With lower price tags, high margins and a chance for uniqueness, more retailers are expanding their private label assortments.
By Richard Turcsik
Pinching pennies. Tightening their belts. Pulling shut the purse strings. With consumers doing whatever it takes these days to save a buck, what’s a retailer to do? Bet on the house—house brands, that is.
According to industry experts, private label sales are reaching record highs with no let up in sight. One study from London-based Planet Retail predicts they will reach $209 billion by 2014 and account for one in four grocery products sold in North America. For some retailers it is already that high, or even higher.
“The facts are pretty undisputable at this point,” says Joanna Gresham, food and beverage strategist, at Pavone, Inc., a food- and beverage-focused marketing agency based in Harrisburg, Pa., that counts Campbell soup, Hershey chocolate, Turkey Hill ice cream, Entenmann’s cakes, Utz potato chips and Yuengling beer among the brands it represents. “The rise of private label is here and it is expanding.
“Most of the manufacturers we work with and have spoken with are keeping an eye out. Certainly private label is in the forefront of their consideration as they are looking to market their products,” Gresham says, noting that unit sales are up 6.4% for private label, while national brands have declined 1.7%.
“Consumers are trying private brands more now due to the recession, yet studies indicate that they’ve become more brand loyal and have no plans to deviate from their new private label favorites,” says David Brown, director of retail sales at Allens, Inc., a Siloam Springs, Ark.-based manufacturer of branded and private label canned and frozen vegetables.
Brown says Allens has seen an increase in demand for both canned and frozen vegetables as more consumers are opting to dine in. “Consumers are looking for nutritious and quality meal options for their families at a lower price, which is why many turn to private label,” he says. “Eight out of 10 consumers say that store brands are as good as or better than national brands and nearly 20% of shoppers expect to buy more private label in the year ahead.”
Private label has been around since the dawn of retailing, but in the supermarket industry it got a big jumpstart during the 1978-79 recession, when skyrocketing inflation led to the development of black-and-white packaged generics—basic grocery items, usually far inferior to national and existing private label brands that sold at substantially lower retails.
“In this recession, the retailer, having realized from past experiences that cheaper prices were not going to be a solution for them or the consumer, went instead with expanding assortment, offering more private label products on the shelf, rather than simply finding cheaper private label and putting it on the shelf,” says Brian Sharoff, president of the New York-based Private Label Manufacturers Association. “Today, retailers are doing a much, much better job of protecting their own brands and advancing private label than what happened during the 1970s’ recession.”
Nixing corn syrup
As a result, retailers are wielding more power, with many chains dictating ingredient specifics of the products bearing their name.
“Ahold has announced that they are holding all of their store brands and all of their private label to consumer taste tests, and if they don’t perform as well or better than the national brands they will be reformulated or eliminated,” says Gresham, who participated in a test at the Giant Food store where she shops.
Tim Sullivan, director of product division, at Mad Will’s Food Co., an Auburn, Calif.-based manufacturer of upscale sauces, dressings and marinades, says many of his clients have given him a mandate: no high fructose corn syrup.
“They want to know if our products are Whole Foods compliant,” he says, referring to the natural food chain’s list of disapproved additives. “I’ve probably reformulated maybe a dozen or so products just in the past five months where the client’s original formula contained high fructose corn syrup. In the world of private label, that is just ringing loud and clear.”
Sullivan says retailers have also approached him seeking products made with local and regional ingredients. “They are interested in Michigan cherries,” he says. “Here in Northern California we have wonderful Mandarin orange growers, so we are doing some value-added Mandarin products for a private label partner of ours.” Mad Will’s has also found a local olive oil provider, where the entire crop is estate grown, made with 100% Arbequina olives and certified extra virgin by the California Olive Oil Council.
Emulate the nationals
Of course, the vast majority of private label is still remarkably similar to its name-brand counterpart. “Clearly we are an emulation of the national brand,” says John Sterling, vice president of marketing and category management, at Ralston Foods, a division of St. Louis-based Ralcorp Holdings, which specializes in private label ready-to-eat and hot cereals, along with cereal-based snacks. “On the one hand, we are trying to let the consumer know we are an alternative to the national brand, but most retailers are probably looking for their own feel in their packaging.”
