Safeway chairman and CEO Steve Burd told analysts during a recent earnings call that the Pleasanton, Calif.-based supermarket chain will be putting even more muscle behind its private-label offerings if national brand vendors didn’t start rolling back prices – a strategy he insists is needed in today’s recessionary times.

Burd described the 1,000-basis-points gap in sales growth between national brands and private label as “extraordinary” and said “the biggest spread in modern times” is further proof of the need for food makers to lower prices.

Burd may be more outspoken than his colleagues when it comes to exhorting the nation’s CPG manufacturers to lower prices, but he’s hardly alone. Retailers and industry experts confirm that the pricing tension between supermarket retailers and food makers has been exacerbated by the recessionary economy, shoppers’ willingness to trade down to lower-price options and the influx of more private label on store shelves.

Supermarket executives say they’re trying to meet the needs of today’s cash-strapped, value-focused consumer by offering more private-label products and sharpening their pencils when it comes to pricing. They argue that branded manufacturers, which are now benefitting from dips in commodity prices and transportation costs, should be passing the savings on to consumers in the form of lower prices.

Representatives for the national brands say they’re more inclined to offer coupons, promotions and other types of temporary price reductions. Having spent a portion of 2008 raising prices to compensate for the increased costs of corn, grain and the like – not to mention fuel – they’re reluctant to switch gears. Moreover, they say pricing decisions cannot be easily overturned, given that large purchases of commodities like grain were made on the futures market when prices were at their highest.

Pricing roulette
Pricing strategies “are the single-biggest roulette wheel for both retailers and national brands,” says Thomas Blischok, president of consulting and innovation for Chicago-based Information Resources. “Even if the economy rebounded tomorrow, the implications of the current recession – the decline in home values and the sharp drop in employees’ 401(k)s – are going to stay with us for another four to eight years.

“Shoppers are making purchasing decisions through the lens of affordability,” he says. “It’s all about stretching the dollar.”

Who will win shoppers’ business – national brands or store private label – remains unclear to Blischok. A high-quality, value-priced private brand can be a powerful differentiator, yet shoppers have demonstrated their willingness to switch stores in search of the best price for the national brands they desire.

Michael Sansolo, a contributing editor for Morningnews¬beat.com and a former senior vice president of the Food Marketing Institute, also expects the tension between grocers and food makers to simmer for some time to come.

“We live in volatile times: Conventional wisdom doesn’t apply, so how this battle will play out remains to be seen,” he says. “Ultimately, there will be a new equilibrium. I expect stores to continue to build on the already strong foundation of private brands and as these labels command more shelf space there will be some rebalancing.”

In the coming months, Sansolo expects retailers to focus more attention on rationalizing SKUs and paring back assortments to include only those brands and products that provide a retailer with a competitive advantage.

Most experts believe retailers ultimately hold the upper hand in the wrangling over pricing. After decades spent gradually expanding the percentage of private-label goods on their shelves, retailers have shifted their PL efforts into high gear in recent years.

At St. Louis-based Schnuck’s, store-brand sales are up by double digits and now account for more than 20 percent of total revenue. At Roundy’s Supermarkets in Milwaukee, plans call for stocking 6,000 private-label items – a 50 percent increase from current levels. Private label is expected to reach 18.5 percent of retail sales at Minneapolis-based SuperVALU by the end of this fiscal year – an increase of more than one percentage point in just 12 months. Cincinnati-based Kroger reports that 27 percent of sales come from private-label goods.

Wal-Mart, the largest U.S. grocery seller, freshened up its Great Value house brand in March with new packaging and marketing efforts that zero-in on consumers who want to pay less. Introduced in 1993, Great Value now spans more than 100 categories and is reported to be the country’s largest food brand in both sales and volume. According to company data, 30 percent of Wal-Mart sales come from its private-label packaged goods business.

Consumer buy-in
Propping up the sales figures are consumer research studies and industry metrics that measure the degree to which shoppers have embraced private label.

According to data compiled by Nielsen during the 52 weeks ending March 21, 2009, private label accounted for 16.8 percent of total dollars spent on fast-moving consumer packaged items sold via U.S. food, drug and mass merchandise stores. Overall, the private-label segment grew 9.1 percent (to $84.8 billion) – a rate more than four times greater than that of the branded segment.

Data compiled for the Private Label Manufacturers Association by GfK Custom Research North America finds that more than 30 percent of consumers are “buying more store-brand products” than they were a year ago. Nearly three out of four consumers said that current economic conditions were “important” in their purchasing decisions. The findings also indicate that the percentage of consumers saying they frequently buy private label (55 percent) is up sharply from 41 percent in 2006 and has more than quadrupled since 1991.

“Retailers have been in the private-label trenches for a long time now,” says Todd Hooper, a partner at Kurt Salmon Associates (KSA). “They understand cost structures and they understand how to negotiate pricing.” Brands, on the other hand, “have become more adept at resisting demands to lower prices. They’re used to being pressed by Wal-Mart for the lowest prices and that’s made them more resilient.

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