Beverage Industry

Retailers Push Private Label

June 1, 2004

Retailers Push Private Label

Retail consolidation, not necessarily consumer economics, is driving the growth in private label foods, according to a TradeSmart workshop conducted by Hoyt & Co., Scottsdale, Ariz. Hoyt points out that the growth of private label accelerated during the strong economy of the 1990s, which runs counter to the belief that store brands are tied to poor economic conditions. In addition, private label penetration increased most for households considered “comfortable/affluent” and also was strong in “professional/ white collar” households and homes without children.
The true reason for private label success seems to be consolidation among retailers, and many retailers see it as a way to differentiate themselves from the competition. To illustrate that theory, Switzerland, in which 88 percent of the market is held by the top five retailers, also has the most private label, at 38 percent of the total market. In Great Britain, 83 percent of the market is held by the top five retailers and has a 31 percent private label share. The United States has a relatively low private label incidence at 15 percent market share, which is reflected in its comparatively low rate of consolidation.
But private label is growing in the United States. Store brands are now present in 280 of the 289 consumer packaged goods categories. They have 100 percent household penetration and the average shopper now buys private label products about 70 times per year.
According to Hoyt, the retailer’s argument for private label is strong as private label retailers are more profitable; their gross margins on store brands are 40 to 42 percent higher than national brands; they offer lower overall prices to consumers, which drives sales; and they escape simple basket price comparisons with discounters and supercenters. In fact, Hoyt argues, one of the reasons for mergers and acquisitions during the past few years has been retailers’ belief that they could grow the private label market share of the company they want to acquire.
What does that mean for branded products? There are categories in which private label has not been able to break the branded product hold, including carbonated soft drinks, snacks, cereal, cookies and pet foods. Branded products are more successful in those categories because they offer heavy manufacturer advertising, consistent innovation, manufacturer brand concentration in the category, price gap management and direct store distribution, which gives the manufacturer more in-store control. For branded products, the best defense against private label, says Hoyt, is to build brand equity, invest in R&D to continually improve products, improve production efficiencies, become a hassle-free supplier and share information in category management presentations.
For more details, log on to hoytnet.com, or contact Chris Hoyt at 480/513-0547.