The Private World of Private Label Food Brands
Will the category's 'quality copy-cat' reputation hold up after the recession?
By Diane Toops, News and Trends Editor | 08/03/2012
Private label food brands are a $90 billion business accounting for 17.4 percent of retail food sales in the U.S., according to Nielsen Co. Over the past six years, while most food categories have been struggling, private labels have grown at a rate of 6 percent per year.
Most private label products continue to be sold under retailer brands but are produced by firms further up the supply chain. But these brands certainly are no longer confined to grocery stores. Walmart and Target have hugely increased their food sales, and much of their fare is under their store brands. "Drug store" chain Walgreen's renamed and expanded its offerings under the Nice! brand. Dollar and club stores offer new opportunities for growth.
Much of the optimism is based on the U.S. catching up with Europe's love of private label brands. Over there, private label accounts for 24.2 percent of retail food sales -- almost 7 percentage points better market penetration than in the U.S. If private label brand penetration reached that level in the U.S., sales would increase by 39 percent to $125 billion.
Many private label companies and contract manufacturers – as well as branded products manufacturers with significant private label business -- are betting on precisely that.
As distinguished from a brand bearing the name of a manufacturer or producer, private label products are brands owned or sponsored by a retailer or supplier and made by a contract manufacturer. Since manufacturers' brands have large advertising expenditures built into their cost, a retailer with a private label program should be able to buy the same products, presumably at a lower cost, and sell them at a lower price and/or at a better profit margin.
With more control over pricing, retailers are able to advantageously display their own brands for maximum impact. A grocery store can quickly reduce the price of its own private label brand in order to meet or beat a competing store's price. Or it can create a special point-of-purchase display and/or give its brand dominant shelf space and create customer loyalty reward programs in order to boost sales. It is the retailer who designs the manufacturing, packaging and marketing of the products to build on the relationship between the products and the store's customer base.
Source: Corvus Blue LLC Report
Retail chains of all sizes develop and market store brands in various ways. They may create a whole line of products around a particular feature -- such as Safeway's O Organics and Eating Right offerings, Kroger's Private Selection or Albertsons Wild Harvest organic lines. Dominick's/Safeway has Lucerne, Target has Archer Farms, Loblaw has President's Choice – a trailblazer some decades ago -- and Trader Joe's carries a variety of authentic ethnic products that appeal to millennials and more adventurous consumers.
In other cases, a majority of the store brand items in a chain may carry the same name -- such as Costco's Kirkland, Whole Foods' 365 Everyday Value products, and Walmart's Great Value and Marketside. Indeed, Walmart has devised standards to determine what is healthy and a new label, bright green with the slogan Great for You, now appears on its healthier options.
Many consumers believe they are actually buying a national brand rather than a private label, according to Mintel Group. While part of this perception is certainly due to clever packaging and well-crafted brand-building strategies, some of the credit clearly goes to the name, such as Archer Farms or President's Choice.
Some store brands have been able to position themselves as premium brands by mimicking the shape, packaging and labeling of national brands … or by bettering their packaging … or by getting premium display treatment from retailers.
Where's the innovation?
New product innovation is primarily left to brand leaders, who have the technological know-how and resources to sustain both R&D and the introduction of new products into the marketplace.
The general consensus is that private labels can play many roles in the market, but not that of innovator, largely because retailers do not invest in marketing as their brand counterparts do. They take little risk in introducing new products, do not appear to promote innovative product concepts from their suppliers, and partially or fully cover the risk and the information asymmetry of new product introduction by brands using (slotting) fees.
"We want to be a 'fast follower,' " executives at TreeHouse Foods, a $2 billion private label manufacturer, told us when we named the company our Processor of the Year in 2010. Whenever a national brand unveils a product innovation, TreeHouse wants to be able to copy it quickly for its retailer customers.
Private label share in convenience products such as fresh ready-to-eat meals is usually well above 90 percent, according to the Private Label Manufacturers Association (www.plma.com) -- a consequence of freshness requirements and the comparative advantage over processors in the complexity of logistics.