PRIVATE MATTERS

Like the bell-bottoms and leisure suits of their day, early store brands were a '70s fashion many of us would like to forget. People bought these generic versions of commodity products for their price, not their quality, and certainly not for their presentation.Today, the term encompasses not just national-brand knockoffs, but also lines meant to compete with premium branded products. In some cases,

Like the bell-bottoms and leisure suits of their day, early store brands were a '70s fashion many of us would like to forget. People bought these generic versions of commodity products for their price, not their quality, and certainly not for their presentation.

Today, the term encompasses not just national-brand knockoffs, but also lines meant to compete with premium branded products. In some cases, such as Loblaw's PC Mini Chefs line of wholesome, kid-aimed foods, they're designed to offer something not found in a national brand. In the top 20 segments of store-brand foods, proprietary brands now account for about one-fourth of sales.

As consumer acceptance of store brands has grown, retailers have narrowed their price gap with the national brand, while improving the way they promote these lines, retailers and industry watchers said.

"Retailers are beginning to find they can narrow the gap and charge higher premium prices," said Jon Hauptman, a vice president at Willard Bishop Consulting, Barrington, Ill. "With advances in packaging [and] graphics, some of these items are looking increasingly upscale."

Since IGA updated the packaging of its private label about three years ago, for example, many IGA retailers have reduced its price gap from 18% to 20% to between 12% and 15%, said Jim Collins, national accounts manager in charge of store brands at IGA.

"In the past, the packaging wasn't there," he said. "They feel confident now in making the price disparity closer."

Some observers believe more work is needed to close the gap, though.

"It's coming slower than I think it should," said management consultant Frank Dell, president, Dellmart & Co., Stamford, Conn. In not moving faster, he said, retailers are "giving away profit."

Since consumers will often support narrower gaps, Hauptman said, "I think some retailers will find they don't need as wide a gap to maintain strong private-label sales."

Retailers are capable of moving aggressively in pricing private label, according to a March 31 report by Smith Barney. In three of the four biggest food categories -- dry grocery, frozens and packaged meat -- store-brand pricing in food, drug and mass channels outpaced that of branded items in the 52 weeks ended October 2004. Frozens saw the biggest increase, with prices up 5.6%, vs. 2.9% for the category as a whole.

Given the many factors influencing private-label pricing, this trend is far from universal. Gaps vary widely across categories. They can be as high as 50% in categories where the brand is highly differentiated, as with frozen pizza and breakfast cereal. Yet, between commodity-like products, the gap tends to be smaller and store brands tend to have greater share.

Luis Nieto, president and CEO of private-label marketer Federated Group, Arlington Heights, Ill., whose brands include Hy Top, Better Valu and Parade, said despite new premium lines that are priced at a small discount to the national brand and increased promotional activity by national brands in some categories, the price gap in key categories "has not changed substantially."

Retailers "really haven't tried to adjust their price gaps," he said. "If anything, I've seen in selected categories where they've tried to increase the price gap." Retailers have lowered prices in high-volume categories like laundry detergent to grow their share relative to other channels, for instance.

Nieto said he believed retailers were getting more sophisticated and vigilant about pricing. For its part, Federated often identifies opportunities to narrow the spread in cases where quality is comparable.

The purchase frequency and quality of Federated's own-brand macaroni and cheese, for example, are high compared to Kraft Foods', suggesting that consumers care less about the brand, and thus retailers may not have to give a big discount. "There are a number of instances like that," he said.

Desperate to set themselves apart from all the other channels selling Center Store products, retailers have been putting their efforts into upper-tier, store-brand products like specialty foods, wine and naturals/organics.

"Retailers are no longer relying on an assortment that is at or below the national-brand price," said Brian Sharoff, president, Private Label Manufacturers Association, New York. "It's a very different mix of products that was presented 10 or 20 years ago."

The frozens aisle has especially benefited, with new products that address meal, portion control and health demands. "The days of Salisbury steak with mashed potatoes and string beans are over," Sharoff said.

Take Price Chopper's Central Market Classics line, which it recently expanded to include "restaurant-quality" frozen appetizers, entrees, side dishes and desserts priced between $2.69 and $10.99. Consumers today know private label can be top quality, and they're willing to pay top dollar for it, said Mona Golub, chain spokeswoman.

Private label has come a long way in shoppers' views. Unit sales of private-label items in all channels grew 2.5% in 2003, while that of branded items rose just 0.3%, according to ACNielsen. In a summer 2004 report, Private Label Trends, it concluded that stronger private-label shares seemed more related to loyalty to the brand and the retailer than to the level of promotion and price discount.

Shoppers are increasingly looking at store-brand quality, said Barry Scher, vice president, public affairs, Ahold USA. "I think [price is] just as important, but quality has probably advanced more in the consumer's mind. When private label started, it wasn't as good."

Staying on top of prices requires retailers to keep abreast of changes in the national brand's product formula. They have to monitor branded products' movement and promotional activity, which can lower the price difference drastically.

"If they don't stay on top of the analysis, it's very conceivable that the price gap closes, and you don't even realize it," Nieto said.

A few retailers have begun using price optimization software to aid this process.

Such tools can help a retailer understand the relationship between private label and its branded counterpart, and measure its price sensitivity, said Tim Manning, vice president of marketing for software vendor Khimetrics, Scottsdale, Ariz., whose clients include Albertsons and Big Y.

DemandTec, San Carlos, Calif., another active vendor, said its software leverages the understanding of how customers respond to different merchandising events. The software recognizes which products gain credibility with consumers when their price approaches the national-brand counterpart, and which ones do better when the price decreases.

Retailers can't ignore evidence that quality remains an issue for some consumers. In a January survey by Mintel International Group, 59% of respondents said they believed private-label and national-brand quality were the same. Yet, 55% said with national brands, they didn't have to worry about quality.

So, if private label and store brands are close in price, some consumers may opt to buy the national brand. Once the gap widens past 20%, consumers start to question its quality, though, Dell said. "If I already own 25% of the market, I've got consumers doing repeat purchases. There's no rationale to keeping a massive differential," he said. The gap should be between 10% and 15%, he said. "I don't think you ever need to do over 15% below the national brand. It gets to the point where it hurts the image."

Neil Stern, partner, McMillan-Doolittle, Chicago, a retail consulting firm, said he saw the discount eventually narrowing to 5% to 10% from 10% to 30%. When that happens, private label will start getting the promotional attention it deserves, he said. "I think that's going to increase in sophistication, along with private label increasing in penetration."

PRIVATE-LABEL PRICING: IT'S ALL RELATIVE

Top 5 food and beverage categories selling private label with the largest discount to branded products

Category; Private-Label Discount

Carbonated Beverages 53%

Bottled Water 50%

Crackers 46%

Dough Products 41%

Prepared Foods/Dry Mixes 41%

Top 5 food and beverage categories selling private label with the smallest discount to branded pricing

In these categories, private-label price is not at a small discount to branded -- it is actually more expensive than brand

Baby Food 220%

Wine 60%

Frozen Unprepared Meat/Seafood 34%

Salad Dressings 33%

Frozen Prepared Foods 10%

Note: Total U.S. in the 52 weeks that ended Dec. 27, 2003 in food/drug/mass, including Wal-Mart Stores.

Source: ACNielsen