Retailers look to premium products, new categories and revamped merchandising strategies to hold on to the gains made in private label.
By Deena M. Amato-McCoy
While the slumping economy helped raise the profile of private label products in the minds of consumers, the real question is whether store brands can hold on to those gains as the economic picture improves. So far, so good, as observers say upscale products, new categories and marketing strategies are helping to preserve the recent gains in store brands.
Overall, private label brands accounted for 17.4% of total U.S. dollar sales of food products in 2010, up from 15.2% in 2006, according to The Nielsen Co., based in New York. “That equates to a $90 billion industry in the U.S., and almost 30% of the total servings of food products sold,” says Ricardo “Ric” Alvarez, CEO and president of Holland, Ohio-based Frozen Specialties.
Private label continues to hold its own, as two-thirds of consumers reported that private label goods have the same or better quality than name brands, according to a study from The Nielsen Co. “By rivaling their branded counterparts in flavor, nutritional value, packaging design and shelf placement, the cost value proposition of private label is untouched by national brands,” Alvarez says.
Store brands have come a long way since they first hit shelves 30 years ago. With little to no promotional activity to support private label initiatives, store brands earned a reputation as being inferior to national brands in terms of quality, taste and innovation.
“The category was once viewed as the step child [of merchandise],” says Steven Fay, executive vice president and sales team leader, Berner Food and Beverage, based in Dakota, Ill. “Private label was managed by people who didn’t understand the categories and implications of what they mean to the bottom line.”
Once the Great Recession took hold in 2008, store brands gained yet more attention from cost-conscious shoppers. Unemployment was rising, consumer confidence was declining and “consumers were questioning all purchases,” says Annie Owens, director of marketing for Plant City, Fla.-based Mario Camacho Foods. “As the recession intensified, coupon usage was on the rise, and so was demand for private label—from both consumers and retailers.”
Since retailers can control the production of private label lines, and it is exclusively sold at their stores, store brands help chains keep a tighter grasp on costs. Store brands also feature a value proposition of providing a 15% to 20% savings compared to national brands. Even with this discount, those sales go directly to the retailer’s bottom line.
Observers note that grocers cannot solely rely on value when competing with national brands. They must continually improve product quality and packaging to keep pace with national brands and attract shoppers.
Besides solidifying relationships with an already loyal consumer base, these factors also lured in new shoppers who were eager to save money. As a result, grocers noticed a jump in trial and acceptance of private label across many categories. Interest was on such an upswing, many categories saw double-digit growth, according to Owens.
Private label tissue sales are up 6% to 7%, according to Bruce Woodlief, director of marketing for the consumer products division of Spokane, Wash.-based Clearwater Paper Corp. “The overall tissue category is down by 2%, yet private label continues to rise.”
Similarly, the private label snack category is experiencing strong growth. Unit sales are up 17% and unit share is up over 20%, according to observers.
“Even more impressive is that this growth follows four previous years of private label growth,” says Jim J. Wilsky, national sales manager for Coldwater, Ohio-based Tastemorr Snacks.
Private label pasta has also benefited from a surge in consumer interest in store brands. As more people turned to pasta as an economic meal solution, private label pastas were among the big winners and often chosen over national brands, experts note.
Even private label general merchandise is getting more attention from shoppers. And one of the hottest categories is feminine hygiene. “Private label has been the driving force within the feminine hygiene category as it has outpaced the growth of the category itself,” says Sebastien Bourassa, vice president, sales and marketing for Fempro 1, based in Drummondville, Quebec, Canada.
Observers say retailers must carefully consider how much space to devote to private label. The struggling economy has forced all retailers to take stock in their store-level real estate and reallocate space. Chains are conducting a significant amount of SKU rationalization, resulting in fewer products on the shelves. While much national brand merchandise is being pulled from shelves to make room for more private label merchandise, some observers question this strategy.
“Private label prices are clearly driving more new product trials, but by lowering the price and increasing the share of private label, the category is at risk of losing dollar sales,” says Owens of Mario Camacho Foods. “In the long-term, this won’t be profitable for grocers.”
Meanwhile, national brands are also applying pressure. Eager to take back some of the sales volume that private label has claimed, national brands are pulling out all the stops and “trying to protect a decreasing category share,” Wilsky says.
National brands are using their marketing muscle and using aggressive promotions, “and they have been successful,” says Brian Fox, vice president of customer marketing for Kansas City, Mo.-based American Italian Pasta Co.
“Penetration of private label varies widely by market, but the overall frequency and depth of national brand promotions is harming private label,” Alvarez says.
In the end, retailers must uphold the quality and value proposition to stay in the forefront of consumers’ minds, especially at the point of purchase. “Once the consumers have tried the product and notice very little difference in terms of product attributes, private label becomes an easy choice to make,” Fempro 1’s Bourassa explains. “The next step is focus on increasing product turns. As they keep developing new merchandise, improving formulas, packaging and sizes, this will generate trial, and ideally, trade up consumers.”
Historically, chains have struggled with how to promote their categories, especially from a marketing perspective. “Grocers will never have the marketing and promotional funds that the major national brands have at their disposal, but they still have ways to gain a competitive retail position for their private label programs,” says Wilsky.
One advantage that retailers have is the ability to leverage their proprietary databases of customer information. With the increased sophistication of loyalty programs, “many retailers can take advantage of a wealth of data about their consumers,“ says Clearwater Paper’s Woodlief.
However, extracting the data is only the first step. Next they need to analyze trends, shopper purchase behavior, price-points that spur purchase decisions and even what causes them to abandon baskets. Then they must parlay these findings into tailored products, promotions and events that are relevant and meaningful to their loyal and even less loyal customers.
Observers note that some retailers do such a good job at analyzing historic data that they have built private label programs that command attention from consumers, national CPG companies and even competing grocers. Bentonville, Ark.-based Walmart may be one of the most recognizable private label programs in the marketplace today. Comprised of more than five grocery and general merchandise brands, the retail behemoth has a house brand dedicated to almost every category it sells, from apparel and soft lines to homeliness and office supplies.
Rochester, N.Y.-based Wegmans Food Markets’ commitment to private label dates back to 1979. Wegmans has since expanded its store brand (which is marketed under the ‘Wegmans” moniker) across all store categories, including fresh departments such as dairy, deli, meat, produce and meal solutions, as well as dry goods and general merchandise.
Officials at Cincinnati-based Kroger Co. analyze consumer data to create a tiered program consisting of its Private Selection, Banner and Value brands. The result: the chain has found a way to build a loyal customer base across three distinct shopper demographics.
Some chains use shopper data to help develop new merchandise. Any information shared by their supplier partners only makes the effort more effective. Frozen Specialties works with retailers to help market their stores as one-stop solutions for frozen pizza, for example. As a result, they continually work to understand shopper preferences and shopper demographics, “then offer choices that satisfy as many of their needs and demands as possible,” Alvarez says.
Berner is also working with grocers to help them understand sales information and have more actionable insight. Berner shares information from several data streams, including external data, its own sales information and other sources. Company officials meet with category managers and help analyze data and create actionable insight into promotional activity and potential volume increases.
“There is a data revolution, and it impacts many decisions relating to space allocation and shelf positions,” says Fay. “Retailers that are able to sift through data and make informed decisions can build a sophisticated private label program.”