The Supply Side: Private label options explored by suppliers, retailers

Consumers spend $725 billion annually on consumer packaged goods (CPG) and the battle for market share is a fierce one between national brands and private label marketers. The stakes are high for even the slightest pick up in marketshare as it can provide a significant boost to the bottom line.

A report by consumer marketing firm IRI examined growth opportunities for retailers and suppliers looking to capitalize on emerging retail segments like convenience stores, dollar stores, drug stores and warehouse clubs.

During the past year, private label share has increased across half of the largest CPG categories, with drug, convenience and dollar channels showing signs of increased private label momentum. Researchers see ample growth opportunities for suppliers and retailers in the private label arena.

National and private label manufacturers are broadening their product portfolios. These changes are having an impact on private label’s key strength — the price point — and reinforcing the need for retailer/supplier collaboration on private label strategies, the report notes.

PRIVATE LABEL GAINS
Private label efforts to drive growth have met with success across some important product categories since 2010:
• Cups and plates, 56% of share, up 4.8% 
• Food and trash bags, 54% of share, up 3.6% 
• Bottled water, 38% of share, up 6.6%
• Fresh bread and rolls, 36% of share, up 2.7%
• Toilet tissue, 23% of share, up 4.2%

These categories are generally viewed as “staples,” historically a private label strong suit, since consumers tend to see little differentiation between private label and national brand options in these categories. Combined, share victories across just these five categories brought more than $2.6 billion to private label marketers’ top line revenue during the past year, according to IRI.

Private label purchases comprised about 14.6% of consumers CGP spending last year. That’s been a fairly steady rate since 2010, according to the report. Researchers said at the macro-economic level private label sales look flat, but taking a closer look there is mounting evidence to support the belief that an evolutionary change is underway.

SUPPLIER ACTIONS
ConAgra, a manufacturer of national brands, recently completed the acquisition of private label manufacturer, Ralcorp. Together the company is working toward growing national brands and private label brand segments of its business through new product innovation and broader promotional programs that benefits from streamlined distribution.

Jason Long, CEO of Shift Marketing Group, said when it comes to attacking private label brands, he is watching Procter & Gamble.

“P&G have introduced lower tier brands Bounty Basic and Charmin Basic and have just launched a basic version of Tide called Tide Simply Clean & Fresh which is about 35% cheaper than regular Tide,” Long said.

In formulating a cheaper alternative that still carries the sacred brand name, Long said P&G runs the risk of diluting its brand equity and cannibalizing existing sales.

“But, they also will grab sales that had previously been ceded to private label. It's a risky move, but it's a strategy they need to explore in my opinion,” Long added.

P&G’s Tide is the Lexus in the laundry detergent category. It has been used as a loss leader at Target for years and was recently added to the shelf at Aldi, an almost an exclusive private label grocer.

As further proof of the laundry-detergent competition, Texas-based grocery giant H.E.B. recently introduced Bravo Plus laundry detergent, a private label option that was touted as a lower-priced solution that contains the same number of cleaning enzymes as Tide.

The two products were merchandised side-by-side, with signage that called on shoppers to “Take the Bravo Plus Challenge,” with a reassurance that dissatisfied customers would receive a full refund.

DRUG/CONVENIENCE MOMENTUM
The IRI study indicated private label performance within the drug store segment has been consistent year-over-year. Unit share grew 1% to 17.6%, while dollar share climbed to 16.9%.

The convenience store segment has the smallest percentage of private label share at just 2.4% of the market at the end of 2013, according to the IRI report. That said, researchers agree the convenience store segment is ready to be opened up by manufacturers and retailers to introduce new products that respond to consumer demand.

IRI said a prime example of what can happen in the convenience store segment can be seen at Ahold’s Stop and Shop stores. The retailer began offering a broad selection of  tiered private label products under the brands Stop & Shop (basic), Nature’s Promise (organic line), Simply Enjoy (snack foods) and Guaranteed Value, a less expensive tier. Private label now accounts for 40% of the products sold at Ahold’s Stop & Shop stores, IRI noted.

Within the convenience store sector, private label share growth is strongest across edible products. This is supported by numerous launches, including 7-Eleven’s national  launch of 7-Select snacks and CST’s (new owner of Valero) rapid expansion of its Fresh Choices brand.

CONSUMER DEMAND
Analysts said consumers remain locked in conservative purchase behaviors that were initially adopted earlier in the economic downturn. Private label plays a key role in helping consumers save money. 

IRI reports on average, private label solutions offer consumers savings of 22% versus national brand solutions. The price gap, however, has been on the decline for several years. Today, only 5% of private label categories provide savings of more than 50% to consumers.

The study also notes that one-third of consumers are actively seeking out private label solutions to save money, and 10% of grocery list makers are listing specific private label products to buy before even entering the retail environment — roughly the same prevalence that existed at the depths of the recent recession.

A strong target for suppliers and retailers are light private label buyers. These buyers, defined as the bottom one-third of private label spenders, currently spend an average of a little over $200 annually on private label products, IRI noted in the report.

RETAILER UPSIDE
Long said on the retailer side of private label, the best example that comes to mind is Costco’s revered Kirkland brand. 

“The brand has come to stand for consistent quality across multiple product categories and has established trust with the consumer,” he said.

The wholesale club sector is demonstrating the strongest private label share growth, according to the IRI study. The growth is occurring among heavy and light purchasers of private label products and boosted wholesale club private-label sales nearly $1.4 billion in 2013, as compared to 2010.

Long said many private label brands are still a “shot-in-the-dark” from a quality and consistency standpoint, but one other retailer that has hit pay dirt with private label is Home Depot.

“I like what Home Depot has done with its HDX private label brand. Home Depot maintains that it's a branded house, and that the HDX brand is only for ‘fill-in’ opportunities, but from a supplier vantage we're seeing more and more emphasis being placed on the HDX brand in certain categories. It will be interesting to see where Home Depot ultimately takes the HDX brand,” Long said.