Sterling says Ralston can create proprietary cereal formulas from scratch, but most retailers don’t go that route. “It’s a bigger challenge to do that, partly because the consumer does not have a reference point, which means you’ve got to put more money into consumer communication marketing. One of the reasons private label is so much more inexpensive is because you don’t have to do that,” Sterling says.
Today’s private label products are often of such high quality that they match the national brands, industry executives note. “You really do have products now that are indiscernible from the national brands,” says Andy Dratt, executive vice president at Imbibe, a private label beverage supplier based in Willamette, Ill.
Imbibe makes private label versions of Coke and Pepsi for Meijer stores, says Andrew Rashkow, president and CEO. “If you go into Meijer you’ll find a red [can] cola and a blue cola,” he says. “They understood that they did not want to punt on the Coke customer or the Pepsi customer, so they have Meijer Blue, which tastes an awful lot like Pepsi, and Meijer Red, which tastes an awful lot like Coke, and they do very well with both.”
Even private label pet food is a direct copy of the national brands, these days. “The quality of private label pet food is right there with all of the branded items,” says Frank Arviso, director of sales at St. Marys, Ohio-based Pro Pet. “Private label usually emulates the market leaders and that is exactly what we’ve done. We not only emulate in appearance, but the ingredients as well. We buy the best ingredients and do palate testing and we test right up there with the best.”
Officials at Pro Pet say they have been playing a cat-and-mouse game with the national brands. “The branded people are very smart because they do a good job of constantly tweaking their brands, especially with the looks,” Arviso says. “They might have two nuggets of a different size and color for three years and then all of a sudden they’ll come up with a third nugget—same formula, just a third nugget—just to make it look different. Then we have all of this money tied up in packaging and we have to wait until we cycle through that before we can actually duplicate it again. They do a good job of keeping us on our toes.”
National brands are also fighting back with heavy couponing, lower retails and other cost-cutting measures, says Theresa Rauch, marketing manager, at Berner Food & Beverage, Inc., a Roscoe, Ill.-based manufacturer of private label ready-to-drink coffees, shelf-stable dips, salsa con queso, Alfredo sauces and aerosol cheese.
“Starbucks, like many other branded products, are heavily promoting their products, merchandising them on end caps and running them at $1-off here and $1.99 a four-pack there,” she says. “So while private label sales are good, I think the growth of them has slowed down a bit.”
Frozen Specialties, Inc., a Holland, Ohio-based frozen pizza manufacturer, is combating the national brands by expanding its product line to include pizza bites, breadsticks, personal microwave pizzas, artisan pizzas, Italian-style pizzas and redesigning its Mr. P’s brand, says Ric Alvarez, president and CEO.
“As a retailer, you need to look at yourself as the one-stop solution for frozen pizza for each one of your customers,” Alvarez says. “Offer the first and second most popular brand names and then determine what other flavors, sizes and types your customers want and bring in private label to meet those needs.”
Finding a niche with private label can help transform a category. Just ask Mark Singleton, vice president of sales and marketing, at Rudolph Foods. Between its branded, co-pack and private label business, the Lima, Ohio-based firm bills itself as the world’s largest pork rinds manufacturer.
“We have one customer who has had 20% year-over-year growth in private label pork rind sales,” Singleton says. “We’re up to five flavors with them, whereas some of the branded nationals only offer two flavors—hot and regular or regular and barbecue.”
In addition to unique flavors, better packaging is also drawing consumers to private label pork rinds. “What has changed for us is that private label graphics have gotten so much better,” Singleton says. “Our private label partners are doing a great job of working with good art companies to put non-generic bags out there. Some of the bags are so good looking with high-quality graphics and hierarchy of messaging.
“I really believe private label is an absolute critical part of any grocery chain’s strategic vision for their business,” Singleton says.