Consumer Packaged Goods: Muscling In

For manufacturers, private label brands turn retailers into both customer and competitor.

Private-label brands have put their stamp on supermarkets, drug stores and mass merchandisers in a very public way. Stroll through a Kroger store and grab its Private Selection upscale house brand. Reach for toilet paper at Wal-Mart and grab the company's own less-expensive version of a popular national brand.

Private label, or store brands -- defined by the industry's trade association as all products sold under a retailer's own name or a brand name created by a retailer -- have long been a fact of life in the consumer packaged goods (CPG) market. Ever since the Industrial Revolution "when things started to be boxed and packaged," says Brian Sharoff, president of the Private Label Manufacturers Association (PLMA). But it has been in the last 35 years or so, spurred by tremendous inflationary pressures in the 1970s, that the private-label brand has pushed more forcefully to make a place for itself on the store shelf and at the table.

The growth in private labels has created both opportunity and challenges for consumer-packaged goods manufacturers. It also demonstrates the growing strength of retailers in this industry.

To be sure, national brands continue to dominate the U.S. retail landscape. Private label brands have a firm foothold in all retail channels, however. One of every five products sold in U.S. supermarkets in 2004 was a private label (store) brand, according to the PLMA and based on data provided by market research firm Information Resources Inc. Private label sales in that channel reached $40.5 billion. Private label sales in drug stores added another $3.9 billion. Around 1950, by comparison, store brands accounted for approximately 10% of sales, a percentage that had held steady for many years, according to Sharoff.

Fast Facts

Market research publisher Packaged Facts, New York, recently forecast that retail sales of private-label foods and beverages will grow at an annual rate of about 5% through 2009 to $58.7 billion.

For national brand manufacturers like Procter & Gamble Co. or General Mills, it has meant new competition for retail shelf space, with the competition coming from the retailers themselves. The upper hand in those relationships appears skewed toward the owners of those store shelves. On the other hand, some national brand CPG manufacturers also are players in the private-label market, although "they try to keep it quiet," says David L. Dunne, a marketing professor at the University of Toronto.

Birds Eye Foods, for example, known for brands such as Freshlike and Snyder of Berlin, also creates food products for store brands. Del Monte Foods Co. makes private-label wet soups and gravies while at the same time producing for such well-known brand names as StarKist and Kibbles 'n Bits.

Private-label manufacturing can be an added source of revenue for brand name CPG manufacturers, particularly if they are losing shelf space, as well as an opportunity to put spare plant capacity to use. And there may be little in the way of additional fixed costs. "They run the lines a few hours longer and slap on different packaging," says Dunne. Of course, margins for CPG national brand manufacturers are thinner on store brands they produce.

A PLMA spokesperson points out that private-label manufacturing can prove a healthy alternative to smaller manufacturers or regional brands that might otherwise lose out altogether as retailers reduce the number of brands they carry.

Sharoff believes the growth of private labels translates to a significant shift in the manufacturer-retailer relationship. "You've got to reach a conclusion that more and more power is shifting to retailers and the retailing function; less and less in the manufacturing function," he says. "I can't see any factors that would swing the pendulum the other way."

Such as the economy. It's not a factor in private-label popularity, he claims, because they're growing in "non-economically sensitive" categories.

Not quite true, remarks Alan Joyce, an analyst for market research firm Packaged Facts. "The state of the economy will always have some influence . . . especially when it's in decline. As more consumers are forced to pinch pennies, more of them naturally turn to ultra-value priced options offered by retailers' store brands," he says. "But over the last 10 to 15 years, the opposite hasn't always been true. While the economy boomed in the 1990s, so did the popularity of private-label goods. This has been partly due to steady increases in the quality of store brands, but also due to retailers putting more marketing muscle behind their own brands, using them as an important point of differentiation from their competitors."

However, consumers are fiercely loyal to national brands in many food and beverage categories, Joyce points out.

Dunne agrees. "If you have brands which can make people change stores, then you have some power." He cites Oreo as a "tremendously strong brand."

Popular opinion is that the top national brands likely won't suffer in most categories, but minor players will see their shelf space shrink in many outlets. "In some store categories we could end up with far fewer SKUs and a much smaller selection of national brands at many retailers -- maybe only the top three nationals -- in addition to the growing family of private-label brands," Joyce says.

Internationally, the penetration of private labels has flattened in the past five years to 20% to 25% of total grocery volume, says Dunne. He suggests that the U.S. private-label market -- which is weaker than in Europe -- may follow that same path as retailer consolidation continues.

"With the retail industry constantly concentrating on an international scale, and competing more internationally, private labels are here to stay," he says.

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