‘Dramatic events’ highlight 2017December 6, 2017
Store Brands | December 6, 2017 – Brian Sharoff has seen plenty in his more than 35 years as president of the Private Label Manufacturers Association (PLMA). But it has been a long time since Sharoff saw a year like 2017 in the private brands industry.
“The two most dramatic events of the year were probably also the two most dramatic events of the last decade, mainly Amazon’s acquisition of Whole Foods Markets and Lidl’s arrival into the United States,” Sharoff says.
In June, Amazon announced it was buying embattled Whole Foods, which was struggling and losing customers. In late August, the acquisition became official, and Amazon immediately lowered prices on many of Whole Foods’ store brands, adding some zing to the organic and natural foods retailer’s store traffic and sales. Amazon also began selling Whole Foods’ store brands on amazon.com.
Also in June, Lidl, which operates more than 10,000 stores in 28 European countries, opened its first stores on U.S. soil. To date, Lidl has opened 38 stores on the East Coast and will probably open hundreds more in the years ahead. Based in Germany, Lidl offers a 90 percent assortment of private brands.
Considering Whole Foods’ and Lidl’s considerable involvement in store brands, it’s easy to see why Sharoff describes their impact as “events.”
In fact, Sharoff says he has to go back to 1991, when Walmart introduced Sam’s Cola, to recall a just-as-dramatic happening in the private brands industry. Sam’s Cola was one of the first three store brands that Walmart launched in its grocery business to compete against juggernauts Coke and Pepsi.
Like Sharoff, Store Brands also considers Amazon’s acquisition of Whole Foods and Lidl’s landing in the U.S. as two of the industry’s top stories of 2017. Here’s our list of the top 10 stories gleaned from our print and online coverage of the store brands industry this year:
Amazon jolts the industry
It was rumored to happen late in 2016, but didn’t. And then it did happen in June — Seattle-based Amazon purchased struggling Austin, Texas-based Whole Foods Market for $13.7 billion in an all-cash transaction.
In August, when the transaction closed, Amazon officially became a major player in the brick and mortar grocery segment by gaining Whole Foods’ 470 stores. Amazon also became a major player in private brands by obtaining Whole Foods’ array of store brands, including its 365 Everyday Value line. While Amazon’s acquisition of Whole Foods put competitive grocery retailers on alert, what really made them shudder was that Amazon, with its potent e-commerce presence, immediately begin selling Whole Foods’ products online.
Amazon also wasted no time in lowering prices on a selection of private-branded grocery staples across Whole Foods’ stores — doing so on the first day in an effort to lay waste to the “Whole Paycheck” label that Whole Foods had gained for being too expensive.
In October, the Thasos Group, a data intelligence firm, said that foot traffic to Whole Foods increased 17 percent year-over-year during the week of the price reduction beginning on August 28. As of the week ending Sept. 16, the firm reported foot traffic at Whole Foods decelerated to 4 percent year-over-year, but remained elevated compared to the three weeks preceding August 28.
It was also reported that Amazon had sold roughly $1.6 million in Whole Foods’ store brand products online in the first month of ownership. While the number is small compared to the $8 billion in retail sales that Amazon averages monthly, it signified a new revenue platform for Whole Foods and one that grocery analysts expect to grow. It was also a message to competitors to embrace online grocery.
But Amazon’s grocery business has a long way to go before it’s ranked with the heavyweights of the business. Amazon’s grocery sales are reportedly about $24 billion; Walmart, the nation’s largest grocer, sells about $250 billion annually in grocery. Walmart also announced in October that it was stepping up its online grocery business.
It will be intriguing to see what Amazon’s next steps are for Whole Foods and its own private brands, including Happy Belly and Wickedly Prime.
Regarding private brands, Ryne Misso, director of marketing for Market Track and a Store Brands columnist, said that Amazon’s acquisition of Whole Foods could further the growing positive perception of all private brands among consumers.
“By making these high-quality private brands more accessible to average consumers, it is not out of the question that in the near future consumers may even prefer or seek out private brands over national brands,” Misso said.
Lidl lands in the U.S.
Lidl landed like a rock star. When the Germany-based retailer opened its first U.S. stores on the East Coast last summer, hundreds of people gathered in line on the mornings of the days of the openings to be the first to shop in the sleek-looking new grocery stores.
At a July store opening in Norfolk, Va., consumer Lisa Melita said she was “counting the days” for the store to open. Melita had shopped at Lidl before in Europe.
“Lidl says quality,” the 52-year-old said.
