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
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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.
Manufacturers of store brand products include: large national brand manufacturers utilizing their expertise and excess plant capacity to supply store brands; small manufacturers that specialize in particular products or processes and concentrate on producing store brands almost exclusively (these companies are often owned by corporations that produce national brands); major retailers and wholesalers that own their own manufacturing facilities and provide store brand products for themselves; and regional brand manufacturers that produce private label products for specific markets.
Despite owning or licensing 65 brands, 53 percent of Dean Foods' fresh dairy sales are private label.
St. Louis-based Ralcorp Holdings Inc. is a leading supplier of store brand food products and attributes its success to "high, consistent quality, the breadth of various product lines and very competitive pricing."
Another giant is Omaha-based ConAgra Foods. On May 24, CEO Gary Rodkin told attendees at the Citi Global Consumer Conference in New York that he'd like to see ConAgra become a "top-tier" operating company in five years by leveraging core adjacencies, growing internationally and becoming "the fastest-growing private label business."
He stressed the company primarily will remain a branded business, but by moving the portfolio toward private label, it will be positioned in some categories with greater growth opportunities. Asked to elaborate, Rodkin referenced the company's November 2011 acquisition of National Pretzel Co. "When we bought the National Pretzel Co. -- which is by far the biggest player on the private label side of the pretzel category -- it wasn't so that we could have a cheaper version of Rold Gold pretzels. The real reason we bought it is because of their technology they developed, which some of you may have had -- peanut butter filled pretzels, which you can find at a number of retailers like Trader Joe's or Costco.
"And that brand -- that piece of the business -- is on fire because it's true value and it's got good margins. And when we looked at that and said, 'Wow, not only could we expand that business with our scale sales force and our customer connections, but our R&D capabilities can do all kinds of things with that.' So, if you take that and apply that same discipline across all the acquisitions that we're making in private label, that's what really gets us excited about it, not the fact that we'll be the lowest price on the shelf."
Retailer proximity to consumers helps them to develop new product categories. Some pursue product categories neglected by food processors -- fair trade, organics, environmental and animal welfare. And although private label innovations may not be radical, they definitely generate value. One should not overlook the fact that most large retailers have significant product development and marketing departments. Retailers integrated backward into the supply chain can now perform activities that were previously carried out almost exclusively by food processors.
The number of new products introduced into the market varies depending on the sector and the part of the country. Perception is that the recent economic crisis reduced the number of new product introductions. Both retailers and processors are less willing to take risks primarily for three reasons: profitability is low, which leaves little financial scope for innovation; large retail chains have reduced the number of SKUs in order to survive the crisis; and there are no groundbreaking innovations in the food industry.
Private label challenges to brands
Research shows a strong correlation between private label sales and current macroeconomic conditions. Higher-than-average unemployment rates and low consumer confidence scores tend to drive private label sales up. As neither of these indices is expected to improve markedly in the near term, private label sales should remain strong.
Improved consumer sentiment concerning the quality of private label products also argues for continued strong growth -- and indicates that private label brands should be able to retain gains made during the recession even as the economy improves. A Nielsen online survey conducted in the third quarter of 2010 found that 60 percent of respondents purchased more private label brands through the recession, and that 94 percent of those respondents will continue to purchase private label products even after the economy improves.
Brand companies invest in R&D in order to be more innovative and, therefore, to maintain their market share and margins. In the past, smaller rival processors were not strong enough to be threats. But now private labels are eroding those advantages.
Some practices are contributing to a decline in innovation by brands: the delisting of a large number of SKUs at short notice affects sales, profitability and investment; brand marketers are cautious about discussing coming new product innovations with retailers for they can beat them to the market with the help of another private label supplier (such as Ralcorp or ConAgra); Nielsen data shows that private label products often have more shelf space and more SKUs than is warranted on the basis of their turnover; and information shared by brands about their strategic plans can be used by retailers to promote their store brands.
While national brands work hard at differentiating themselves, private label competition is becoming savvier with respect to brand building and much better at developing private label names that rival the best national brand names.
Private label brands face challenges too
Seemingly despite many advantages over brands, private labels can hit a brick wall where copyrights, trademarks, patents and intellectual property rights are concerned.
Rumors swirled more than a year ago that TreeHouse Foods had developed a generic coffee pod for the popular Keurig single-serve coffee makers. But it never was unveiled to the market, apparently because there were enough patents to protect Green Mountain Coffee's K-Cup design. However, those patents reportedly are set to expire in September, which should open the floodgates for private label alternatives.
Copycatting (or copycat packaging) refers to selling private label products with packaging similar to that of a rival brand. That may induce consumers to buy the private label product either by mistake or by (rightly or wrongly) assuming that the copycat label has the same reputation as the branded product. Some private labelers try hard to fool consumers into believing the product is produced by the branded manufacturer.
But, intellectual property law provides branded manufacturers with tools to limit copycat packaging. Regardless of the efficiency of the current litigation circuit, where such matters are largely settled, the question is whether producers can actually invoke their rights if they find themselves in a dependent position.
Businesses that produce both leading brands and private labels may be reluctant to stand up for their brand out of fear of consequences on the private label contract. And brands may be reluctant to sue a retailer that is a major customer. In consequence, intellectual property rights may be insufficient to protect branded products against their copycats, in particular private labels.
Private label penetration is concentrated in a relatively narrow band of categories and consumers, according to Nielsen. The top 50 private label categories account for 69 percent of private label sales, compared to 48 percent of sales for top brands, and heavy private label users account for almost 62 percent of private label sales. Private label brands need to find ways to increase sales in categories like pasta sauces, candies, frozen pizzas and other products where they traditionally have not fared well while retaining and growing their strong performance in categories such as cheese, frozen chicken and snacks.
Rising commodity prices also present a significant challenge for private label. Certain segments are affected more severely than others. Consumers tend to be less price sensitive about staples such as bread and milk, but will become increasingly selective in other categories as prices increase. For private label vendors in those categories where price increases are not a good option, it becomes increasingly important to find ways to reduce costs while still maintaining margins.
Many companies try to reduce packaging costs. Others reduce the quantity of product per package instead of increasing prices, as consumers have demonstrated they are more sensitive to increases in price than they are to decreases in quantity. Companies pursuing this strategy try to make changes in ways that are less perceptible to customers; for example, by keeping the height and width of the package the same, but changing the depth so that the packages' profile on the shelf remains similar.
Interestingly, the Internet may be one of the best weapons held by brands. Branded marketers have been leaders in using e-commerce and social media to strengthen their ties with their consumers, pitch products interactively and conduct market research to gain added insights into their markets.
Branded products' edge on the Internet may be of particular concern when demographics are considered. Younger consumers already tend to be more brand conscious, and are among those most effectively targeted through online strategies. Private label brands will need to work to differentiate themselves through strategies that connect with the passions of this generation, such as expanding ethnic food offerings and developing "green" strategies, such as reduced packaging and other eco-friendly production and distribution programs.
Similarly, private label brands need to retain and grow their relatively stronger position with baby boomers by ensuring that their products reflect the changing health needs in this market as it ages.
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