After a hiatus of a few years, I am again writing a monthly column for Food Processing and looking forward to it.
There are so many things that have changed since I stopped writing that I really don't know where to begin. But I would like to talk first about the emergence of private label. Over the past few years I've done a significant amount of research on private label brands and their development into major players in so many categories. It appears that some of the major branded companies are now making PL, which is a big change for many manufacturers because 20 years ago private label was an enemy.
ConAgra must agree with me. Its purchase of Ralcorp indicates that the branded business sees private-label as a strategic addition to the corporation. Ralcorp is a leading private label manufacturer in a variety of different categories. This is a very forward thinking strategy and in the long run it will lead to greater profitability for ConAgra. Hormel is another example of a company that has blended private-label products into its national brand marketing program.
On the other hand, companies like Campbell Soup have reported concern about private label penetration into their categories. A wire story headline said, "Campbell Soup investors fret over low-priced private label competitors." It went on to say Campbell has been battling lower-priced private-label soup competitors and companies that make other simple meals like frozen foods. Campbell had tried to counter that pressure with promotional spending and new products. Another headline said, "Check Out Line: General Mills' new Cheerios a hit, but private label bites." The same article points out that General Mills increased media spending 33 percent, yet its sales were flat.
I am not impugning brands in any way. Branded companies in my opinion will always be the backbone of food sales. Even in countries such as Switzerland with about 46 percent of food sales being private label, brands still dominate. The issue is not whether national brands or private label will dominate but rather will the inclusion of private label in branded companies lead to higher earnings.
There are at least two different dimensions to the inclusion of private label products into a branded company's product lineup. You don't need PlanetRetail.com to see the growth of the value-oriented retailer and the increase in the number of value-oriented shoppers. The branded company can either give up the value segment or try to lower prices to be more competitive in the value channel. Both of those are not very appealing alternatives.
Another alternative might be to create a lower price brand – say, under the ConAgra name. This of course can devalue the national brand, the real profit generator for the company, and so is difficult to execute properly.
ConAgra took a different approach. I believe that the ConAgra strategy has two huge benefits. First, in wake of greater retail concentration, it helps solidify the relationship between ConAgra and the retailers by supplying private label products. Second, it puts ConAgra PL products on the shelves without debasing its own national brands and without a fight to get just a little more shelf space (and paying for more shelf space).
However, I think in the long run the third benefit could be the biggest. Many branded companies have suffered through the last five years of recession. Consumers were doing everything possible to: stretch their budgets; to buy lower-priced products and to shop in value-oriented retailers. Branded companies that did not have a value-focused brand suffered. By having a private label brand, ConAgra should be able to smooth out the trough in earnings by watching its private label sales increase during recessions while its brands decline and vice versa.
Private label was once a dirty word in the world the brands. Today, depending on the category, private-label is a significant part of sales. Private-label products are making more persuasive claims on their labels, and their claims are focused more on changing consumer desires.
But be aware, retailers will be demanding more from PL suppliers and not just lower prices. The best retailers will be looking for innovation, unique products and flavors targeted to specific markets, and at an absolute minimum show national brand equivalency. I expect to see more national brand companies pursue strategies like ConAgra. I believe that the perceived differential between private label brands and national brands will get smaller; and private label will gain even greater retail concentration; and in some categories, private-label could be the dominant "brand."
In the future, my opinion is that branded companies will see private label not as a competitor but as part of a well-developed long-term strategy for success.
This article originally appeared in the June 2013 issue of Food Processing Magazine.