The deep-discount retailer, with U.S. operations based in Arlington, Va., opened 38 stores in Virginia, North Carolina, South Carolina, Delaware and Georgia. Lidl, which has more than 10,000 stores in 28 European countries, plans to open 100 stores by mid-2018. Lidl won’t say how many stores it plans to open nationwide, but it could be hundreds in coming years.
Lidl aims to offer high-quality products at the lowest prices through its slew of store brands, which make up 90 percent of its assortment, including its premium Preferred Selection private brand. Lidl also wants to make grocery shopping more convenient for consumers with its 36,000 square-foot stores, (27,000 square feet dedicated to the sales area). And Lidl maintains that its product selection, featuring fewer SKU’s in each category, reduces clutter and makes buying decisions easier.
“We keep it pretty simple,” said Will Harwood, Lidl’s U.S. public relations and communications manager.
Lidl’s keep-it-simple philosophy permeates its operation, which impacts product prices. The company cuts costs wherever it can. All those windows in its stores? Well, they just allow for more natural light and less use of electricity. Simply, Lidl is big on cutting any kind of waste to pass the savings onto consumers.
Todd Maute, a brand expert and partner at New York-based brand agency CBX, said Lidl has done a good job of communicating quality, which is something that is tried and true to its operating model.
“While Lidl really plays up price, what it hasn’t done, which is typical in the industry, is scream price as part of its packaging strategy,” Maute said. “Lidl screams quality product as its packaging strategy. … It’s a recipe for success.”
According to a German business newspaper, however, some of Lidl’s stores were struggling out of the gate. The newspaper, Lebensmittel Zeitung, cited “insider information” in reporting that some of Lidl’s 37 U.S. operating stores were “frighteningly weak.”
Harwood disputed the report, saying, “I can tell you that our launch to date has exceeded expectations. We are pleased with how customers have taken to our stores.”
In October, the Wall Street Journal (WSJ), citing data from digital advertiser and data analyst inMarket, reported that Lidl had sprung a leak. According to inMarket, Lidl was drawing 11 percent of consumer visits to traditional grocers in nine markets in Virginia, North Carolina and South Carolina. By August, Lidl’s share of that traffic fell below 8 percent.
On paper, Lidl has many things going for it, including its private brands. Lidl also realizes it will have to make some adjustments to its product offerings to appease American consumers.
Aldi’s major expansion
A few days before Lidl opened its first stores on U.S. soil, its German counterpart, Aldi, announced it would embark on a $3.4 billion capital investment to expand from 1,600 to 2,500 stores nationwide by the end of 2022, perhaps trying to steal a little thunder from the new kid on the block.
Like Lidl, Aldi, with U.S. operations based in Batavia, Ill., offers a 90 percent assortment of private brands, including its Fit & Active, Friendly Farms, SimplyNature, Clancy’s and many others. A few months earlier, Aldi announced a $1.6 billion program to remodel 1,300 stores by 2020.
If the deep-discount chain meets its goal of 2,500 stores, it will become the third-largest grocery chain by count (behind Walmart and The Kroger Co.) and serve 100 million customers per month.
“We pioneered a grocery model built around value, convenience, quality and selection, and now ALDI is one of America’s favorite and fastest-growing retailers,” said Aldi CEO Jason Hart. “We’re growing at a time when other retailers are struggling. We are giving our customers what they want, which is more organic produce, antibiotic-free meats and fresh healthier options across the store, all at unmatched prices up to 50 percent lower than traditional grocery stores.”
A private brand push in online grocery
These two headlines appeared on the Store Brands’ website on the same day in late September:
Amazon.com amps up sales of Whole Foods store brand items.
Wal-Mart’s Jet.com to launch own grocery brand.
The headlines are a telltale sign of where online grocery is heading with private brands playing a key role.
About a month after Amazon officially acquired Whole Foods in late August, it had sold about $1.6 million in Whole Foods’ store brand products online, including 365 Everyday Value, Whole Foods Market, Engine 2 Plant-Strong and Whole Trade.
Purchased by Bentonville, Ark.-based Wal-Mart last year for $3 billion, the e-commerce site Jet.com will launch its own grocery brand in the coming months called Uniquely J. The private brand will include more than 60 food and household items including nonperishable grocery items like olive oil and coffee pods as well as packaged goods like laundry detergent and paper towels.
Walmart also announced in October that it expects its e-commerce sales to grow 40 percent next year. The nation’s largest grocer also said it would add 1,000 online grocery locations in the U.S. through its fiscal year, which ends January 2019.
When Amazon announced in the spring that it was going to acquire struggling Whole Foods, many grocery experts declared that competitive retailers had better get their online grocery houses in order.
