Thanks to the lousy economy, home cooking is where it's at today. Maybe that's one reason PL Buyer’s 2009 "Hot List: Foods" includes a record 146 entries - an increase of more than 100 percent over last year.
Collection agencies, pawn shops and bankruptcy lawyers probably have all the work they can handle right now, but few other businesses can boast of any significant growth these days. The private label industry is one very big exception.
After several years of sluggish growth, store brands grabbed a record 17.1 percent of all consumer packaged goods (CPG) dollar sales in 2008, an increase of almost a whole share point vs. the previous year, according to a year-end report by Chicago-based market research firm Information Resources Inc. (IRI). However, the gains were driven primarily by expanded sales of private label foods and beverages. In both the frozen foods and fresh/perishable departments, for example, store brand dollar share jumped 1.2 points from 2007 to 2008 to reach 18.0 percent and 31.1 percent, respectively. And in center store, private label share expanded half a point to reach 13.6 percent. Of course, much of the credit for store brands’ success over the past year goes to the poor economy.
With less money to spend on non-essentials, “A lot of people are cooking for themselves at home rather than eating out in restaurants,” says Dan Raftery, president of Antioch, Ill.-based Raftery Resource Network. “But you also have a lot of shoppers switching from national brands to less expensive private labels. So there are really two drivers.”
But that’s only part of the story.
At the same time cash-strapped consumers are tightening their belts, food prices have gone through the roof. By the end of the third quarter of 2008, IRI reports, food and beverage prices at retail were a whopping 8.5 percent higher than the same period a year earlier, prompting even those not impacted by the economic downturn to consider less-expensive store brand alternatives. The good news is retailers were ready for them.
In an effort to protect margins and profitability, “many large retailers such as Wal-Mart, Safeway, Loblaws and others have invested hundreds of millions of dollars to revamp and expand their private label offerings,” says Doron Levy, president of Toronto-based Captus Business Consulting. “It’s often hard to tell the house brand from the name brand in many categories. … Private label has become a serious contender.”
The Perfect Storm
According to Levy, “The weak economy, rising prices and recent improvements in many retailers’ store brand programs have combined to create a ‘perfect storm’ for private label growth,” which is clearly reflected by the size of this year’s Private Label Foods Hot List.
Made up of food and beverage categories with at least $10 million in annual sales with dollar sales in U.S. food, drug and mass merchandise outlets that jumped at least 10 percent over the 52 weeks ending Jan. 25, 2009, the 2009 Hot List includes a record 146 entries - an increase of more than 100 percent over last year. Although much of the growth can be attributed to price increases on the private label side (Hot List categories averaged a 9.0 percent jump in price per unit vs. the previous year), 59 of the 146 categories also posted unit sales gains in excess of 10 percent.
Perhaps because so many consumers are new to store brands (the “switchers”), “Private label doesn’t seem to be as negatively impacted by price increases [as national brands],” Raftery says. No matter what the price - or the jump in price - he explains, store brands still cost less than their national brand counterparts, offering penny-pinching consumers a less expensive way to continue buying their favorite foods and beverages.
Not surprisingly, private label tended to gain ground in categories in which overall prices (national brand and private label) increased the most. In fact, of the 11 food and beverage items that appeared on IRI’s list of the 20 segments (among the top 100) that posted the largest price increases over the 52 weeks ending Nov. 30, 2008, 10 appeared in this year’s Hot List in one form or another - often more than once. They include pasta, margarine/spreads/butter, shortening and oil, mayonnaise, natural cheese, rice, fresh bread and rolls, processed cheese, coffee and vegetables.
But there is a limit to how much consumers will pay - even for less-expensive private label alternatives. When prices rise too high, shoppers will cut back on certain items, a behavior that’s reflected by the handful of Hot List categories that - despite double-digit dollar sales gains - actually posted unit sales losses: noodles, margarine/spreads/butter blends, natural string cheese, sugar substitutes, refrigerated bagels/bialys, evaporated/condensed milk, English muffins, dry mac & cheese mixes and fresh bread. In all of those segments, increases in price per unit were much higher than the 9.0 percent registered by the Hot List as a whole - from a low of 11.5 percent in the dry mac & cheese mixes category to a high of 25.6 percent in the noodles category.
The good news is that private label gained share points in all of the categories in which unit sales declined, suggesting that national brand sales were down even more. In fact, private label padded its share in all but three Hot List categories (refrigerated grated cheese, ice pop novelties and frozen apple juice concentrate), adding two or more share points in a whopping 55 of them.
