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Hot Shots

May 20, 2010
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Made up of food and beverage categories that saw dollar sales across food, drug and mass merchandise outlets (excluding Walmart) expand 10 percent or more during the 52 weeks ending Jan. 24, the 2010 Private Label Hot List actually includes fewer categories than last year’s version (126 vs. 146). This marks the first time in recent memory the list actually contracted from year to year - despite the fact that private label unit share across outlets hit an all-time-high of 23 percent. What happened?

Through much of 2008 and early 2009, food prices were rising faster than they had in decades, landing a record number of categories with inflated dollar sales on 2009’s Hot List, reports Sue Viamari, editor of Chicago-based SymphonyIRI Group Inc.’s Times & Trends newsletter.

“When total CPG prices rose, private label rose even more sharply. Particularly during periods of inflation,” she explains, “private label has an advantage. ... Retailers can afford to raise prices yet still offer consumers savings vs. national brands,” helping them close price gaps that had become too wide, boost margins and still win share points.

During the last quarter of 2009, however, the United States entered a deflationary period that saw store brand prices fall even faster than overall prices. Retailers used their private labels to position themselves as low-cost leaders, negating some of the gains posted by store brands earlier in the year. In fact, 20 percent of the categories on this year’s Hot List actually saw a reduction in average price per unit from 2008 to 2009.

But according to Viamari, fourth-quarter deflation does not deserve all the blame for a smaller-than-expected 2010 Hot List. Many Americans simply are getting by with less.

“Consumers have adopted very conservative shopping and consumption patterns over the course of the recession,” she explains. “In general, consumers are trying to make products last longer and are more selective about what is ‘necessary’ vs. ‘nice to have.’”

In fact, the February 2010 issue of Times & Trends revealed that total consumer packaged good (CPG) unit sales decreased 1.9 percent from 2008 to 2009, although dollar sales edged up 0.4 percent as a result of price inflation. So while store brand sales did increase from 2008 to 2009, across-the-board cuts in spending kept private label growth in check.

Recession Helps Fuel Growth

Although the 2010 Hot List is a little smaller than last year’s compilation, 126 private label categories with double-digit gains still represent a noteworthy achievement. Clearly, says Jon Hauptman, a partner with Barrington, Ill.-based Willard Bishop, the poor economy spurred some of the store brand holdouts to finally give private label a try.

“Many shoppers found these products to be appealing, cost-saving alternatives to national brands,” Hauptman explains, adding that he expects “smart shopping” strategies to stick post-recession, suggesting a bright future for store brands as well.

But Hauptman gives some of the credit for private label’s performance over the past year to the emergence of second- or economy-tier private label programs, which enjoyed some of the strongest store brand gains over the past year or so.

Not only do such products allow customers to maximize their grocery spend, “They’re a great defense against extreme-value formats such as supercenters, limited-assortment stores and dollar stores,” he explains. “Retailers are finding that expanding their assortments of economy private label is a great way to enhance price image without lowering prices.”

Other factors behind private label’s success over the past year are the expansion of store brand assortments and SKU rationalization, which combined to give private label a bigger piece of the grocery pie.

“While SKU rationalization activities at many retailers started on the non-foods side of the store, these activities [have started to extend] to the rest of the store,” Hauptman reports. “Overall, I think SKU rationalization will have a positive impact on private label,” he adds. “It will force retailers to eliminate slower-moving, undifferentiated brands and SKUs, thereby providing more space for top brands and private label. ‘De-cluttering’ the shelf via SKU rationalization will also help shoppers find private label options more easily.”

But retailers must be careful not to overdo it. Yes, shoppers want a simpler, streamlined shopping experience, Viamari says.

“At the same time, though, consumers are looking for selection,” she says. “So it’s a delicate balance.”

The impact of SKU rationalization on private label sales is best reflected by those 2010 Hot List categories that saw the biggest increases in dollar share from year to year, including single-serve prepared salads (+10.7 share points), frozen cheesecakes (+8.0 points), ice pop novelties (+6.7 points), nutritional snacks/trail mixes (+5.9 points), refrigerated side dishes (+5.5 points), refrigerated pizza/pizza kits (+5.3 points), canned meat/meat spreads (+5.1 points), natural string cheese (+4.1 points), frozen raw shrimp (+4.0 points) and shelf-stable bottled “other” fruit juice (+3.8 points).

