Private Label Beverages:
October 1, 2004
Private Label Beverages:
The gateway to retailer loyalty
by Joana Cosgrove
Often overlooked in favor of more widely recognized national brands, private label (PL) beverages, occupy an understated space on the shelf.
While it’s true PL beverages lack the marketing dollars that buoy national brands, and are inherently more susceptible to market fluctuations, they quietly play the important role of “gateway product” when it comes to drawing consumers into a retailer’s realm of PL products.
This characterization is especially true when it comes to PL carbonated soft drinks, the single largest supermarket grocery category, chalking up 5 to 6 percent of typical grocery sales. “Soft drink penetration is well over 90 percent to 95 percent with a high frequency and velocity,” says Edmund O’Keefe, vice president of investor relations and corporate development, Cott Corp., Toronto, Ontario. “We’ve found that if a customer likes the retailer brand proposition associated with the soft drink then they’re more likely to try, for example, the salsa, cookies or detergent – a phenomenon that we call the “halo effect”. If you get it right, you’re not only helping improve your position, point of difference and profitability in CSDs, you’re also building the halo effect for your retailer brand program all across the store.”
The halo effect initiated by PL soft drinks is crucial considering the ongoing trend of retail consolidation in which large retailers continue to get larger. “As they consolidate, the market and become more powerful, they will turn to PL as a key driver for differentiation because each retailer wants to position themselves somewhat differently,” comments O’Keefe, who adds that the biggest market opportunity for PL is the U.S. market. “On a volume basis in carbonated soft drinks, PL has 27 percent of the market in England, it has 20 percent of the take-home market in Canada, but it’s only 11 percent in the United States. Clearly the United States is a significant market for retailer brand soft drinks. The best-in-class large retailers in the United States have PL shares of between 20 percent and 35 percent of their soft drink volume, whereas the average is only 11 percent. As the big retailers get bigger and concentrate the market, they’re driving those shares up.”
During the past five years, sales of carbonated soft drinks – both PL and national brands – have fallen sharply, due in large part, to increased water consumption, which is the byproduct of an increasingly health-focused and obesity-wary consumer population. Instead of reaching for a cola, more consumers are guzzling calorie-, caffeine- and carb-free sparkling flavored waters. “The water category is a $700 million category, and PL accounts for about 22 percent of it. It has grown about 10 percent this year, and in units it has grown about 25 percent to 30 percent,” says Tom Aquilina, Aquilina & Associates, a Chicago-based consultant who teaches Private Label Sales and Marketing Strategies course curriculum at St. Joseph’s University.
“If you look at a supermarket today, space allocation for water at retail is probably 30 percent to 40 percent greater than it was five years ago. What used to be a beverage aisle is now largely dedicated to waters of all types – distilled, spring – and the consumption is huge because the water industry has done a tremendous job marketing water.”
The sparkling flavored water category is a shining example of how PL is capable of creating its own distinct and successful niche. It also illustrates PL’s ability to be both a follower and, in this case, a leader in flavor creation. “Speed to market with new flavors is an area of strength for PL,” Cott’s O’Keefe says. “A lot of new flavors like pineapple and strawberry are favored by the Hispanic market and the average consumer alike, and PL can respond quickly with innovative flavors.”
Much like PL carbonated soft drinks, PL chilled juices have hit hard times thanks to what industry insiders call “The Cola Wars: Part 2.” Pepsi-owned Tropicana against Coca-Cola-owned Minute Maid have commoditized the juice business by enacting the same battle plan the two companies used to grow their soft drink business, to the detriment of PL brands.
“Twenty years ago, Pepsi and Coke took prices down to a point where PL didn’t make any sense. If you could buy a 2-liter bottle of Coke or Pepsi for 89 cents, why would you buy a bottle of PL cola for 79 cents? That’s what happened with juice,” says Rich McCelland, director of marketing, Pasco Beverage Co., Dade City, Fla. “You can find two (64 ounce) cartons of Tropicana or Minute Maid on sale for $4 almost every day, so you have a situation where the average consumer wouldn’t buy a PL juice at $1.99 because they can get a national brand for only pennies more. Unless they are familiar with or already enjoy the taste of a PL brand, the consumer will almost always opt for the national brand.
“Minute Maid and Tropicana aren’t making money selling juice at two for $4,” he continues, “but the companies behind them are so big, they can afford not to – that’s not the case for most PL suppliers who can’t afford to lose money.”
Putting PL juices back on track is a slow and educational process. McClelland says he tries to help category managers understand that this kind of national brand pricing is erosive and self-defeating. “Tropicana and Minute Maid are available everywhere,” he says. “When retailers sell Tropicana at two for $4, it reduces margins, supplies temporary consumer gratification and maybe even refrigerator load. But apply that same scenario to PL and the juice becomes a destination product because you can’t buy Sam’s Choice orange juice any place other than a Wal-Mart.
“When a consumer gets hooked on the fact that Giant’s PL has the quality of a national brand with a price-value relationship that’s significant, than Giant becomes a destination for the consumer,” McClelland explains. A major PL hindrance is that most consumers don’t realize retailers have rigid control standards and criteria for selecting private label vendors that’s equal to or better than the national brands in quality, he adds.
Sales of some single-fruit PL juices like orange are definitely suffering, but sales of allied juices are growing. Pasco is currently producing a line of mango, guava and strawberry-banana nectars for PL accounts like HEB that are a hit with consumers of all ethnicities. Juice blends like apple-cherry and cranberry-grape are also popular. In single-flavor juices, grape juice is getting a lift from studies linking grape and grape juice consumption to a variety of health benefits.
McClelland believes the surging popularity of juice blends is attributable to the same trend that’s impacting beverages across all categories: the quest to provide flavorful and healthful alternatives to soft drinks.
Courting the PL consumer
The groundwork for increasing PL beverage shares has been laid, but in the meantime there’s a lot of work to do, according to Aquilina. He says first retailers must find a way to win customers using flavor. “A Coke consumer probably does not drink Pepsi, and vice-versa. They’re loyal and they’ve acquired the certain taste that each brand delivers,” he says. “PL has not provided that point of differentiation in taste to create that sort of following.”
His second assertion for increasing the share of PL beverages boils down to on-shelf merchandising. “There’s a tremendous opportunity to market carbonated beverages in supermarkets, but retailers have to realign their current merchandising strategy compared to where it is today, it can’t be an afterthought. DSD is very territorial with their shelf space and they manage it extremely well.”
|Private label product sales|
|Dollar Sales||% Change
vs. Year Ago
|Unit Sales|| % Change
vs. Year Ago
|CONVENIENCE/PET STILL WATER||$269,861,984||27.0%||130,810,344||12.9%|
|JUG/BULK STILL WATER||$324,489,312||-3.4%||361,754,816||-6.4%|
|GROUND DECAFFEINATED COFFEE||$33,000,692||0.9%||11,743,059||-0.8%|
|INSTANT DECAFFEINATED COFFEE||$10,036,108||3.9%||2,886,060||4.6%|
|WHOLE COFFEE BEANS||$26,553,128||0.4%||5,842,718||1.3%|
|CANNED AND BOTTLED TEA||$21,869,780||28.1%||13,524,116||21.4%|
|Source: Information Resources Inc., Total U.S. Food, Drug and Mass Merchandise (excluding Wal-Mart) for the 52 weeks ending Aug. 8, 2004.|