Shifting Sales?

U.S. private-label dollar share has remained flat over the last 15 years. But a report from McKinsey & Co. said if more retailers replicate efforts by Kroger, Safeway and other private-label-friendly companies, there's $55 billion in “value at stake,” or dollars that could shift from national brands to retailers over the next eight years.

SN contacted several financial analysts to get their perspective on the findings. They were Chuck Cerankosky, managing director at FTN Midwest Securities, Cleveland; Gary Giblen, executive vice president at Goldsmith & Harris, New York; and Andrew Wolf, managing director at BB&T Capital Markets, Richmond, Va.

Following are excerpts from the interviews.

SN: Depending on how aggressive retailers get with private label, McKinsey estimates that there is about $55 billion “value at stake.” Do you think there could be that kind of shift?

Giblen: Yes, because retailers are starting to become brand development and brand management companies. Take Safeway, which just disclosed that it will sell O Organics through Sysco.

In doing so, it will position O Organics like any other controlled brand.

It remains to be seen how successful such efforts will be, as most retailers don't have the resources to do a national advertising campaign. Whole Foods is the exception.

Still, I think more retailers will [build private label], because it's become less and less attractive to be a purveyor of other people's brands. And retailers are desperately seeking ways to differentiate from Wal-Mart.

Private-label share has been flat, because the [national] brands realized it was a true threat and became more aggressive.

In turn, companies like Safeway have hired people from consumer goods companies. We'll see more of that kind of merging between the classes of trade. But it remains to be seen if manufacturers will, in turn, start opening chains of stores.

Some retailers are certainly adding better private label to the mix and also entering categories that weren't private-label-acceptable before, such as beer and wine. And Safeway Select has proven that retailers can produce a comparable product.

Wolf: If you look at the [private-label share] numbers, there hasn't been a shift over the last few years. While, yes, it seems like it could happen in the future, there first needs to be a change in terms of the laggards catching up with the leaders. This is tough, because due to competition, laggards often can't catch up because they get extinguished. They don't survive because they don't adapt quickly enough.

So the idea that you can create more private-label sales by helping the laggards won't hold up. True, some laggards are just late adaptors and will catch up. But in general, most laggards are laggards for a reason.

There's also the difference between U.S and Europe. Relative to Europe, [U.S.] national-brand manufacturers are much stronger. They can amortize all their marketing costs over a much bigger market. This gives them much bigger marketing budgets.

Also, our market is not as concentrated as in Europe on the retail side. Europe has dominant national players. We don't have that in the U.S. We have large national retailers, but there's not one, two or three who dominate nationally. The biggest national player is Wal-Mart, and it's more of a brand player.

In England, if the three or four national players decide to go private label, consumers have no choice but to accept it. Here in the U.S., individual markets may have three or four dominant players, but nationally that's not the case.

Also, many U.S. retailers are moving to everyday low prices. And the way that you communicate low prices is through the best [national] brand prices.

There are exceptions, such as Trader Joe's, which is almost a pure private-label retailer.

I'm not saying the U.S. isn't a place where private label can't resonate, but there is a huge structural difference between the U.S. and Europe.

On the other side, Europe is more fragmented on the consumer side. This means their brand marketers can't advertise the way ours can.

Cerankosky: Yes, it will continue to grow as retailers try new and different things.

What strikes me is how retailers are getting better and better in private-label fresh and prepared foods, such as Safeway's Signature brand. In doing so, they're enticing customers to buy store brands without really thinking about it. Even retailers that don't brand their prepared foods the way Safeway does are doing well, such as Whole Foods, which has outstanding seafood. Efforts like this make customers rely on the store for variety and quality assurance.

Retailers have all learned from Whole Foods and other chains in terms of offering improved fresh offerings, from sandwiches to microwavable meals.

So we'll continue to see retailers get better in the most important part of the store: prepared foods.

SN: If there is such a shift, in what ways could the dynamics of the food industry change?

Cerankosky: It will put more power into the hands of the retailer.

What every retailer wants from a vendor is new and innovative product. Usually, what you see introduced is just another motion-picture-inspired cereal. That creates excitement among a select demographic, but doesn't really move the needle for a retailer in the cereal category.

Retailers realize that if they improve private-label penetration by offering great products, they can make more money. As consumers get more sophisticated and realize that Kroger private-label coffee tastes the same as XYZ brand, but costs less, they will buy it.

SN: What will need to happen for a substantial shift in private-label share to occur?

Wolf: The economy will certainly play a role. We haven't had a deep consumer recession that will make consumers trade down.

Even if that doesn't happen, share may go up. But there's a natural limit as to how much.

There's a structural reason why growth in the U.S. isn't like Spain and other places. The [national brands] here have so much more ammunition because of the market size.

While retailers can innovate, there's only so much they can do, because brands have a lot of power in terms of marketing dollars. If you're a retailer and only push private label and the national brands are not moving, then [manufacturers] are going to shift their marketing emphasis and money elsewhere.

Retailers rely on manufacturers in terms of trade money.

Still, it will be interesting to see how Tesco does. Tesco is a much more traditional-based supermarket, as opposed to Trader Joe's, which is more niche-based. Yet Tesco is heavily private label, so it should be an interesting test.

Cerankosky: It depends how aggressive retailers are. Retailers are doing many things to entice the skeptical customer to buy their store brands.

Some retailers provide strong financial incentives like couponing. Others offer quality guarantees.

The industry has come so far since the days of generics, when you didn't know what would be in the package. Now, many companies have multiple tiers and extensions under an umbrella brand.

At Safeway, Safeway Select isn't alone any more. There's O Organics, O Organics for Baby and Toddler, and Eating Right.

Multiple tiers are important because some people may be comfortable buying a value-priced paper towel, but want a peanut butter that's a national-brand equivalent.

Retailers are also doing well with [unbranded products like meat and seafood] products that can only be found in their stores.

Aggressive Actions

McKinsey identified five techniques that leading private-label retailers are using to build private-label sales:

1. Use shopper insights and loyalty data to grow private label where their best consumers want it.

2. Identify the right categories and products to develop private label, using innovative products to capture category white space.

3. Take a holistic view of category economics to grow total category profit.

4. Develop marketing and merchandising capabilities, create cross-category brands, and go beyond price.

5. Organize for success — not just sourcing, but the right strategies, business plans, targets and incentives to drive overall profitable growth.
   Source: McKinsey & Co.

Charting the Course

Retailers express strong interest in growing private label, according to interviews McKinsey conducted.

• “We aspire to private-label share similar to Tesco's in Europe.”
• “Private label is our No. 1 growth priority.”
• “Our private label differentiates us from Wal-Mart.”
• “We believe that private-label share could triple in five years.”
• “Private label drives profits through higher customer loyalty.”
• “Differentiated private label provides simpler product range.”
  Source: McKinsey & Co.

Leaders of the Pack

Private-label “share leaders” — including Kroger, Safeway and Wegmans — account for nearly double the share of retailers that focus more on national brands

PRIVATE-LABEL SHARE 2006

Source: McKinsey & Co.