Private Label vs. National Brands

Private Label has peaked in our estimation.

But the media hasn't gotten the message.

Despite all the hoopla from the Private Label Manufacturers Association (whose position is, guess what? that private label is the Next Big Thing), the increase in private label purchasing has leveled off or even declined. And in some categories like personal care and children's products, it never really caught on. Seems when it comes to our appearance and our kids, we're worth the extra money for the brand name.

Another reason for the stall is that private label products are primarily about lower prices. Despite all the bull, most consumers say they buy house brands because they're cheaper. The co-packers who supply the stores with their products are under the same cost pressure as the national brands, hence a flattening-out of the price differences. The brands have also responded to the PL threat in a variety of ways, including couponing, price cuts and increasing the amount of product in packages without increasing the price (see Frito-Lay's recent move).

But a recent request from a reporter to comment on a proposed story about Private Label included these questions:

1.) How can a brand prevent this switch from happening? Brands have to offer value. Those who don't will be marginalized and even dropped (supermarkets don't carry products that under-perform). Also brands have the advantage of "deep pockets" when it comes to marketing. Some large chains like Safeway are putting significant ad dollars behind their private label products, so that's not a universal. And with Wal-Mart having recently re-launched its PL line, all bets are off!

2.) How can a brand win back these consumers once the recession ends? Offer value (see above #1).

3.) How can a store develop its own brands into a brand (for example
Safeway's organic food line to be sold in other stores)? The Safeway example is over-hyped. They've had limited successes with getting other chains to buy their O-Organic line, though they’ll tell you otherwise. Let's be realistic, folks: Kroger, for example, isn't going to buy their products, at least not in any significant numbers. The ones who do are mostly the smaller chains and indies. The "white spaces" for store brands are in innovation: the large CPG houses won't usually move into a product category or line unless there is a SIGNIFICANT payday ($100MM+ for foods). A store brand can be profitable in a smaller category if it offers innovation.

4.) How can leading consumer brands offer low priced items to retain these
consumers? Tide recently did this by offering a low price point basic
detergent. The brands need to stop being greedy. Last year, they started shrinking net weights on many packaged foods to compensate for a sharp spike in commodity prices. Stores were howling about those price increases, but the CPG houses were being squeezed by the costs of things like wheat (which was driven up by speculators), and the steep increase in fuel costs that made transportation a significant factor in P/L. Now with commodity prices having leveled off or even dropped, and fuel costs much lower, the brands are offering more net per package while keeping the price the same. I think they can go further, but many are more interested in protecting their profit margins because of investor pressure.

5.) Is there anything else that you are seeing that should be noted as it
relates to this issue? The national brands need to get their heads out of the sand. Private Label has succeeded to a large part because those brands have soaked up extra production capacity making often identical house-branded products. Private Label is a threat to their business, so stop manufacturing for a "competitor," make sure the brand has distinctive value points that will keep consumers choosing the national brand over the store brand, and as always, make proper use of food licensing! It's one of the best ways to tackle the supermarket challenge. Call me if you want to know how!

Excerpted from BSLG's weekly subscription news reader service Food Business News. To subscribe or for information about licensing, contact Broad Street Licensing Group (tel. 973-655-0598)