“The world is changing, and it’s changing very rapidly,” said Samir Bhavnani, vice president at 1010data, a data management and analytics firm. “Any retailer that acts like it’s 1995 is in big, big trouble.”
So what does all of this mean for private brands? A few things:
- Consider that millennials are likely to lead the charge in online grocery, considering that many of them grew up carrying around iPhones, not teddy bears.
- Also, according to several studies, millennials are embracing private brands more than any other age group and have a greater propensity to be heavy buyers of such products.
And it’s not just millennials. Bhavnani said he expects aging baby boomers, especially those with disabilities, to take more advantage of online grocery in the future.
“Private label manufacturers and retailers have a very strong opportunity to built private brands [through online grocery],” Bhavnani stated.
Amazon and Walmart aren’t the only two grocery retailers making a push in e-commerce. Costco Wholesale recently began CostcoGrocery, which will provide two-day delivery on dry goods and sundries, and same-day delivery for fresh foods, produce and dry goods through a partnership with Instacart.
BJ’s Wholesale Club introduced two new websites dedicated to showcasing the value, quality and assortment of its two private brands — Berkley Jensen and Wellsley Farms.
“The new websites allow BJ’s to tell the story of these brands, educating members on the quality and assortment while allowing them to research products and shop,” said Rafeh Masood, senior vice president and chief digital officer for BJ’s.
Aldi also announced this summer that it was teaming with Instacart to get into the grocery delivery game. Aldi is testing the service in Atlanta, Los Angeles and Dallas. Aldi plans to roll out delivery across the nation if it is successful in the pilot markets.
Kroger’s lawsuit a good sign for private brands
The Kroger Co.’s lawsuit against Lidl for trademark infringement made national news — “Store-brand smackdown,” read a headline in the Washington Post. Kroger filed the lawsuit in July, shortly after Lidl opened its first stores on the East Coast, claiming that Lidl was infringing on its Private Selection brand with its Preferred Selection brand and causing confusion among customers. Cincinnati-based Kroger, the nation’s second-largest grocer, asked the federal court for an injunction to force Lidl to stop selling its Preferred Selection products immediately, but the judged ruled otherwise. The case was scheduled for a bench trial on Jan. 11, but Kroger dropped the lawsuit in September.
The lawsuit came and went quickly, but it said a lot about the progression of private brands, according to Todd Maute, a partner at New York-based CBX, a brand agency and retail consultant.
Maute said the lawsuit reminded him of years ago when the owners of top consumer product brands always went after what they saw as trademark infringement on the part of private brand emulators. But this lawsuit was different — “A twist on the prevailing dynamic,” Maute said —because one of the top owners and creators of private brands was taking a fellow private brands competitor to court.
Maute said the lawsuit shows just how far private brands have come.
“Here we [had] one major grocer suing another over private label trademarks,” he said. “I see it as an indication of how far private label has come, at least with respect to those retailers that truly understand its power and potential.”
Maute said nobody could fault Kroger for trying to protect it’s very successful 20-year-old store brand. He also credited Lidl for not backing down and wanting to protect its own store brand as it continues to open stores in the U.S.
Maute said he remembers reading a story several years ago about how Disney lawyers forced a small Florida daycare center to whitewash an image of Mickey Mouse that the center had had painted on the side of its building.
“Is that aggressive? Sure,” Maute said. “However, nobody could accuse Disney of trademark apathy. Without commenting on the merits of the Kroger-Lidl case, I say kudos to those retailers that fully embrace their store brands — up to and including protecting them in court.”
How to pump up private brands
In January, Store Brands provided exclusive analysis of the “The Power of Private Brands,” an in-depth report from the Food Marketing Institute, IRI and Daymon stating that private brands at supermarkets and regional grocers, hampered by deflation and a decline in grocery trips, haven’t kept up with national brand sales the last two years. But the report stressed that supermarkets and grocers can take advantage of the growth potential of private brands by customizing products, recognizing the need to invest to drive store brand innovation and embracing a wider range of promotion vehicles, including emerging social media platforms.
“It will be a lot of hard work and will require grocery retailers to think differently about their store brands, but there is a lot of opportunity for them [with private brands],” said Mark McKeown, client insights principal at IRI.
Kristof Duna, director of private brands at Merchants Distributors Inc. in Hickory, N.C., and co-chair of the FMI Private Brands Council’s research and education committee, said the research justifies what he is seeing in the marketplace with private brands and grocery. But while grocers have lost dollar share, Duna believes they can regain it by investing more in store brand innovation.