The Rich Get Richer
Interestingly, some of the most significant share gains came in categories in which private label penetration is already high. In fact, 10 of the 11 categories that gained four or more share points boast dollar shares well over the 17.1 percent private label average, including cooking and salad oils (43.8 percent), canned/bottled carrots (61.1 percent), nutritional snacks/trail mixes (38.8 percent), egg substitutes (23.3 percent), natural cheese slices (36.2 percent), shelf-stable grated cheese (31.1 percent), “all other” processed cheese (30.5 percent), natural shredded cheese (50.5 percent), canned and bottled peaches (29.3 percent) and canned/bottled mixed fruit (27.8 percent). But according to Sue Viamari, editor of IRI’s Times & Trends newsletter, strong growth in already well-established private label categories is no coincidence.
“A lot of the [best-selling] private label products are commodity-like, with little differentiation between brands,” she explains, pointing to categories such as cheese, vegetables, flour, dry pasta, etc. When the economy went south in early 2008, prompting even non-users of store brands to give them a try, it only makes sense that they would “test the private label waters” in those kinds of categories. Although they might not have been ready to sample store brand soda or canned soup, they were willing to take a risk on basics such as shortening, kernel popcorn, tomato paste and powdered milk, helping solidify private label’s leadership position in those segments.
“The driving factor is whether the national brands are able to offer a point of difference - something that the private label alternative doesn’t,” Viamari explains. “If the store brand is essentially the same but costs less, there’s no reason for consumers to pay more.”
Despite its dominance among commodity products, private label also made significant inroads in many categories once believed to be impenetrable. Although the gains came off small bases in most cases, among the more surprising additions to this year’s Hot List were canned and bottled tea, single-serve frozen dinners/entrees, baby food/snacks, frozen pizza, potato chips and barbecue sauce, to name a few. What’s behind the move into categories long thought closed to store brands?
“People are spending less,” Levy explains. To keep profits steady, “Retailers have to make more on each individual transaction. And the only way for them to increase margins is through private label. So, if they’ve already got a private label alternative in a particular category, they’re going to merchandise it aggressively. And if they don’t, they’re going to call their buyer and find one. It’s all about the push for higher margins in categories normally dominated by national or regional brands,” he adds.
But simply putting a new private label product on the shelves doesn’t necessarily mean consumers will buy it.
“True,” Levy says. “But I really believe that today’s consumers are much more willing to try house brands in categories with a weak private label presence. The hunt for value is on, and it’s really dictating shopper behavior.”
Eating In Gains Momentum
The Hot List says a lot about how Americans are eating these days. For example, the switch from dining out to dining in on (semi-) home-cooked fare is reflected in the high number of convenience-oriented frozen foods on the list - single-serve frozen dinners/entrees, processed frozen chicken/chicken substitutes, frozen pizza, frozen breakfast entrees, frozen sweet goods, frozen waffles, frozen appetizers/snack rolls, frozen fresh baked bread/rolls/biscuits and more.
“Yes, consumers are eating at home more often,” Raftery says, “but they still have a need for convenience, which is one of the main reasons they ate out so often in the past. Frozen foods meet the need for convenience but allow them to save money by eating at home.”
A variety of value-added non-frozen Hot List foods serve much the same purpose: potato side dishes, refrigerated pasta/noodles, refrigerated sauce/gravy/marinade, fresh-cut salad, breakfast/cereal/snack bars, prepared pudding, refrigerated prepared salad/fruit/coleslaw, shelf-stable toaster pastries/tarts, refrigerated dinners/entrees and more.
For those consumers already eating at home and looking for ways to cut back further, “from-scratch” cooking seems to be making a comeback, suggested by the large number of common meal ingredients on this year’s list - cooking and salad oils, dry rice, spaghetti/macaroni/pasta, pancake/French toast/waffle mixes, “all other” beans, noodles, dried beans/grains, tomato paste, meat sauce/marinade/glaze, breadcrumbs, refrigerated uncooked meats, spices/seasonings, etc. Home baking also seems to be on the rise, given the appearance of categories such as flour, shortening, pie/pastry filling, cooking/baking nuts, chips/baking chocolate/cocoa, frozen pie/pastry shells, baking powder/soda, cake/cupcake/pie mixes and coconut.
Evidence also exists that certain consumers are trading down to less-expensive proteins. For example, canned meat/meat spreads, canned lunch meats and canned tuna all made the Hot List for the first time this year.
At the other end of the spectrum, the Hot List is home to a fair number of higher-priced better-for-you categories that reflect consumers’ continued interest in healthful eating - no matter the cost: refrigerated flavored spreads (e.g., hummus), refrigerated kefir/milk substitutes/soy milk, nutritional snacks/trail mixes, egg substitutes, sunflower/pumpkin seeds, shelf-stable bottled tomato/vegetable juice cocktail, sugar substitutes, rice cakes/popcorn cakes, olive oil and “other” dried fruit.
