Frugal Shoppers Are Here to Stay

When the recession ends, private-label sales growth will continue…but at a slower pace.

By Laura Kennedy, Researcher-Reporter, the Kiplinger letters

June 25, 2009

The strong sales growth in cheaper private-label goods is likely to last. Growth in sales of store brand products will continue to outpace gains in national brands even after the recession, particularly at drugstores, mass merchandisers, dollar stores and warehouse clubs. And stores will expand their private-label offerings across the board, from premium store-exclusive products down to the cheapest national brand copies of well-known brands.

Store brand sales will jump about 10% in 2009, matching growth in 2008. Meanwhile, sales growth of name brands could end the year down a little. So far this year, unit volume sold for national name brands has fallen close to 4%, while private-label product unit volume sold is already up more than 3% over 2008. In supermarkets alone, private-label products nabbed another percentage point in market share over the past year and now make up 15%-18% of total sales.

Even in a nonrecession year, private-label sales growth usually about doubles that of brand sales. A consumer survey released in April by the NPD Group, a market research firm, found that last year, 24% of food and beverages served in American homes were store brands, up from 18% in 1999.

And when the recession ends, shoppers won’t stop being frugal. While growth in private-label product sales will come back to earth -- likely in the mid-single digits -- as consumers resume more normal spending patterns, shoppers’ decade-or-so-long shift toward favoring private-label products will continue.

Neil Stern, a senior partner at McMillan Doolittle, a retail consulting firm, says that in past recessions, private-label sales growth has spiked and then slowed when the economy improved. But in the past year or so, private label has become “much more public,” he says, giving it the push needed to keep growing when recovery begins. “Retailers are more aggressive in advertising it and getting a bit more in your face, talking about [their] private label.”

Retailers like private-label brands because sales generally yield higher profits than those of national brands since many of the marketing, processing and development costs passed on by other brands are cut out by the direct retailer-to-supplier relationship.

In a recent survey by the Food Marketing Institute, 90% of supermarket industry respondents said they plan to increase the number of private-label products in their stores in the coming year. Krista Faron, senior new product analyst at Mintel, a market research firm, says that most of the activity in recent months in product development has come from retailers expanding their private-label offerings.

Distinctive store brand products keep consumers coming back. “The second strategic appeal is around shopper loyalty,” says Jim Hertel, a managing partner at Willard Bishop, a retail and consumables consultancy. “Private brands offer the opportunity to develop unique items unavailable anywhere else. It’s another opportunity to make a positive consumer impression.”

“As we’ve seen some branded manufacturers slow down the new product pipeline, some of the more interesting and innovative products we’ve seen have come from retailers,” Mintel’s Faron says. “[They’re] spending the dollars to reinvigorate categories they play in.”

The growth will keep suppliers and manufacturers of the products busy. Plenty of room for growth still exists in the national brand equivalents that most people think of when they hear “private label.” In fact, even categories in which growth is slow -- such as frozen vegetables -- are ripe for more private-label investment and innovation as consumers get more comfortable with store brand products.

Milt Sender, chairman of Daymon Worldwide, which helps retailers and manufacturers develop private-label products, cites the growth in store brand baby food as an example. “More and more private-label baby food is sold in this country,” he says. “A decade ago, that couldn’t have happened. The consumer gets confidence and is more willing to try different things.” Sender also says shoppers are more open to private-label pet food these days.

New opportunities will come in organics, other environmentally friendly products and health related items and foods. More retailers will also develop tiered programs to cater to consumers shopping at all price points: a premium line with higher-end products, often those unique to the store; midlevel products that are a mix of the national brand equivalents as well as new items; and the most basic line at a very low price point. “If you cover the three tiers and the niches,” Stern says, “you have a higher percentage of private labels.”

The biggest growth opportunities now are in copies of national brand products, Stern says, but he adds that when the economy recovers, growth in private-label sales will come from “niches, in the ability to create unique product.”

For weekly updates on topics to improve your business decisionmaking, click here.