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A Perfect Storm

A Perfect Storm

During the years when economic waters where choppy rather than treacherous, supermarkets were unknowingly enhancing the buoyancy of a lifesaver of sorts by bolstering their private-label lines. Now that joblessness and a lack of consumer confidence have primed the private-label market for growth, a greater category presence and well-honed skills have left retailers poised to capitalize on the situation.

During the years when economic waters where choppy rather than treacherous, supermarkets were unknowingly enhancing the buoyancy of a lifesaver of sorts by bolstering their private-label lines. Now that joblessness and a lack of consumer confidence have primed the private-label market for growth, a greater category presence and well-honed skills have left retailers poised to capitalize on the situation. Many are taking advantage of the opportunity by further expanding their store-brand lines.

Among them is Spartan Stores. The Grand Rapids, Mich.-based grocery distributor and retailer operates 100 stores in the state, and distributes to 400 independents in the region, which has been dealt a series of economic blows.

With an unemployment rate of 10.9% in December, Michigan tops the nation's list for joblessness. So it's no surprise that consumers there have also driven an increase in Spartan's store-brand sales that trumps the national average. During a recent 16-week period tracked by Nielsen, retailers across the U.S. had seen an average 8% increase in store-brand sales over the prior year, while Spartan experienced 10% growth, according to Alan Hartline, executive vice president of merchandising for Spartan Stores.

“With the tough economic climate, and even more so in Michigan, consumers are switching from national brand to private label,” he told SN.

The transition has reportedly been seamless, thanks to the chain's broad range of choice in private label. Close to 90% of the more than 3,000 store-brand SKUs Spartan merchandises and distributes are Center Store products. Last week it added 21 SKUs of 100% Natural Spartan Brand Chicken to the mix. It's steering shoppers toward the new offering with shelf signs in Center Store.

Suggesting that consumers “Try It at Your Next Meal,” the promotional messaging is placed near appropriate sides for chicken, such as boxes of Spartan Alfredo pasta and sauce, and Spartan four-cheese instant potatoes. The meal solution is also reinforced with a coupon for a free box of Spartan brand stuffing that appears on chicken packages.

Rather than adding new items to its private-brand offerings, Wal-Mart has focused its efforts on relaunching its Great Value line. Of 5,500 Great Value items tested against national-brand equivalents, 1,200 products, including cold cereals, cookies and yogurt, are being reformulated. Products will boast improved value, higher quality and redesigned packaging when they hit shelves this quarter.

The move is seen by some as a departure for the retailer, which prides itself on its bare-bones efficiency.

“In the past, Wal-Mart was all about price, and they forgot about the other things people wanted when they were shopping,” observed Patty Edwards, a research analyst for Seattle-based Storehouse Partners. “They've gotten so much better at developing brands that I think they can do a really good job bringing this back now.”

Although the retailer has not had to start from scratch, the initiative has been no small undertaking. To keep more than 500 suppliers on the same page, it leverages a private-label management platform from Agentrics. Renamed Wal-Mart Aspect, the system helps the company manage product specifications, design packaging, view test results and track how well suppliers are conforming to food safety audits. The system could also help Wal-Mart plan for new product introductions.

Although the chain has traditionally focused on national brands, a private-label expansion may be on the horizon, said Citigroup retail analyst Deborah Weinswig.

According to her estimates, Wal-Mart has the potential to improve its private-label penetration from approximately 16% of today to a whopping 40% over the next three years. Share improvements could be achieved through SKU rationalizations designed to make room for store brands.

“If Wal-Mart carries the top three branded products in a given category, the company might decide to carry only the top two brands and replace the third brand with Wal-Mart's own private label,” Weinswig said.

A similar strategy may have been considered by Canadian retailer Sobeys. After the Stellarton, Nova Scotia-based chain polled shoppers to see what they thought of the idea, it learned that a paring back of national brands would have to be done sparingly.

“Consumers told us, ‘Don't take out the national brands and force the choice on me’; that actually annoys customers more than anything,” said Belinda Young, chief marketing officer for the chain. “But provide the right national-brand choice and provide the right private-label proposition alongside and allow me to make the right decision.”

For some retailers, that means adding rather than taking away. Though national-brand-equivalent store-brand tiers are fairly well developed, tens of Center Store categories are without value-tier representation, noted Jim Hertel, managing director of Willard Bishop, Barrington, Ill. Historically, certain categories were neglected because retailers were fearful of trading shoppers down to lower-priced alternatives. But today, the tides have turned, and store brands priced 35% below national brands have become a necessity.

“Some shoppers buy purely on the basis of what's the lowest price,” noted Hertel. “It's important to give them, not an overwhelming amount of choice, but at least a choice at that price point.”

Costco, Issaquah, Wash., is able to offer its members value-priced Kirkland Signature store brands, thanks in part to its hard-and-fast margin rules, said Storehouse Partners' Edwards.

The wholesale club averages a relatively low 8% to 10% profit margin on national-brand sales, and will not exceed 14% on any branded item. Although conventional retailers enjoy store-brand profit margins that are about 10 percentage points higher than what they realize on a national brand's sale, Costco's margins for its Kirkland Signature brand cannot exceed 15%.

“That is an absolute cannot-break rule from [chief executive officer] Jim Sinegal, and it's enforced all the way down the line,” said Edwards. “I can't imagine how angry the man would be if they tried to sneak something past that.”

The pricing model may help support Costco's more aggressive approach to store brands. According to reports, Sinegal has projected that Costco's private-label sales will grow from 20% of the wholesale club's overall sales to 25% within the next five years.

Meanwhile, expanded offerings are popping up on the retailer's shelves. Among the new releases is a line of Kirkland Signature environmentally friendly cleaning products, including liquid laundry detergent made with palm and coconut oils; clear liquid dish soap; and multipurpose cleaner that comes with a 32-ounce reusable spray bottle. Refills for the bottle are available in a 170-ounce size.

Costco has also expanded its Kirkland wine selection and nearly replaced all of its branded spices with store brands, according to Edwards.

“Every time I walk through Costco I see more and more Kirkland brands,” she said.

With so many retailers vying for shoppers' wallet share, chains have had to get creative when touting their private-label offering.

Though conventional efforts like endcaps, seasonal pallet modules and ongoing temporary price reductions are used to push Spartan's brands, the chain also drives growth through less traditional means.

Last year it launched www.turntospartan.com. Shoppers can log on to the dedicated site to access store-brand Internet coupons and recipes, rate products, and read reviews. A coupon for $1 off Spartan Brand Crunchy Butterfly Shrimp, which received a 4.5-star rating out of a possible five stars, was recently available on the site.

Retailers like London-based Sainsbury's take a more price-focused approach to trading shoppers down.

“It went through stores and filled them with signage saying consumers can save at least 20% if they buy private-label vs. branded products,” said Natalie Berg, grocery research manager for Planet Retail, London. “They also placed signs at the entrance so that it'd be the first thing shoppers see. As a result, private labels are growing at twice the rate.”

Chains are also engaging shoppers even before new private-label items are introduced. Sobeys sets up very specialized consumer panels and trains them to gauge quality and make sensory appraisals. The panels include premium foodies, health-focused shoppers, price-conscious consumers and kids.

“Every single new or existing product gets run through the appropriate panel,” said Young. “We believe in it so much that if a product doesn't pass the panel, then it just doesn't launch.”

TAGS: Walmart