New Look for Home-Cooked
Despite the rise in at-home cooking, the appearance of certain categories on this year’s Hot List suggests consumers are unwilling to give up the restaurant fare they’ve grown accustomed to over the years. But instead of ordering out for pizza and hot wings or hitting the drive-through for an Egg McMuffin, they’re preparing restaurant favorites at home, hence the growth of categories such as refrigerated pizza crust/dough, tomato sauce, natural shredded cheese, frozen pizza, frozen appetizers/snack rolls, and frozen breakfast entrees.
But consumers aren’t just eating at home more often, they’re also entertaining there. So instead of heading to the stadium to watch the big game or to the movies to see the newest release, they’re inviting friends over to catch something on TV, leading to a spike in sales of a wide range of snack-type categories, including potato chips, refrigerated dips, “all other” crackers, “other” salted snacks, cheese spreads/balls, snack nuts, microwave popcorn, pretzels, tortilla/tostada chips and salsa, as well as the aforementioned frozen pizza and frozen appetizers/snack rolls.
“It’s interesting to see those types of categories on the Hot List,” says Raftery, noting that many have been controlled by national brands for years. Whether candy, potato chips or ice cream (all of which made this year’s list), “When consumers decide to really indulge, they usually forget about the budget and opt for their favorite national brand product, regardless of the cost.”
But, Raftery continues, the appearance of some of these categories on the Hot List suggests that’s no longer the case.
“The implication is that consumers like what they taste,” he says. “The quality is such that they’re sticking with the store brand after the initial purchase rather than just trying it once and then returning to the national brand.”
Levy adds: “There’s been a huge shift in the way private label categories are structured. It’s not about having a ‘me-too’ alternative to the leading national brand ketchup or pancake syrup. …. It’s about quality and differentiation - offering products that don’t necessarily have a national brand equivalent.”
How can retailers use the Hot List to strengthen their private label food and beverage programs? Although it might be tempting to add a store brand offering in every hot-selling category listed, that’s not always the best approach. A recent IRI report notes that new product experimentation is at an all-time low, as consumers stick with the tried and true. As a result, line extensions might make more sense right now than completely new products. Another important factor to consider is category size.
“Obviously, retailers need to offer more TLC to faster-moving, bigger-volume categories,” Levy says, pointing to the big guns on this year’s list - fresh bread ($1.7 billion), natural shredded cheese ($1.3 billion), natural cheese chunks ($1.0 billion), ice cream ($1.0 billion), snack nuts ($598.0 million), cooking and salad oils ($507.1 million), fresh-cut salad ($450.7 million), processed cheese slices ($384.2 million), refrigerated uncooked meats ($349.9 million) and natural cheese slices ($344.7 million).
“The bigger the category, the more depth you can offer,” Levy explains. “That’s how you eat your competitors’ market share. More real estate equals more facings equals more sales.”
However, Levy continues, “You can’t ignore margin opportunities in some of the smaller, slower categories. You may only sell one or two jars of nutmeg per month, but it helps the bottom line if they’re under your house label.”
So don’t discount lower-volume categories such as refrigerated flavored spreads, refrigerated pasta/noodles, refrigerated non-sliced lunchmeat, sugar substitutes, ice pop novelties and frozen tortellini/tortelloni, all of which carry higher-than-average retail prices and the promise of good penny profits.
“This is an opportune time for private label to shine,” Levy says. “This buying environment is perfect to roll out new lines and fill categories with higher margin private label. I think we will see big numbers in next year’s Hot List as well, as more and more grocers jump on the private label bandwagon.”
But Viamari doesn’t think it’ll be that easy.
“I expect [national brand] manufacturers to try to undo private label gains over the past year through increased differentiation. … The battle will rage on.” PLB
SIDEBAR: Mintel Adjusts Category Forecasts
Market research firm Mintel International Group Ltd., Chicago, said it reviewed and reforecast its last two years of research reports to account for stronger-than anticipated growth in several food and beverage categories because of the recession. Among Mintel’s findings (overall, not strictly private label):
• Bread, originally forecast to grow 2.1 percent in 2008, has grown 8.0 percent.
• Sweet spreads, initially expected to increase by 12.0 percent in 2008, have gone up 26.0 percent.
• Frozen meals, originally predicted to decline by 0.3 percent, increased by 4.5 percent.
• Side dishes, initially estimated to grow 2.3 percent in 2008, grew more than 5 percent.
• Coffee, originally forecast to grow 2.4 percent, grew 6.0 percent.
“As consumers spend less and stay in more, certain food markets are benefitting,” said Bill Patterson, senior analyst at Mintel. “These recession-proof, or rather recession-fueled, industries are destined to do well throughout the economic downturn, but it will be interesting to track their sales after the nation recovers.”