PRODUCT DEVELOPMENT AND PROMOTION

How large is the private label market? Private Label 2000: Standing Out in the Crowd, issued by Datamonitor in May, estimated the current private-label food and beverage market in the U.S. at $48.6 billion and said that number will likely grow to $67 billion by 2004. Consider this: food sales in supermarkets stood at $315 billion in 1999; the $48.6 billion in private-label sales accounted for 15.4% of the total, and this will jump to 18% in 2004, estimates Datamonitor.

What's behind this growth? Narrowing the reasons to one is difficult if not impossible. Growth in each food and beverage category has its own rationale. For instance, Datamonitor found "tremendous" growth in the ready meals category as "people" have increasingly less time to prepare food." Because there is a lack of brand loyalty in this category," says Sari Post, consumer markets analyst with Datamonitor, "it is an area where high-quality private-label products can distinguish themselves."

Also fueling the growth is the consolidation of retailers. Large supermarkets offer the same diverse assortments of manufacturers' products but are finding that a strong private-label program can differentiate them from their competition. In addition, with the consolidation of larger supermarket chains, private labels are increasingly available around the country and are helping these store chains to create a loyal customer base around the U.S.

Bullish on Brands

How do manufacturers of national brands regard the private-label market? Some have embraced it-to the point of actually producing items for sale under a supermarket's brand. others follow the tack of the Grocery manufacturers of America (GMA) and disregard store brands as a threat to established national brands, which the GMA notes still account for about 80% of all sales in the U.S.

National brands have their advantages, says Lisa McCue, senior manager of industry communications with GMA. "Manufacturers' brands have the promise of higher quality on a consistent basis, which is not always the case with private labels. Manufacturers are not complacent but are looking for ways to provide better value for the consumer."

Many private-label suppliers are not content simply to put a similar item on the shelves, however. Private-label suppliers are increasingly testing to see if the product meets or sometimes exceeds manufacturers' brands. ken Gordon, chief technical officer with Shuster Laboratories, estimates 40% of Shuster's business is testing private-label products, often to the standards of their nationwide counterparts. For example, Shuster has tested numerous private-label products for quality characteristics predetermined by the client and compared them with the manufacturers' brands, if so desired.

Shuster also tests generic products, notes Gordon, though that category has declined to the point of disappearing. However, he relates, "Premium private label has grown in popularity with the ingroduction of premium private label products like special cookies, fancy desserts..." He also notes that, while private labels may be entering into premium products, they still tend to follow the manufacturers' brands.

McCue agrees, observing that consumers can always look to manufacturers for new, diverse products. "Store brands don't do a lot of innovation- more imitating than innovating," she says.

That may well be the case, but the private-label concept has expanded of late, particularly with the debut of premium items to lure customers. Not only are consumers tempted by the similar private-label items; the store-brand alternatives can be an attractive source of revenue for supermarkets.

Private-label Profits

Supermarkets see profit margins 27% higher on their own brands versus manufacturers' items, according to Datamonitor, and those numbers grow when looking at premium private-label products. The Kroger Co. has publicly noted the benefit of private-label product to its bottom line, declaring that strong sales in private-label products for Kroger stores helped boost the company's earnings before one-time charges by 20% in the first quarter of 2000. Industry experts note that Kroger is aiming for 30% of its sales to come from the private-label sector-a $15 billion incremental sales opportunity.

Added to the financial benefits, customer loyalty can also be strengthened with a private-label item. The store brand is only available in that supermarket chain-nowhere else. Supermarkets are, therefore, realizing the importance of private labbels to encourage return shoppers and, more and more, to gain customers for premium products.

Although upscale items are an interesting new arena for store-brand suppliers, the private-label vendors have not forgotten the importance of the value shopper. Long the target of store-brand producers, many of these cost-conscious consumers have found a new home for less-expensive wares-the dollar storees. To that end, Dollar General will introduce a line of lowfat cheese, wheat and chicken-flavored snack crackers under its Clover Valley label, and similar private-label growth is expected in the snack food aisles at Family Dollar Stores around the country. What's in the future for the store-brand snack food segment? Private-label snack marketers plan to enter the 55,000 convenience stores around the U.S. in the near future.

The benefits of private-label products have certainly not been lost on consumers, who will "gravitate toward store brands depending on commodities that are not easily differentiated from national brands, i.e., milk," says McCue. In the juice market, for example, Joli Cooper, chief marketing officer with Pasco Brands Inc.'s Vitality Beverages, noted in an interview with the St. Petersburg Times, "Minute Maid and private label are really the only brands in frozen concentrate. In chilled juice, private label recently took over at number two behind Tropicana, and in reconstituted juice, there's really only Minute Maid and private label."

The dominant private-label juice supplier in the U.S., Pasco Brands is focused on making private-label beverages for various supermarket chians. Cooper explains, "There's never been any significant marketing of private-label juice, except for piece-meal efforts," but Vitality is looking to change that. The company plans to create sophisticated marketing and labeling, working with the stores and bearing some of the costs. These marketing efforts will include coupons, taste tests and even working on promotions with branded products-for example, breakfast with Eggo waffles.

Not that Pasco Brands will focus solely on the juice market. Cooper says the company has a mission to supply "all kinds of non-branded beverages in the store. There is tremendous opportunity in the private-label juice market and other beverages as well. Look around astore. There are opportunities for private labels all over."

Losing Steam?

Those opportunities may well exist, but the news surrounding private-label foods is not all positive; store-brand (salty) snacks recorded their first decline in years in 1998, according to Information Resources Inc. (IRI), perhaps the result of less shelf space for store-brand snacks. (Frito-Lay had introduced a number of new snack items during the year.) Nevertheless, the decline of store brands in the (salty) snack area continued the following year, as private labels' 7.4% of total snack sales in 1998 decline to 7.1% in 1999, according to IRI;'s figures for supermarket, drug store chain and mass merchandiser outlets.

Indeel, private-label products registered a marginal 0.1% growth in unti market share in supermarkets in the past year, according to the Private label manufacturers Association (PLMA), but don't discount store brands yet. Private labels have gained in market share in supermarkets for five straight years, and the PLMA notes, if the current sales pattern holds, private labels could account for 24% of supermarket sales within a decade. The PLMA has also reported significant gorwth in private-label food and beverage consumption in mass merchandiser outlets, i.e., supercenters, which shoppers are increasingly treating as supermarkets.

Private-label products present a significant profit generator for supermarkets. Therefore, supermarkets are branching into new areas for private label and promoting these store brands in new ways. Seldom mentioned in advertisements of the past, private labels are increasingly the subject of store marketing efforts either in print or on television.

Charles Caleb Colton once said, "Imitation is the sincerest form of flattery." Store brands may well simply imitate branded manufacturers, but that imitation certainly flatters the bottom line at supermarket chains around the country and, increasingly, around the world. In addition, store brands are improving in quality (to a par with manufacturers' brands in many cases) and providing shoppers with a growing number of options in the food aisles.

Updated: Thursday, September 6, 2007.