Interestingly, three of the 10 categories with the highest share gains also landed on the list of categories in which average price per unit increased the most from year to year, including canned meat/meat spreads (+25.2 percent), baked beans (+18.8 percent), canned salmon (+18.6 percent), ready-to-serve broth (+17.4 percent), frozen cheesecakes (+16.9 percent), baby food/snacks (+16.7 percent), frozen side dishes (+16.2 percent), “all other” beans (+13.9 percent), single-serve prepared salads (+12.4 percent) and canned/bottled green beans (+11.3 percent). Although the 2010 Hot List does not reflect price increases on the national brand side, private label prices often rise and fall along with their national brand counterparts, suggesting that some consumers might have made the switch to store brands when they saw branded prices rise above an acceptable level.

Growth in High- and Low-Share Categories

Although strong dollar sales gains in categories in which store brand shares are relatively low to start with are no surprise, the 2010 Hot List includes only 36 categories with single-digit dollar shares. But the appearance of categories such as canned and bottled tea (2.8 percent), baby food/snacks (2.2 percent), barbecue sauce (8.4 percent), potato chips (7.2 percent), single-serve frozen dinners/entrees (2.2 percent), low-calorie soft drinks (3.5 percent) and novelty non-chocolate candy (5.1 percent) on this year’s list is significant because many of these highly differentiated, heavily marketed national-brand-dominated segments once were thought largely closed to store brands.

According to Doron Levy, president of Toronto-based Captus Business Consulting, consumers still reeling from the effects of the recession really focused on value last year - so much so, they were willing to switch to store brands in categories that normally are dominated by national or regional brands.

In fact, a February 2010 survey by GfK Custom Research North America for the New York-based Private Label Manufacturers Association  reveals that 43 percent of shoppers reported passing up a familiar national brand in favor of a private label alternative in a category in which they usually opted for the former, up from 35 percent in June 2009. But retailers are doing their part to help consumers make that choice.

“Because of tightening margins, major chains are realizing the benefit of an expanded house brand selection,” Levy explains.

He calls private label’s movement into less-obvious categories a matter of survival.

Despite gains by private label categories with low shares, a whopping 45 entries on this year’s Hot List boast dollar shares in excess of 20 percent - well above private label’s 17.7 percent average across categories. Leading the pack are refrigerated cakes-no snack/coffee cakes (80.3 percent), canned/bottled carrots (63.5 percent), white granulated sugar (59.9 percent), shelf-stable honey (54.2 percent), single-serve prepared salads (53.5 percent), frozen raw shrimp (52.8 percent), coconut (50.2 percent), refrigerated prepared salad/fruit/coleslaw (48.2 percent), nutritional snacks/trail mixes (47.1 percent) and brown/powdered/flavored sugar (46.7 percent).

“In some of these categories, only private label is offered [in certain stores],” Levy says. “So to some degree, SKU rationalization helped drive growth in the house brand.”

But retailers don’t deserve all the credit for those categories’ strong performance over the past year. According to Viamari, consumers new to private label generally start by purchasing low-differentiation, commodity-type products (sugar, vinegar, kernel popcorn, etc.) for which store brand quality already is well-established. This practice boosts sales in low-risk categories, where shares are high to begin with. Then, as they become more comfortable, consumers branch out into other, more differentiated private label products.

Consumer Trends Play a Key Role

Although pricing and share certainly played a role in determining which categories made this year’s Hot List, many of the entries reflect changes in consumer buying habits. For example, consumers forced to cut back on meals prepared away from home are dining in much more frequently. But they are just as busy and “cooking challenged” as ever, creating increased demand for quick, easy-to-prepare fare, especially on the frozen side. In fact, a recent article in The Wall Street Journal said frozen food sales over the past year expanded more than four times the rate of total food sales, as retailers added better-quality options to their frozen food assortments.

As a result, SymphonyIRI reports, private label added almost a whole point to its share of frozen food unit sales across outlets (20.4 percent), thanks to strong gains in categories such as frozen side dishes, frozen breakfast entrees, frozen fish/seafood, frozen pizza, frozen plain potatoes/fries/hash browns and frozen fresh-baked bread/roll/biscuits.

Similar advances were posted by convenience-oriented refrigerated categories (refrigerated pizza/pizza kits, refrigerated appetizers/snack rolls, refrigerated side dishes, refrigerated pasta/noodles, fresh-cut salad, refrigerated sauce/gravy/marinade mixes, refrigerated prepared salad/fruit/coleslaw, etc.), which also benefited from a perception among consumers that they are “fresher” and/or closer to homemade than their frozen counterparts. In fact, SymphonyIRI says, the fresh/perishable department was the only one that actually posted a unit sales gain (+0.9 percent) over the past year, although dollar sales dipped 3.6 percent as a result of deflation. And private label added more than one point to its unit share of the department, which now stands at 34.2 percent, although its dollar share fell more than half a point to 31.1 percent.

