Price-Conscious Shoppers Spur Private-Label Growth

Retailers, especially grocery store chains, are seeing growth opportunities in private-label brands.

By Laura Kennedy, Researcher-Reporter, the Kiplinger letters

May 23, 2008

Retailers are enticing price-conscious shoppers with private-label goods. As consumers tighten their purse strings, store chains are luring them to spend more dollars in one place with appealing branded products not found in other stores.

Think Trader Joe's: The grocery store chain's private-label products make up 85% of its items, building customer loyalty and higher margins. In most instances, private-label brands are comparable in quality to brand-name products but can be priced more cheaply because they're cheaper to produce. When price is such a decision point for consumers, private-label products can bring in sweet additional profits for many chains. For example, well-known retailing chains such as Whole Foods, Wal-Mart and Target are embracing and expanding store brands.

In the supermarket sector, however, many stores have yet to fully invest in private-label lines, and their expansion will be a key driver of growth in private labels' share. Currently, store-brand goods account for about 15% of consumer spending and about one in five of products purchased in grocery stores. A few supermarkets are ahead of the game. Kroger and Safeway each have private-label shelf penetration of about 25%, says Neil Stern, a partner at McMillan Doolittle, a retail consulting firm.

As other retailers have discovered, private-label goods can lure customers back into store aisles. Twenty years ago, shoppers bought 95% of their groceries in traditional markets, compared with only about 65% today, says Brian Sharoff, president of the Private Label Manufacturers Association. The rest of the purchases have migrated to nontraditional sources of groceries, such as Wal-Mart Supercenters, smaller organic grocery store chains, even 7-Elevens.

The trend spells opportunities for big and small suppliers. The private-label partnerships make it easier -- and cheaper -- for manufacturers to get their products prominently displayed on store shelves. "In terms of true growth, it will be driven by innovation and private-brand launches that are truly unique," says Stern. "They can't be just copying programs."

Environmentally friendly manufacturers will get special attention from retailers hurrying to tap consumers' growing green inclinations. Furniture stores want more bamboo chairs, for example. Grocers are on the lookout for new, fair trade coffees and other food. Retailers will turn to international producers for certain ingredients, too, to cater to shoppers' diverse tastes.

National brands are fighting back with more-aggressive marketing efforts to bolster the appeal of their products. In the face of mounting commodity costs and cost-conscious consumers, prominent brands are increasing their advertising budgets: Kraft is upping its to as much as 9% of sales, from 7%, while Colgate-Palmolive upped its advertising spending by 17% in 2007 and will likely implement another double-digit increase this year.

Even with the growing popularity of private-label brands, grocers and other retailers will be motivated to keep a balance of household names and store-brand products on their shelves to give consumers the breadth of choice they want.

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