Making the Store Become the BrandDecember 4, 2017
Windisght Grocery Business | November 20, 2017 – Private-label foods and other consumable goods were one of the 20th century’s biggest retail success stories. Can they take that success to the next level in the 21st?
The story of how private label evolved from marginalized (and mocked) “generic foods” to a genuine competitor with national brands is well known. But the spectacular growth it enjoyed up to about 2008 has slowed considerably.To regain that momentum, industry observers say retailers will have to combine the aspects that allowed private label to grow in the first place, with adaptations to very different landscapes in marketing, retailing and consumer expectations in general.
Private-label food and beverage sales “have been on a declining trajectory that outpaces those of national brands,” according to the Food Marketing Institute (FMI). Increases in year-over-year dollar sales not only dropped below those of national brands in the second half of 2014, but they also became year-over-year decreases starting in the fourth quarter of 2015. Market share for private label in supermarkets dropped in dollar share from 19.5% in 2013 to 19.2 in 2015, and in units from 23.5% to 22.9%, according to the Private Label Manufacturers Association (PLMA).
Certain individual product categories have enjoyed considerably more success, but there’s little disagreement that taken as a whole, sales of private-label products have become stagnant. There is, however, considerable disagreement as to the cause.
The conventional wisdom is that sales of private-label products are tied to the economy. As it worsens, consumers turn to private brands; as it improves, they go back to the more expensive but familiar and reassuring national brands. According to Cadent Consulting Group, during the recessionary years of 1980, 2000 and 2009, the private-label food dollar share ranged from 16.1 to 17.1%; in the recovery years of 1995 and 2005, it fell to 14.8% and 15.4%, respectively.
Debunking ‘a Myth’
PLMA President Brian Sharoff is adamant that the notion of private-label sales being tied to the economy is, and has always been, “a myth.”
“It’s circulated because the national brands circulate it,” Soloff says. “Because it’s the only way they can explain to their shareholders why national brands continue to grow in unimportance and private label continues to grow in importance. You can’t blame yourself if you’re a national brand. You can’t say, ‘Our products are irrelevant, our products are too expensive, our products aren’t meeting the needs of consumers’—how can you do that and not lose your job? So, you have to blame somebody else, and you decide it’s the economy.”
Even people who disagree on the notion agree that it’s rapidly becoming untied—if it isn’t already.
“What we’re suggesting here is that the future will be different because private label is acting very differently in this country today,” says Karen Strauss, a principal at Cadent.
Ironically, it may have been the latest recession that gave private label the boost it needed to decouple itself from economic fortunes. By the time the latest recession began in 2007, private-label products were well along the path to becoming true competitors to national brands in terms of quality, packaging and other aspects.
“I think the timing of all of this, the enhancing of the product, the enhancing of the packaging, the increase in the assortment—it was the perfect storm in a positive way with the economic downturn,” says Susan Viamari, VP of thought leadership for Chicago-based IRI. “So when the economy turned down, people felt pretty good about private label. They were trying [the products] as a lower-priced alternative but found, hey, this isn’t your mother’s private label.” That left them willing to keep buying private label even when the economy perked up, she says.
But that willingness varies considerably among shoppers, products and retail venues. Younger shoppers— millennials and Generation Z—have shown themselves consistently more open to private label than older consumers. According to Cadent, 51% of millennials have no real preference between private label or national brands, compared with 39% of baby boomers.
Cadent points out that by 2027, there will be 15 million more millennials than boomers; this gap could translate to a 1.5 percentage point gain for private label across the total population.
Doug Baker, FMI’s VP of industry relations for private brands, says this generational difference in attitude stems in part from how foods were marketed then versus now.
“Once you go into the baby boomer generation who grew up on Saturday morning cartoons, with commercials for Froot Loops, they grew up on brands,” Baker says. Now, marketing is more diffused and dependent on digital channels—with which millennials are more familiar.
There is also a difference between the two generations’ economic experiences. “Millennials in particular came into adulthood during the recession,” Viamari says. “Finances were an issue.”
All this translates into less brand loyalty for younger consumers, she says. “Millennials are not concerned with the brand on the package. They’re more concerned with what’s inside.”
That concern varies, however, based on product type. According to Nielsen data, private-label penetrationamong specific foods can vary from as little as 1% (lard and liquid coffee) to more than 60% (milk and frozen fruit).
More generally, the most popular private-label categories in grocery stores, according to IRI data, are fresh bread and rolls, fresh eggs, milk, natural cheese and shelf-stable vegetables.
The categories where private label is most successful all tend to have certain things in common. Private label is doing especially well in the so-called “perimeter” categories: fresh produce, baked goods, deli goods, fresh meat and other products sold along the perimeter of the supermarket. In addition, they tend to do well in less-processed products that are thought of more as ingredients than meal solutions. (Of course, those two groups overlap considerably.)
A report from the Hartman Group called The Future of Private Label Food suggests that consumers are moreopen to private label among less-processed foods precisely because there’s less manufacturer involvement— which means less product identity.
