On Point: Quality will tell

A strong private label program is its own reward.

By Tom Weir

An important trend in the industry over the past decade or more has been the slow, steady increase in the quality of private label products sold in many supermarkets. It has become commonplace for consumers to rate store brands as equal in taste and quality to the big-name national labels.

This has not occurred by lucky accident but because many retailers have seen the need to upgrade their products and have done the hard work to follow through. That effort can bring in higher margins and penny profit from a significant portion of the business for many years. While the wisdom of such investments has become widely accepted, external factors related to the long-running economic slump keep making them look better and better.

A recent survey from The Nielsen Co. found that 60% of consumers in North America said they buy more private label when the economy sags, and in a GfK Roper study cited by the Private Label Manufacturers Association two-thirds of those who said the economy altered their food purchases said they had switched to private label in categories where they previously bought only national brands. Ninety-four percent of the Nielsen respondents and 80% of the GfK Roper respondents said they will keep buying private label when the economy recovers.

But a real recovery seems to be nowhere in sight. Unemployment continues at worrisome levels, the rate of job growth may encourage economists but not those out of work, household incomes are little better than flat, and things are growing more expensive. In the first quarter of the year, reported The Washington Post, consumer prices rose at an annual rate of 5.7%, more than four times the rate of average weekly wages.

The bottom line is that the vast majority of supermarket shoppers need to save as much money as they can, and buying private label groceries is one way they have been doing it. A study last fall by PLMA said consumers could knock almost one-third off their grocery bills by buying store brands rather than nationals. While this may sound problematic for the big-name brands, their penetration is far higher than private label’s 17% and many have fiercely loyal consumers. Second- and third-tier brands are likely to suffer most.

All retailers will sell their share of national brands. Where the real competition among supermarkets should be right now is in private label. Those who have made an investment in store-brand development that combines lower prices with high quality stand to gain. Those who can offer only the low-price part of that combination will probably lose. Shoppers will migrate to stores where they don’t have to buy things they don’t like just to save money, and the longer the economy stumbles along, the larger and more permanent that migration will become. Remember, private label’s 17% penetration is an average, which means some grocers get a bigger, more profitable share than others.

This is the case for always doing your best in every part of your business. It puts you in position to make the most of almost any opportunity that comes along. This time it’s private label. Next time it could be in one of the perimeter departments. You won’t know until it happens, and when it does you don’t want to be playing catch-up.

Tom Weir can be reached at tom@taweir.cnc.net.

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