flat. Sales of health-care products - perhaps the least discretionary of all non-foods - edged up 1.9 percent, although unit sales declined by the same amount.

“General merchandise, in particular, and to a lesser degree, beauty/personal care and health care all fell victim to a reprioritization of CPG dollars,” reports “Times & Trends” editor Sue Viamari, who says consumers are redefining what’s “essential” and cutting back on or eliminating altogether items that no longer fit the bill. And that’s had a profound effect on this year’s Private Label Non-Foods Hot List.

Non-Food 'Essentials'

Made up of private label non-food categories with at least $10 million in annual sales across food, drug and mass merchandise outlets (excluding Wal-Mart) with dollar sales that expanded at least 10 percent over the 52 weeks ending Jan. 25, 2009, the most recent incarnation of the Private Label Non-Foods Hot List includes a record 54 categories - four more than last year. Although the 8 percent increase in the non-food list’s size year over year is respectable, it pales in comparison to the more than 100 percent increase in the Private Label Foods Hot List, which swelled from 72 categories last year to 146 this year. (See the Private Label Foods Hot List and a corresponding report in next month’s issue.) Why was the expansion for the Private Label Non-Foods Hot List not as dramatic?

It all goes back to consumers’ changing definition of what’s essential and what’s not. Clearly, food is essential, and more shoppers are turning to private label in an effort to stretch their food dollars further in the face of rising prices and a poor economy. The same thing is happening on the non-foods side, but only in those categories deemed “necessary.” So, while last year’s list was populated by categories such as shoe laces/accessories, hand and body lotion, rawhide dog chews, and perfumes and cologne, this year’s version has a much more utilitarian feel.

“There really aren’t too many non-essentials here,” confirms Dan Raftery, president of Antioch, Ill.-based Raftery Resource Network.

From toilet paper and dog food to blood pressure kits and tampons, the biggest gains were posted by private label non-foods considered by most to be necessities. In fact, Raftery points out, more than a third of all Non-Foods Hot List categories fall under the “health care” heading, underscoring consumer efforts to self-treat whenever possible in an attempt to limit medical expenditures.

As a result, IRI reports, private label enjoyed its most significant unit share gain in the health-care department, where store brand unit share edged up more than 1.5 points to reach 34.1 percent across outlets - even better than the 1-point share gain it posted in the frozen food department and well over the average private label gain (0.7 share points) across departments.

When Price Isn't Right

Also driving private label gains in the health-care arena, as well as in many other segments, are above-average price increases. An IRI analysis of the top 100 CPG categories found average prices increased 4.9 percent during the 52 weeks ending Dec. 7, 2008, versus the same period a year earlier. But four of the 10 categories with the highest price increases (all above 10 percent) were non-foods, and all four (or a subcategory that falls under them) made this year’s Private Label Non-Foods Hot List, including cold/allergy/sinus tablets, paper towels, dog food and skincare.

According to Raftery, private label prices in those categories (as well as in all but three of the remaining 50 Hot List categories) also went up over the past year. In fact, Hot List categories averaged a 10 percent increase in price per unit over the past year - well over the norm for all CPG. But for the most part, those increases paled in comparison to jumps in national brand retails, prompting cash-strapped consumers to make the switch to store brands.

For example, even though it represents a 13 percent jump, “It’s hard for consumers to register a 5-cent-per-unit increase in the price of, say, private label wet cat food,” especially when national brand prices are up two or three times as much, Raftery explains. As a result, “A lot of the private label price increases over the past year flew under the radar.”

But price increases weren’t the only driver behind categories that made this year’s Non-Foods Hot List. Many, including four of the top five dollar sales gainers overall, had significantly-higher-than-average prices to begin with - think blood pressure kits ($35.97), anti-smoking products ($35.06), humidifier/vaporizer/air purifier filters ($23.84), trash receptacles/waste baskets ($13.95), baby formula ($13.21), heat/ice packs ($9.41), muscle/body support devices ($8.67), dry dog food ($7.61), antacid tablets ($7.28), cold/allergy/sinus tablets ($6.22), etc. And, while not every consumer will jump at the chance to save 25 cents on a $1.29 tube of store brand lip balm, many shoppers will take the opportunity to save $5 or even $10 on private label anti-smoking tablets or baby formula.

On average, Viamari adds, private label products offer 30 percent savings over their national brand counterparts, although the gap varies greatly from department to department. “For example, private label health care products offer an average savings of 47 percent, and private label beauty/personal-care products offer a 64 percent savings,” she says. “Particularly in a recessionary economy, the impact of these price gaps is huge. So, it’s not just price point, per se, but also relative price point.”

