Previous recessions have shown a clear correlation between the state of the economy and private label market share. In the past, private label sales spiked during a recession but quickly returned to normal levels at the first sign of an upturn. This time around, however, private label will have a much stickier effect due to a combination of improvements in the quality and marketing of these items as well as retailers’ SKU rationalization efforts, which has carved out more shelf space for private labels. Furthermore, new frugal tendencies amongst shoppers have ignited demand for these products.
Today, private label accounts for one in every three products sold at Kroger, while approximately 15 percent of Wal-Mart’s grocery sales are made up of its own brands. Private label not only offers greater value to consumers but is increasingly becoming a point of differentiation for supermarkets — not to mention a more profitable one.
So it’s no surprise that retailers are working hard to improve recipes, redesign packaging and even invest in advertising for these products. All of these efforts will certainly help to raise brand awareness. However, there is a much more direct way to grow share of private label items — get rid of the competition. Many grocery chains across the United States and Europe are now focusing their efforts on SKU rationalization, a process that not only enables retailers to reduce inventory and labor costs but, perhaps more importantly, in the long run, to give private label items greater prominence on the shelf. Wal-Mart, for example, is in the process of reducing its overall assortment by 15 percent in the United States (30 percent in the UK), while supermarkets such as SuperValu are reducing their SKU counts by up to 25 percent in certain categories.
SKU rationalization is mainly relevant in categories where there is an over-proliferation of brands such as the cereal aisle, and therefore unlikely to have a significant impact on the produce category. That said, it does represent a further power shift into the hands of the retailer, and that, of course, is an area that affects all suppliers. In our latest report, Private Label: The Brands of the Future, we have identified several ways in which brand suppliers can respond to the private label threat, ranging from the slightly more defensive tactics (i.e. launching value sub-brands) to collaborative approaches such as joint promotions and co-branding. Suppliers should also be looking to innovation as well as shopper-centric strategies, whether that is engaging directly with consumers through social media or investing in the direct-to-consumer channel. In fact, you can argue that retailers have been stripping out the middleman for years by pushing their private labels. Brand manufacturers are now recognizing an opportunity to do the same by going direct-to-consumer through brand stores, services, and online channels.
In our report, we have also identified ten key private label trends for 2010. There will certainly be a repositioning of the value lines that have featured so heavily during the recession. These lines have helped the grocers to retain shoppers by improving their price perception; however, as the economy improves, the focus will transition to the more profitable premium lines. In fact, we believe that there is room for a super-premium line that has yet to be introduced in the United States. In Europe, where private label penetration rates can be as high as 50 percent (compared to about 25 percent in the United States), we are now seeing the introduction of these super-premium lines that cater to quality-seeking shoppers trading out of restaurants. For example, Tesco is now offering a Restaurant Collection range priced at Â£10, or $14.
There is also plenty of room for growth with niche sub-brands, which have yet to take off in the U.S. market. For example, France’s Casino recently launched a Halal food range while Carrefour offers a gluten-free line. Transparency is also on the rise as consumers take a greater interest in the provenance of products. In fact, NY-based Wegmans recently began putting the manufacturer name on the packaging of select private label items, a tactic used primarily by German and Swiss grocers.
The most successful private label lines are now embarking on a series of brand-building exercises as they transition from “generic alternative” to “CPG brand.” Safeway and UK grocer, Waitrose, are pioneering this trend globally by distributing their private label lines to other retailers. Currently, very few retailers are able to make this transition, as it requires extremely strong brand equity; however, this is a trend we expect to gain pace, further blurring the line between national brands and private labels.
Going forward, it’s clear that there are ample growth opportunities for private label in the United States. However, private label penetration rates are unlikely to ever reach levels found in markets such as Switzerland or the UK. In Europe, a combination of market consolidation and a strong presence of hard discounters has enabled private label to flourish. The U.S. grocery sector meanwhile remains largely regional and fragmented — even Wal-Mart holds less than a 15 percent share on a national level. However, it is fair to say that Americans’ affinity for national brands will continue to be tested as retailers raise the bar of their private label items.