Private label is quickly becoming one of the most viable assets potential investors and analysts look for when considering financial opportunities within the grocery industry.
In the past, the investment community had its sights set on leading national brands and the manufacturers of popular consumer packaged goods. Today, however, these major brand manufacturers are so busy defending their current market share that many are neglecting any further development of existing products and product lines.
Investors want to see growth and, as a result, many have shifted their focus away from national brands and onto retailers who are aggressively promoting their own private label items. Through customized store brands, grocers are learning to create strong brand recognition and customer loyalty -- two valuable components that increase a retailer's attractiveness in terms of store equity.
"One of the major drivers in this industry is brand building or brand recognition and private label is a part of that," said Jonathan Ziegler, managing director for Deutsche Bank, Alex. Brown in San Francisco. "But, this is just one of many things investors look for in terms of evaluating retailers. They also look for management of the stores, store location, who the competition is and performance, to name a few."
Private label provides the unique opportunity for supermarket retailers to offer their consumers one-of-a-kind products that can only be found in their stores, a strategy that promotes store loyalty and a strong awareness of the grocer's brand.
However, national brands can also play a vital role in building brand recognition for the retailer. After all, it's the national brands that drive traffic to the stores, even if private label plays a large role in drawing consumers back. With this in mind, market analysts suggest that the retailers who learn to leverage both national and private label will be the industry participants that emerge as most attractive to investors in the long run.
"The big deal used to be what was going to happen with private label versus national brands, but now investors want retailers who promote both types of brands well," said Douglas Christopher, analyst for Crowell Weedon in Los Angeles.
"The retailers who learn to successfully balance their own private label with national brands are extremely attractive to investors because they are both crucial elements to creating brand recognition for the stores. National brands lure consumers into the stores and if a retailer has a good private label line, they will undoubtedly have strong brand recognition too -- it's dually attractive in terms of equity."
In the past, many investors overlooked the role private label plays in building a solid retail brand. Store brands were regarded as items that push net sales and maintain commendable shelf presence. But now, they have become a definite financial asset to retailers.
Those who have developed and effectively marketed a strong line of store brands are consequently receiving outstanding evaluations from analysts. And, as investors increasingly take interest in the retailer side of the industry, grocers are beginning to realize a number of valuable return on investment advantages associated with a flourishing private label line.
A panel of industry experts assembled by the Private Label Manufacturers Association (PLMA) recently produced a roundtable report on private label and its increasing importance for the retailer, entitled "Store Brands Return on Investment: Quantifying Private Label's Total Return to the Retailer" (see related story on page 34).
According to the panel, "the store brand component of a retailer is seen as more than a profit margin generator or a marketing and merchandising device, but as a full-fledged financial asset that needs to be carefully measured, nurtured and deployed."
With most national brands at a standstill, many grocers are following the advice of industry experts like the PLMA roundtable panel and learning to measure, nurture and deploy their store brands as a means of leveraging their potential return on investment. The payoff for retailers is a steady growth in market share. Investors who once favored national brands are now being drawn to grocers who in many situations, are receiving higher evaluations than consumer packaged goods giants like Procter & Gamble.
"Brand products and companies like Coke or Procter & Gamble used to be the big blue chip stocks that got the highest evaluations in the market because of brand value," said Gary Giblen, director of research for CL King & Associates in New York. "Proctor & Gamble used to have a higher evaluation than supermarkets like Kroger and Safeway but investors are now starting to recognize that brand equity is with the retailer and less and less with national brands. Supermarket chains are really establishing leading brand equity versus packaged goods companies by creating their own line of private label products."
Making retailers' private label efforts a bit difficult is the issue of industry-wide consolidation. As several retailers join forces, the store brands from each side of the merger or acquisition must be effectively managed or brand recognition will be lost in the shuffle.
In some instances, the smaller, less-developed private label lines are phased out altogether and all parties work toward the development of a single store brand. However, according to Mark Husson, analyst for Merrill Lynch in New York, the investment community is highly impressed with retailers who are capable of leveraging a number of private label lines amidst the flurry of mergers and acquisitions.
"Coincidentally, the best evaluations today in food retailing are Safeway and Kroger and they just happen to have some of the strongest private label lines in the industry, even after a number of mergers and acquisitions," said Husson. "Investors are mostly impressed with retailers like these because they are helping to consolidate the industry and are good with technology, real estate and have strong marketing arms. But, as they consolidate, those with strong private label lines are adding value to acquired companies by pushing them to develop stronger brands, which requires further promotion of all private label."
Conversely, a solid line of private label goods can actually be a downfall for some retailers.
Most retailers who develop their own labeled items do so in an attempt to create a stronger connection between their store's brand and consumers. When a retailer's emphasis is on the quality of their stores, promoting a line of quality products can only reinforce their desired brand image.
However, not all retailers focus their marketing efforts on the quality of their store's brand name alone. Many warehouse grocers pride themselves on offering lower prices than the competition -- a promise based on the price reduction of national brands, not a line of private label.
"Private label is definitely a good thing for stores like Safeway that want to build customer loyalty based on their own branded products. But, when a retailer is trying to convey a different message, pushing a private label line would be a mistake," said Meredith Adler, analyst for Lehman Brothers in New York. "Investors want to see how actions lead to performance and for some, promoting a private label line could lead to poor performance. Stores that stand for great prices on major brands shouldn't push private label because it will take attention away from their main marketing stance."
Whether a store brand helps or hurts a retailer's brand identity, investors are undoubtedly paying attention to how private label affects competitive success and stock market evaluations. And, as the existing market share continues to move away from national brands and toward store brands, Wall Street expects retailers will work even harder to strengthen their private label lines while becoming more accustomed to the support and interest of the investment community.