PL Shares Expand

In years past, many categories that made the Private Label Non-Foods Hot List were simply mirroring across-the-board growth in “hot” categories, growing along with their national brand counterparts instead of taking sales away from them. This year, however, it’s a different story. In fact, store brands gained share in all but one of the 54 categories on the Hot List, adding 2 or more share points in 21 of them. Topping the list of dollar share gainers are: heat/ice packs (+11.3 share points), muscle/body support devices (+10.7 points), anti-smoking tablets (+9.2 points), antacid tablets (+9.1 points), hand sanitizers (+6.7 points), blood pressure kits (+6.4 points), baby electrolytes-RTD (+5.6 points), trash receptacles/waste baskets (+5.3 points), cold/allergy/sinus liquid/powder (+3.9 points) and color-safe bleach (+3.8 points).

Although one might expect to see strong growth in categories in which private label penetration is currently very low, nine of the 10 biggest share gainers already enjoy category dollar shares above - and in most cases, well above - the 17.1 percent private label average. In fact, 21 of the categories on this year’s list boast above-average dollar shares, suggesting something else is driving store brand gains. In many cases, say industry insiders, it’s the retailers themselves.

“Right now, the drive at store level is to take in as much margin as possible,” says Doron Levy, president of Toronto-based Captus Business Consulting. “As consumers cut back on purchases and overall sales decrease, retailers have to find ways to make more money per unit. And private label is the best way to do that.”

Although retailers have had some success entering categories traditionally closed to store brands - shampoo and conditioner, baby formula and liquid laundry detergent all made this year’s Hot List, though the gains came off of small bases - they seem to be more focused on maximizing private label sales in categories in which store brands already are well-established, either by adding additional store brand SKUs or delisting national brands that don’t bring anything unique to the table. The trend seems especially strong in categories in which little differentiation exists between brands to begin with, making it even easier for retailers to limit the number of choices and give private label a bigger piece of the pie.

“Private label does well in commodity-type categories where differentiation is low, like toilet tissue, wax paper and bleach,” Viamari explains. “Innovation by national brands is a key deterrent of private label gains. And in many [Private Label Hot List] categories, [national brand] innovation has not been strong.”

On the store brand side, however, innovation has picked up a bit, particularly in the surging healthcare department.

The Takeaway

In terms of total dollars, the top-grossing Non-Foods Hot List categories are toilet tissue ($664.8 million), cold/allergy/sinus tablets/packets ($607.0 million), antacid tablets ($238.7 million), alkaline batteries ($206.9 million), dry dog food ($192.5 million), aluminum foil ($189.2 million), cold/allergy/sinus liquid/powder ($129.8 million), liquid laundry detergent ($115.7 million), sanitary napkins/liners ($107.0 million) and mouthwash/dental rinse ($102.3 million). Because they combine two very desirable attributes - high dollar volume and strong growth - retailers tend to concentrate their private label efforts on them. But industry insiders urge caution.

Products such as cold medicine, batteries and antacids are no-brainers because they take up little space but carry big price tags. But toilet tissue? It retails for just $2.82 a package on average; margins are relatively low, and it requires a lot of shelf space both in the store and in the warehouse. Clearly, Raftery says, a strong private label presence is justified by the category’s high dollar volume, but retailers should be judicious in terms of space allocation. In fact, he continues, some of the best private label opportunities may be found among lower-volume Hot List categories in which not all retailers currently are competing. In categories such as hair accessories, home air fresheners and acne treatments, all of which brought in less than $15 million over the past year, store brand share currently languishes in the low single digits, leaving plenty of room for growth.

Regardless of total sales, Raftery says, “If it’s got a good average ring and good margins, there may be an opportunity for retailers to add a private label in some of these categories.”

In fact, he remarks, there might never be a better time for retailers to jump in.

Because they’re eating out less and dining in more, “Consumers are in stores - especially supermarkets - more often now than ever before, creating all kinds of incremental sales opportunities,” Raftery says. “It’s the classic, ‘While I’m here, I might as well pick up …’ kind of thing.”

But consumers can’t buy what’s not on the shelves, he stresses, so retailers really need to take a close look at their non-food offerings, particularly on the store brand side.

“With the recession expected to last much of 2009,” Viamari says, “private label is well-positioned to have a wonderful year.”

Even better is the news that gains made by store brands during an economic downturn typically become permanent, with sales remaining strong even after the economy improves. The challenge for retailers is to bring new customers into the private label fold, Viamari says.

“Right now, a small group of shoppers represent a large share of private label sales,” she maintains. “While retailers want to increase sales among current customers, capturing new shoppers is critical to continued success.” PLB

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