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.