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NEW YORK -- Private-label lines are an increasingly significant component of the grocery product mix, according to Brian Sharoff, president of the Private Label Manufacturers Association here, and their continued growth is radically changing the way supermarkets look, as well as how they do business.As has been reported regularly in SN, retailers are branching out into more and more categories, creating

NEW YORK -- Private-label lines are an increasingly significant component of the grocery product mix, according to Brian Sharoff, president of the Private Label Manufacturers Association here, and their continued growth is radically changing the way supermarkets look, as well as how they do business.

As has been reported regularly in SN, retailers are branching out into more and more categories, creating line extensions and increasing the number of stock-keeping units for their store brands. For example, in 1998, some of the chains that have augmented or enhanced their private-label offerings include Edwards and Tops, divisions of Ahold USA, Atlanta; Safeway, Pleasanton, Calif.; Wegmans Food Markets, Rochester, N.Y.; Genuardi's Family Markets, Norristown, Pa.; Wild Oats Markets, Boulder, Colo.; and Rice Food Markets, Houston. Wholesalers like Fleming Cos., Oklahoma City, and Supervalu, Minneapolis, have also increased their offerings, while Sam's Club, Bentonville, Ark., introduced a brand new line this year, called Member's Mark. Moreover, in-store magazines are being used by some of the largest chains, like Safeway, Cincinnati-based Kroger and Ahold, to strengthen store-brand name recognition, with the use of coupons and recipes. Wegmans and Spartan Stores, Grand Rapids, Mich., are using private-label grocery products as the hub for meal solutions in Center Store, while Safeway and Northlake, Ill.-based Dominick's Supermarkets are partnering with other organizations in citywide or community events -- and using those opportunities to push their brands, as well as to brand their stores.

To find out more about how the private-label industry will help change the supermarket landscape as the United States heads toward the millennium, SN spoke with Sharoff on the eve of the Association's annual convention, being held this week in Chicago.

SN: Is supermarket consolidation good for the private-label industry?

SHAROFF: No doubt, if you have a major player like Kroger, they can make a decision that helps all their stores, plus, plus, plus. But what's more significant is what Ahold [is currently doing]. By opening up the Sensational line, they seem to be demonstrating that there are more profits to be made by going along with their own brands rather than just relying on national brands. And the Sensational line will be across the board.

Ahold is a global company, and when it makes decisions, they apply to China, Thailand, Brazil, the United States and their home chain [in the Netherlands]. It's a whole different type of retail.

SN: Does private label then become a national brand on that scale?

SHAROFF: A private-label brand is a brand the retailer controls, while the words "national brand" refer to a handful of large companies with national distribution, supported by large amounts of advertising, and recognizable to most Americans. Well, Wal-Mart accomplishes the very same thing with its Member's Mark brand, [which becomes] entitled to national-brand status.

SN: Will consolidation increase the percentage of private-label products in stores?

SHAROFF: It won't change the percentage that much. It might go to 25%. Private label is not growing within categories, it's growing in the number of categories offered. A lot of small retailers can't get into private label because they can't order products in sufficient numbers. The same is true of large retailers in lesser known categories. So if you have a big-enough retailer, he can order the volume in lesser known categories and make a profit on it.

SN: So where will we be in five or 10 years?

SHAROFF: I don't think market share will vary more than 23% or 24%. It doesn't seem to go up more than a percentage point every year or year and a half. But that's a lot of business. England is one of the few countries in which private label is above 40%, but it has an entirely different distribution system. But the United States has gone beyond France in terms of private-label share. For the first time, private-label share in the United States is higher than in one of the major countries in Europe. We're also higher than Holland now.

SN: What will the impact be on private label of stores branding themselves in the marketplace?

SHAROFF: There will be a few tiers of retailers. Retailers like Kroger and Safeway, which have the financial wherewithal to brand their stores and to be national advertisers, will have store brands in [many categories]. From a retailing history point of view, as consolidation occurs, there will be niche marketing occurring at the same time. As the big guys get bigger, somebody invents a format down below, because entrepreneurship has to have [an outlet].