“There are still retailers that want to take the benefits of private brands without really looking at the investment needed to keep them on the cutting edge,” Duna said.
Dave Harvey, Daymon’s vice president for global thought leadership, said retailers simply need to think differently to distinguish their private brand offerings to increase sales.
“What will drive future growth in private label are categories actually being created by retailers themselves,” Harvey stated.
Here are key highlights from the study:
- Nearly all U.S. households – 96 percent — are purchasing some form of private brand at retail outlets that sell food products.
- Private brands performance has been on a declining trajectory at grocery that outpaces that of national brands, and the performance gap has widened over time.
- Much of the private brand decline at grocery was due to the deflationary impact of dollar sales in dairy, eggs and cheese.
- Product customization is the biggest opportunity for private brand growth.
- The industry views the biggest threat to private brands to be a lack of capital investment to drive innovation.
Organic private brand represents a small but growing segment of the industry.
- Millennials are embracing private brands and are more likely to be heavy buyers.
- The best store brand quality perceptions belong to perimeter categories — 74 percent quality perception for dairy, 70 percent for fresh produce and 68 percent for bakery.
When asked if adding an organic tier to their private brands would be worth retailers’ time, effort and money, Daymon’s Carl Jorgensen didn’t have to think long before replying — answering the question faster than you can say Peter Piper picked a peck of pesticide-free peppers.
“You would be investing in the fastest-growing part of private brands,” said Jorgensen, Daymon’s director of global thought leadership/wellness. “Sure there is a cost in starting a new store brand, but look at the opportunity.”
Organic private brands represent a small but growing segment among supermarket chains and regional grocers. While organic represents only 6 percent of share of sales across private label food and beverage, it gained a half share point in 2016 at the expense of value and mainstream segments, according to “The Power of Private Brands,” a recent report from the Food Marketing Institute, Daymon and IRI. Private brands represent about 20 percent of overall food and beverage sales, but 30 percent among all organic items, the report stated.
Several retailers have seized the own-brand organic opportunity with success. Among large supermarket chains, Cincinnati-based The Kroger Co. has one of the top private brand organic programs going. Kroger debuted its Simple Truth Organic line in 2012 and it has grown to be one of the largest-selling organic brands in the country.
Lakeland, Fla.-based Publix Super Markets debuted its organic and free-from store brand, Publix Green Wise, in 2003. Publix is growing the line carefully and strategically. In 2016, Publix introduced about 50 new products to the line, and about 100 new products were added this year, including organic waffles, granola and nut butters in grocery, organic soup in deli and organic-sprouted wheat bread in bakery.
Karen Hall, Publix’s director of emerging business and private brands, said there is a “concerted effort” to expand the the line.
“I don’t know if it will always be 100 percent growth [annually],” Hall says. “We shouldn’t have products in every sub-section; that’s not the strategy. I also don’t know when we will get to the point of saturation.”
Jorgensen said organic growth hasn’t come close to hitting its growth ceiling, his reason being that organic only has a 5 percent penetration rate among all retailers, which includes national brands and store brands.
“That gives you an idea of how much white space there is,” he says.
Sam’s Club’s: It’s not about Costco
Costco Wholesale and Sam’s Club are the two largest warehouse club chains in the country. Issaquah, Wash.-based Costco has its popular Kirkland Signature private brand line, which includes an array of products and accounts for nearly 25 percent of Costco’s business. Up until recently, Bentonville Ark.-based had — count ’em — 21 store brands.
In April, Sam’s Club announced the revamping of its private brands’ program and that Member’s Mark, which has been around for 20 years, would be its lone brand. Some industry insiders saw Sam’s Club’s move as one to directly compete with Costco’s Kirkland.
Sam’s Club formed, essentially, a new private brands team to spearhead the revamp, which will touch about 1,200 products in food, beverage and general merchandise by the end of 2018. It includes 600 new products — 300 introduced in late 2016 and 2017 and 300 in 2018 — and enhancements to 600 others. And it won’t stop there. Sam’s Club will continue to develop and introduce new products in the coming years.
Sam’s Club, a 600-store chain founded in 1983, has added everything from fair-trade-certified 100 percent Arabica coffee to organic virgin coconut oil to smoked pulled pork to honey sourced from a U.S. bee cooperative.
Chandra Holt, Sam’s Club’s former vice president of private brands who was recently promoted to senior vice president of merchandising at the warehouse chain, said she was often asked if Sam’s Club upped the ante on Member’s Mark to compete with Costco’s Kirkland Signature.
