Brand X Power

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.