Consumers looking to stretch their food budgets even further adopted more of a back-to-basics approach over the course of the recession, eschewing convenience products in favor of from-scratch cooking, which boosted sales of staple ingredients such as ready-to-serve broth, bouillon, tomato paste, ketchup, dry meat/seafood seasoning mixes, dry soup, mayonnaise/sandwich spread, liquid gravy, spices/seasonings and bread crumbs, among others. In fact, SymphonyIRI reports, private label’s share of center-store unit sales edged up almost half a point to 20.6 percent.

The from-scratch trend also was evidenced by the large number of common baking ingredients on this year’s Hot List, including ready-to-use pie crust, chips/baking chocolate/cocoa, brown/powdered/flavored sugar, pie/pastry filling, cooking/baking nuts, white granulated sugar, frosting/frosting mixes, refrigerated cookie/brownie dough, pudding/pie filling/mousse mixes and baking powder/soda.

Although more consumers are cooking and eating from home, many also are entertaining there as well, creating a spike in sales of snack foods, desserts and other products that Viamari says offer “indulgence that doesn’t break the bank.” Top gainers include frozen cheesecakes, specialty nut/coconut candy, “other” salted snacks (no nuts), frozen sweet goods – no cheesecakes, potato chips, non-chocolate chewy candy, single-serve microwave popcorn, chocolate syrup/dessert toppings, plain mints, tortilla/tostada chips, cookies, doughnuts, frozen ice cream/ice milk desserts and cupcakes/brownies.

And then there’s the whole better-for-you trend, evidenced by the appearance of categories such as nutritional/intrinsic health value bars (this year’s top private label gainer), sugar substitutes, sunflower/pumpkin seeds, nutritional snacks/trail mixes, “other” dried fruit, refrigerated kefir/milk substitutes/soy milk, rice cakes/popcorn cakes and dried plums.

“Nutrition is now at the center of many consumers’ wellness strategies - and another way to save money,” Viamari says. “Consumers are using food to manage conditions from being overweight to high cholesterol and diabetes.”

The Takeaway

According to industry experts, retailers hoping to keep the private label momentum going can use the 2010 Hot List to identify categories in which their own-brand efforts fall short. Special attention should be paid to high dollar-volume categories (cookies, white granulated sugar, fresh-cut salad, refrigerated bacon, frozen plain potatoes/fries/hash browns, frozen pizza, processed frozen/refrigerated chicken/chicken substitutes, frozen fish/seafood, refrigerated prepared salad/fruit/coleslaw, potato chips and frozen raw shrimp), as well as those with the highest average price per unit (frozen ice cream/ice milk desserts, frozen raw shrimp, frozen cheesecakes, refrigerated cakes-no snack/coffee cakes, refrigerated appetizers/snack rolls, refrigerated pizza/pizza kits, frozen meat (no poultry), frozen sweet goods – no cheesecake, frozen fish/seafood and processed frozen/refrigerated chicken/chicken substitutes).

But they should not ignore smaller-volume categories, especially those in which store brand share is low, leaving plenty of room for additional growth. Private label opportunities also exist in high-share categories once thought to be saturated, evidenced by dollar and share gains in categories such as white granulated sugar, honey, canned/bottled corn and ice cream cones.

Whatever the category, “Private label manufacturers and retailers really need to continue to innovate,” Viamari says. “Marketers should be on the lookout for new technologies in their own categories and departments, as well as across the store. New ingredients, new packaging, etc., can be imported to allow for relatively quick and inexpensive innovation that offers differentiation.” Innovative new products - combined with the U.S. Department of Agriculture’s prediction that the Consumer Price Index for food will increase 1.5 to 2.5 percent in 2010 and GfK Custom Research’s finding that more than six in 10 consumers plan to buy more private label in the coming year - suggest a bright future for store brands.

“The next year will definitely be interesting to watch,” Viamari remarks. “In a handful of categories, we are seeing a bit of tapering in private label. ... as some consumers slowly migrate back to their ‘older, less frugal’ ways of shopping for and consuming packaged goods. But other habits are long-standing.” PLB

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