“We have a number of competitors that do a good job with their private label,” Holt said. “But I don’t want any one competitor to define what we are going to do. We are going to do what’s best for our members.”
DeCA debuts private brands
In June the Defense Commissary Agency (DeCA) debuted its first products, bottled water and kitchen and trash bags, under its first store brand lines — Freedom’s Choice (food products) and HomeBase (non-food items).
The products in the lines include everything from beans to rice to cheese to snacks to shelf-stable juice to paper plates. DeCA chose Grand Rapids, Mich.-based SpartanNash as its partner to introduce private brands for the first time in its 25-year history.
“We want [our patrons] to view Freedom’s Choice and HomeBase as their brands,” said Randy Chandler, the principal deputy of sales, marketing and policy for Fort Lee, Va.-based DeCA, which operates a worldwide chain of stores providing groceries to military personnel, military retirees and their immediate families. “They have devoted their lives to the military, and these brands are devoted to them.”
DeCA also introduced TopCare products including first aid supplies, vitamins, over-the-counter medications and beauty care items. TopCare is a store brand supplied by Elk Grove Village, Ill.-based Topco Associates.
Perhaps there is no one prouder of DeCA’s new store brands than Chandler, whose father fought in the Vietnam War as a member of the Marine Corps. Chandler wondered if he would ever see his father again when he left for Vietnam in 1967.
Fortunately, Chandler’s father returned home safely. Chandler, aware that many of his father’s comrades didn’t return home alive from Vietnam, developed an appreciation for those in the military — a gratefulness that has only deepened as he has grown older.
Chandler is passionate about what he can do through his profession to help those who are serving in the military and those who have served. Through DeCA, he wants military personnel to receive the best food at the best prices at each of the 238 commissaries that are located in 13 countries. He has fond memories when his family shopped at the commissary during his father’s military tenure.
“We want patrons to come here to get our store brands because they know they can’t get them anywhere else,” Chandler said. “I know the commissary meant a lot to our family. And that’s what drives me every day to help deliver value to our patrons.”
A surge of store brands?
Several industry insiders and experts expect private brand sales and market share to surge at supermarkets in the next several years.
Several reports cited 2016 supermarket store brand sales as being flat or slightly below sales when compared to 2015.
But speaking at a conference this summer, Diana Sheehan, director of Kantar Retail’s grocery channel research team, cited an influx of private-branded products on the coasts and an increase of millennial shoppers as her reasons for feeling bullish about private brands in the United States.
“My expectation is you are going to see private label sales increase at a faster rate in the next five years than in the past five years,” Sheehan said
Sheehan said while store brands have performed well at retailers throughout the Midwest, the East and West coasts have yet to embrace private brands. But she said that is about to change with Lidl’s arrival, Aldi’s expansion and the impact of Retail Business Services, a company created from the Ahold USA and Delhaize America merger, which already has a strong presence on the East Coast but has plans to ramp up its private brands through its new “Better Together” strategy.
“I think you will see a lot more investment and more creativity [on the East and West coasts],” Sheehan said, noting that the impact of Lidl, Aldi and Retail Business Services could spur other regional and national retailers to invest in their private brand programs.
The PLMA’s Sharoff expects private brands retailers of all sorts — from Walmart to Publix to three-unit chains — to invest in their store brand programs and make consumers more aware of them to compete with private-branded powers Amazon/Whole Foods and Lidl. But Sharoff said it will take a few years for the surge to show up as statistical growth.
“As is well-known, both Amazon/Whole Foods and Lidl are strongly committed to private label,” Sharoff said. “Both are game-changers as they bring entirely new levels of complexity to America’s retail landscape. These are two very powerful entities and they are already challenging established retail leaders across every channel to increase their commitment to private label as well, so there is plenty of reason for optimism among private label manufacturers.”
Sharoff doesn’t expect massive growth of 20 percent, which he added is “not realistic, but if private label goes up a point compared to previous years, that would be significant.”
Don Stuart, co-founder of Cadent Consulting Group, which specializes in private brands strategies, said the time is ripe for “significant private brands acceleration” in grocery.
“Since 1980, private label has been through peaks and troughs. Its share rises when there’s a recession and falls when there’s a recovery,” Stuart said. “Time and time again this has proven to be the case. Up until now.”
Stuart said Amazon and Whole Foods will “lead the charge” in advancing store brands but other entities will also play a role, including many brand-agnostic millennials, deep discounters, traditional retailer reaction to deep discounters to win back share, growth on the grocery store perimeter, new entrants like online retailer Brandless and the further development of private brands as a true brand.