Private Label Buyer

Future Bright In Private Label Perishables

December 20, 2012

The private label arena is not so private anymore. With more retailers leveraging store brands as they seek to increase margins and differentiate their offerings from those of competitors, private label selections are becoming increasingly prominent in an expanding number of outlets.

The NPD Group Inc., a Port Washington, N.Y.-based market research firm, meanwhile, reports that the number of consumers using private label foods and beverages continues to increase.

Private label’s share of household servings hit 27 percent in 2011, up from just 18 percent in 2000, the NPD Group notes.

Part of the increase is resulting from shoppers seeking less-expensive alternatives in a stagnant economy. But improving food taste and texture also are attracting more buyers.

In its "The Evolution of Private Label — Does Brand Name Really Matter?" report, The NPD Group notes that two-thirds of adults say store-brand quality is much better today than it was five years ago.

And while private label use is growing, the opportunity for even stronger expansion exists as store brand name awareness and identification remains low.

Twenty-five percent of shoppers, for instance, are unable to identify the top-selling store brand as a store brand, The NPD Group reports.

And less than 25 percent of adults in 2012 say they intend to purchase more private label foods compared to a year ago, down from 34 percent in 2009.

Consumers’ loyalty to store brands is strongest in categories in which the selections are mostly used as ingredients, such as butter.

Yet, the quality of private label perishables will continue to strengthen and products will increasingly match the national brands in terms of packaging, formulation, marketing and brand value, says Mike Paglia, senior analyst at Kantar Retail, a Cambridge, Mass.-based retail analysis and consulting firm.

“Private-label is getting much more sophisticated and really becoming its own brand,” he states. “It’s an evolution that has been taking shape over the last decade and more retailers are setting the bar — in which branded suppliers have to compete against — higher.”

Indeed, some major chains are leveraging a variety of store brands that are positioned for different food categories and shopper segments.

Pleasanton, Calif.-based Safeway Inc., which operates about 1,700 stores in the U.S. and Canada under the Safeway, Vons, Pavilions, Dominick’s, Genuardi’s, Randalls, Tom Thumb and Carrs banners, has about a dozen brands.

They include: Lucerne dairy products; Open Nature natural foods; Eating Right health-oriented selections; Primo Taglia premium meats and cheeses; Waterfront Bistro seafood; O Organics organic selections; Safeway Farms fresh produce and meat; Rancher’s Reserve premium beef; Safeway Select premium foods; and Signature Café deli and foodservice items.

Safeway reports that its strategy is to differentiate its offerings with high-quality private-label perishables.

The retailer notes that its store brand prices also are generally lower than those of comparable products from national brands and revenues of some corporate brands are especially strong.

Open Nature, for instance, which was launched in the fourth quarter of 2010, generated more than $100 million in sales in 2011.

The Kroger Co., Cincinnati, Ohio, also is heavily leveraging store brands.

Kroger, which operates more than 2,400 supermarkets under such banners as Kroger, Dillons, Fry’s, Gerbes, QFC, Pay Less Super Markets, Owen’s, King Soopers, Scott’s, Baker’s, City Market, Jay C Food Stores, Ralphs and Smith’s, reports that its corporate brands generated 35 percent of unit grocery sales in its fiscal 2011 fourth quarter.

The company notes that it manufactures 40 percent of its corporate brand products, “which gives us margin and speed-to-market advantage.”

Store brands include Private Selection, which Kroger classifies as its “best quality” brand and encompasses more than 1,000 items including gourmet pizzas, ice cream, deli meats and cheeses.

The “Banner Brands,” which carry the store name, represent the “better” tier and generate the majority of store sales; and the Value brand represents the “good” tier and is designed to appeal to price-sensitive shoppers.

Kroger reports that store brands generate strong profit margins with the Banner Brands growing 8 percent in 2011 and Private Selection delivering a nearly 5-percent sales increase.

 Banner Brand products launched last year include Greek yogurt, while Private Selection was expanded to include gourmet premium appetizers and desserts.

Kroger notes that its vision is to “build lifetime loyal customers with our exclusive, preferred brands.”

And that can be accomplished in part by enhanced quality and selections.

“Retailers are investing more money each year into improving the recipes, tastes and nutritional attributes of their private label items,” Paglia says. “Many over the last few years also have been hiring folks from the supplier and manufacturing communities to develop their in-house private label programs. They are bringing the manufacturing mindset in-house and it is being used to develop formulations as well as branding and marketing.”

In addition to the greater margins from store brands, retailers with strong private label programs also have the advantage of being able to situate products in the most prominent merchandising spaces and can more easily discontinue offering underperforming national brands, he notes.

“Many manufacturers lack a private label defense strategy because up until the last couple of years they didn’t have to think about store brands in a competitive sense,” Paglia says. “But because private label often functions as well as any other brand, it is becoming more important for manufacturers to treat it as any other product they compete against.”

While private label perishables are indeed increasing in popularity and generating greater revenues, many national suppliers still have operational advantages.

The manufacturers, Paglia says, often have more experience and resources that enable them to better deal with such issues as marketing, branding and understanding the right pricing and formulations.

“Retailers have to play catch-up in that regard,” he says. “But they have been closing the gap significantly, particularly because some have aggressively been hiring former CPG folks to grow their private label programs.”

And Paglia predicts that private label’s share of perishables sales will continue to increase over the next few years.

“It probably won’t get as high as in Europe, but it will grow,” he states.

Francisco Ridruello, senior food analyst for Euromonitor International, a London-based market research firm, says the dollar share for private label packaged food is about 25 percent in Western Europe, 16 percent in North America, and approximately 3 percent in the Middle East and Africa regions.

He notes that private label also is important to retailers as it gives them full control over the supply chain, including determining how much inventory their suppliers must produce.

And by allocating most of their private label production and packaging to a handful of suppliers, retailers are able to cut development costs because of greater economies of scale.

Ridruello predicts that more stores will be devoting additional shelf space to their private brands over the next few years at the expense of supplier brands.

In addition, private label selections will increasingly include additional premium offerings, he states.

“National brands manufacturers will face greater challenges if private-label selections get more sophisticated,” Ridruello adds. “They will have to stay one step ahead and it will be more difficult to have their products carried in the limited retail shelf space.”

And while private label merchandisers have been benefiting from consumers seeking lower-priced alternatives during the recession, they also are likely to retain many of those shoppers as the economy improves, analysts say.

 That is because greater product quality is resulting in eating experiences that are equal to — or exceed — those of the national brands and is changing shoppers’ perceptions of store brands.

Rabobank Group, a Netherlands-based financial services company, reports that retailer brand sales grew 14 percent at the height of the 2008 recession, compared to 3 percent for national brands.

Yet, since 2010, the growth in retail brand sales has stayed 2 percent to 3 percent ahead of national brands.

As a result, national brand suppliers also face the challenge of differentiating their offerings.

 “The national suppliers will have to say, ‘we offer something else that is worth paying for,’ Ridruello states. “Only brands that demonstrate value to consumers will be able to survive.”