“The cultural stakes associated with any individual ingredient purchase are lower than when buying ready-to-eat or value-added prepared foods,” the Hartman report says. “This is because consumers see themselves as the makers of the end-food experience, not the
Less-processed categories are also the ones where national brands usually don’t have as much history. National brands are better established in highly processed categories that are closer to being meal solutions, such as chilled lunch kits, frozen pizza and canned soup.
“Overall, the categories in this segment—dominated by value-added snacking, prepared meals and meal accompaniment items—have a much stronger brand heritage,” the Hartman report says. “Brands continue to be the standard bearers for quality and authenticity cues.”
Strong product identity, however, can be a double-edged sword for national brands, because it robs them of the flexibility they need to adapt to changing tastes and retail circumstances, says PLMA’s Soloff.
“The national brands are incapable of responding to this because their entire life rests on the concept of mass marketing,” Soloff says. “You cannot make a product that’s ‘better’ than an Oreo cookie. How could you do that without saying to all of the Oreo cookie eaters, ‘Now it’s time for you to switch to my new organic Oreo cookie?’ That would make no sense. Coca-Cola tried that, and you saw what happened to Coca-Cola with its reformulation” as New Coke.
Private brands, on the other hand, are better able to meet specialized consumer needs, both with individual products and with entire lines. Segmentation of product lines into specialties such as super value or premium is increasingly being used by retailers to target consumers.
For instance, Topco LLC, a retailer-owned private brand cooperative, has long maintained three basic product tiers. Valu Time is a line of basic commodities with everyday low prices; Food Club and Simply Done are mainstream or “national brand equivalent” lines; and premium brands include Full Circle Market, Pure Harmony and the newly rolled out Culinary Tours.
“Because mainstream offerings appeal to the broadest set of shoppers, we have more brands that fit within this description,” says Kina Guyton, Topco’s senior director of brand marketing and design. However, the premium category is going strong: Pure Harmony and Culinary Tours were both added in the past 18 months.
Organic is another area where private brands have shown both growth and potential. Organic private brands have been some of the top performers at Safeway (O Organics) and Kroger (Simple Truth). Even hard discounters such as Aldi have prioritized organic house brands.
During a recent 52-week period, organic products constituted only 6% of private-label sales in the major categories of beverage, general food, refrigerated and frozen. But they showed growth of half a percentage point in that time period, rivaled only by premium products, according
to IRI data cited in an FMI report, The Power of Private Brands. That report also states that private brands represent 20% of all food and beverage products, but 30% of all organic products.
Baker of FMI sees potential for even more private-brand segmentation, for niches such as transparency, local production and “free-from” products.
Segmentation “is absolutely a valid strategy because no consumer is equal,” Baker says. “They all have their own needs. The best thing about private brands is [that they] allow you to provide solutions for each of those needs.”
Segmentation increasingly describes food retailers, not just their brands. And more of that is coming. Aldi has become a discount powerhouse by depending almost entirely on private brands, to the point where national brands are nowhere to be found on its shelves. “Anyone who has ventured into an Aldi has experienced the somewhat creepy feeling that you are in a parallel-brand universe, where the simulation of very successful name-brand products borders on the legally indefensible,” the Hartman report says.
Creepy or not, enough shoppers find it appealing that Aldi is undergoing explosive growth: It plans to expand from 1,600 to 2,500 stores by the end of 2022. Lidl, its fellow German discounter, is in the process of invading America with much the same strategy. Aldi and Lidl are almost the inverse of conventional grocers like Kroger, with their offerings of both national brands and several lines of private brands. “One view is the house of brands, and the other is the branded house,” says Jim Holbrook, CEO of Daymon Worldwide.
More shakeups are on the way. Amazon—which rolled out private brands last year in coffee, snacks, baby food and other products—is poised to shake up the private-label world with its purchase in August of Whole Foods. Part of the deal is ownership of 365 by Whole Foods, a private brand (and briefly a store format concept) that has the potential to anchor the entire Whole Foods portfolio.
Another potential disruptor is an e-retailer called Brandless, which went online in July. Brandless offers many items for $3 and only one option per item, all in monochrome packaging with bare product descriptions on identical plain white-label panels. In a way, this reverts to the black-and green-on-white, cargo-font “generic” products of the 1970s that fathered today’s private brands.
Holbrook thinks there’s room for all these iterations of private brands, in all these retail formats: “I don’t think there’s any right answer. I think it’s a matter of corporate philosophy.”
Soloff agrees, saying the identity of a store brand depends, in the end, on the identity of the store.
“It’s up to the retailer, just like it’s up to the national brand manager, to decide what is the positioning of their private label,” he says. “Some retailers have two or three [product] tiers; some retailers have one tier. But that’s a retailer decision. Private label is not a thing that you can describe [as] ‘It’s always this, it’s always that.’ It’s the retailer’s perception of themselves.”