News - Thrifty Living

POSTED: Monday, Dec. 01, 2008

Private labels part of grocers' strategies

CHICAGO - Store brands have come a long way, and they're paying off for grocers.

Once simply cheap copycats, store brands are looking and functioning more like name-brand products, food industry analysts say. And they're becoming more important to conventional grocery chains as a tool to help battle tough competition from both discounters and health-oriented stores such as Whole Foods.

This year, for instance, Minnesota-based Supervalu Inc. launched Wild Harvest, a label that covers more than 200 organic products, and Culinary Circle, a brand for higher-end items such as premium frozen pizzas.

"This is a key strategy for the company, to develop our own brands business," said Andrew Abraham, Supervalu's vice president for store-brand advertising. The new brands are expected to help Supervalu reach its goal of having store brands constitute 17 percent of total sales this year, up from 14 percent two and a half years ago.

California-based Safeway Inc. said store brands typically make up 15 percent to 25 percent of a grocer's sales, and that they are at the upper end of that range. Sales have been growing at a healthy clip in recent years as Safeway has invested heavily in new private labels.

"Even ahead of the economy, we made an investment to drive structural change with the consumer," said James White, Safeway's senior vice president of consumer brands. A recession, he added, would accelerate that change.

There are myriad reasons for the store-brand offensive. First, supermarkets reap higher gross profit margins on their own brands compared with name brands - about 8 to 10 percentage points higher, said Jim Hertel, a managing partner with food retailing consultant Willard Bishop.

Then, there's the Wal-Mart factor. The grocery behemoth and other discount grocery concepts continue to snatch market share from higher-price conventional chains. But because private-label products are less expensive, a robust private-label program can improve a traditional grocer's "price image" to cost-conscious shoppers, Hertel said.

In the past few years, supermarkets have focused particularly on developing premium private labels, which sell at less of a discount than mainline store brands. Safeway has been particularly successful with the development of its O brand for organic foods, analysts said.

O was launched in late 2005 on 30 items and has grown to 350. The line did $150 million in sales in its first full year; $400 million is expected for 2008.

Early last year, Safeway followed O with Eating Right, a premium, health-oriented store brand now found on 200 products.

O and Eating Right are moving beyond being simply store brands. In a novel move, Safeway this year began licensing both brands to other food companies, including France-based Carrefour SA, one of the world's largest retailers.

"You would never have seen that in the old days of private label," said Marcia Mogelonsky, a food industry analyst with market researcher Mintel International.

Economy-conscious shoppers pick up store brands

CHICAGO - On a recent grocery shopping outing, the chicken broth and applesauce in Julie Ernst's cart bore the Safeway label instead of familiar brand names such as Swanson or Mott's.

"Normally, I would have bought a name brand," she said, pushing her cart through an Elmhurst, Ill., Dominick's, a chain owned by Safeway. "But these are on sale - and then there's the economy."

The economy - a roiling cauldron of evaporating jobs and soaring food prices - has caused shoppers to migrate to cheaper store brands at rates not seen since the last recession in 2001, according to market researcher Nielsen Co. Back then, they shifted right back to name brands when the economy perked up.

But this time, the shift may be more permanent, potentially benefiting food retailers at the expense of packaged-food manufacturers, industry analysts say. Since the last recession, supermarket chains have poured millions into beefing up their private labels, launching new brands, improving packaging and bolstering quality.

"I do think we are in for some very fundamental long-term shifts for private label just because so many retailers are getting behind it," said Todd Hale, a senior vice president at Nielsen. "And, without question, consumers have a more positive attitude toward private label."

The upshot: When shoppers such as Ernst switch, they may be more likely to leave a name brand behind permanently. "I think if I don't see any difference, I'll stick with the store brand," she said.

Shoppers increasingly find little difference between name brands and store brands, which typically cost 25 percent less. A recent Nielsen survey found that 63 percent of consumers said the quality of most store brands is as good as that of name brands, up from 60 percent three years ago.

And a successful store brand can lure customers from one chain to another, experts said. Take Andriani Siavelis, who was shopping this week at the Elmhurst Dominick's. She has become partial to the O brand, which Safeway has put on more than 300 organic items, from fresh produce to cookies to frozen pizza.

Siavelis' cart carried several O items - black beans, navy beans, eggs. The brand has changed her shopping behavior, she said, giving her less incentive to shop at chains that focus on organic. "Now I don't have to go to Whole Foods or Trader Joe's," she said.