But I think the key that is interesting is that Wal-Mart is going down to neighborhood size. The experience in the United Kingdom, where retailers are coming up with multiple levels of formats, will play out in the United States as well. So you will go to a big Kroger and a little Kroger and a lunchtime Kroger and a weekend Kroger.

SN: What other changes in formats do you see coming down the pike?

SHAROFF: Some of [these changes] will affect urban America, which has been understored. And it's a big market. And a lot of these guys are looking at how to get back into Philadelphia, Pittsburgh, Manhattan, Los Angeles. The only ones that could come back into the urban markets are the big guys, since they can charge the prices that reflect their purchasing power.

Kroger just came up with signature stores, but the difficulty has always been, how do you expand into smaller stores and maintain price competitiveness?

SN: Do you think that some of the attempts to brand the store, such as the use of in-store magazines, have helped sell private-label grocery products?

SHAROFF: It [has helped] retail image-making more than it has boosted private-label sales. But that [strategy] doesn't get to the heart of how a retailer merchandises its brand. [What helps] private-label [sales] are making sure quality is extremely good in every category, compared with national brands, and using tremendous amounts of in-store signage, taste tests and other proactive activities. [But most important is] strategic packaging. You can dramatically increase your private label with strategic packaging, but not all the retailers want to take a shot.

SN: What do you mean by strategic packaging?

SHAROFF: Most packaging is done on a category basis. [A retailer] looks at the cereal category and [notes] what Kellogg's does with its packaging, [and asks], what do I need to do with my [private-label] packaging to assure the consumer that what's inside is a good product? That's the traditional approach.

Strategic packaging ignores all that. You come up with a theme that you consider to be your graphic message, and you play that theme throughout the store. When you do that, something very special happens. You [may have] a store where 35% or 40% of the SKUs are your own brand. If all the packaging has an artistic graphic theme, it overwhelms everything else in the store. Those are the things that affect a store; branding a store, if you want to call it that.

SN: Which retailers have done a good job with strategic packaging?

SHAROFF: H.E. Butt has taken its design and carried it through, without thinking about what [for example] Kellogg's has to say. So go into the cereal category, and the design is attractive on its own merits. And the same design reappears on laundry detergent. It's a very gutsy step, which not many retailers are quite ready to take. Shaw's is a little bit like that, and Wegmans does it, but it's not as integrated. What Wegmans [has done] is create strong families of brands. If [Ahold's] Sensational line really takes off, it would be a candidate for [strategic packaging].

SN: How well is private label following the trends in Center Store; for example, creating more ethnic or natural-food offerings?

SHAROFF: Everyone is kind of stuck for the moment. In some ways, the current system of product [creation] does not reward those who try to go after trends. If you are a big brand manufacturer, it is very expensive for you to identify a trend and then introduce a product line to follow it [into] national distribution.

Retailers, as they become more powerful, have the ability to find a manufacturer, get the products and introduce them with limited risk [in a region of the country]. They don't have to test market in Atlanta; they can bring out the product only in Detroit, if that's where their stores are. So it's a very interesting change in opportunities. You will see that retailers are more responsive than brands to those kinds of nuances.

SN: Are retailers trying to pare down national brands?

SHAROFF: Branded has a serious problem of being kicked out of whole categories. There are fewer brands, and that's good for the retailer. There has [also] been a subtle change in [the grocery store]. It used to be Brand A, B, C and then private label. But most retailers are taking the position of Brand A, Brand B and private label in the middle. It's one of those things where no announcements are made.

SN: Do you think a retailer like Trader Joe's is an anomaly, or will we see more stores where most of the product is private label?

SHAROFF: Trader Joe's may well be indicative of the niche marketing or entrepreneurial marketing that comes as a result of the big guys getting so big that somebody says, "What about fresh fruit? What about gourmet items?" I think you're going to see more of that. They have the ability to become a national player. They are not going to challenge Wal-Mart, but they are going to be a challenge, market by market, for the upper tier of the consumer base. And the only way you can do that is with private label, if you have the guts to do it.

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