Betting the House on Private Brands

The volume of private-label merchandise has been on the rise in all retail sectors over the past decade. Customers have come to embrace proprietary apparel lines at stores ranging from Victoria’s Secret to Macy’s, and the supermarket segment is working to convince consumers that its goods are as good as – or better than – national brands, not just less expensive.

Gone are the lackluster generics of yore, when a retailer would knock off a leading national brand right down to the packaging and cut the price by 20 percent. Mainstream supermarkets – pinched on price by Wal-Mart on the low end and on exotic/organic offerings by the likes of Whole Foods Market on the high end, are responding with comprehensive programs to reach shoppers of all stripes.

Supermarket brands now sport slick and sleek packaging that is becoming harder for customers to peg as private label. Some programs are so well done – Loblaw’s President’s Choice brand, for instance – that the Canadian retailer has expanded distribution beyond its own stores. Trader Joe’s grew from a small group of convenience stores to hundreds of locations nationwide on the strength of a cult-like devotion to its often quirky offerings.

And Target’s Archer Farms brand is perhaps the domestic gold standard. Launched in 2001, it offers fresh-baked and frozen items in the chain’s 200-plus superstores – about 2,000 items ranging from desserts to trail mixes, dipping oils and bottled soft drinks packaged to deliver stylish quality, value and customer loyalty.

U.K.-based research and consulting firm Datamonitor estimates that the market for private-label food, drinks and personal care products will increase 20 percent – to $131 billion – by 2010. Data-tracking firm Nielsen reports that the sale of private-label food and non-alcoholic beverages rose in the 52 weeks ending July 14, 2007 – and those figures don’t include Wal-Mart, which no longer supplies such data to outside tracking firms.

Private-label sea change
A rising tide has turned into a private-label sea change in the aisles of neighborhood supermarkets over the last five years. Kroger’s Private Selection Organic was a response to customers’ requests for organic alternatives to everyday items such as tea, peanut butter and pasta. Costco plans to partner with Martha Stewart on co-branded prepared meals.

Safeway launched the Eating Right line of more than 120 items including juices, salad dressings, soups, cereals and dinners aimed at customers looking for high-fiber, low-fat or low-sodium foods to satisfy specific heath concerns, and its O Organics line is expected to generate $300 million in annual sales.

Despite the recent flurry of product launches, however, the United States “is generally behind the curve in private-label penetration and it doesn’t matter what category,” says Charmaine Tang, a Citi Investment Research vice president who follows the broadlines, food, drug and home improvement sectors. The U.K.’s Tesco, for example, generates “at least half” of its sales from private brands, she says – and stateside retailers have been bracing for Tesco’s entry into the domestic market with its Fresh & Easy concept.

Two words – increased margins – make it easy to understand why private label is gaining traction. Retailers that source new products to their specifications can usually eliminate the middleman, boosting profits.

Safeway, in fact, is doing so well with O Organics “that you have to wonder what that means for its competitors,” Tang says. At an investors’ conference in December, Safeway chairman, president and CEO Steve Burd announced plans to offer O Organics and Eating Right products to other outlets; Safeway also has discussed partnering with a food-service company to distribute products in that channel.

Lines are blurring
As has happened with department stores, lines are blurring as to who – manufacturers or retailers – holds power and sway in the supermarket and mass channels. Eric Ashworth, chief strategy officer with Anthem Worldwide’s San Francisco office and a Safeway consultant on private-label brands, says, “the reality is that the retail channel is putting traditional consumer product goods manufacturers on a collision course with each other.”

Instead of pitting CPGs against the retailer, Ashworth speaks of a new spirit of partnership that Anthem calls “manutailoring.” The idea, he says, is to build the brand together. “They should forget about ownership because they can both make money on [the new products].” It’s a win for both parties, Ashworth says, “because the retailer is going to be able to put the product on the shelf right away and the CPG is going to save $30 million in marketing spend.

“They share the revenue because they own the brand together,” he says.