Retailer focus key to private label success

by Allison Sebolt
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KANSAS CITY — Led by soaring ingredient and energy costs, prices of consumer packaged goods rose by 4.2% in 2007 with double-digit increases in categories such as milk, eggs and refrigerated juices, according to Information Resources, Inc., Chicago.

I.R.I. said higher prices have caused consumers to turn to supercenters and private label products in an effort to save money. Overall, the C.P.G. industry grew 3.3% during the year.

"The economy definitely had its say in C.P.G. during 2007," said Thom Blischok, I.R.I. president of retail solutions North America and strategic consulting. "With the acceleration of prices across the board, consumers responded by refocusing on supercenters and seeking out lower-cost private label alternatives to name brand items. While at the same time, product innovation in several C.P.G. categories played a healthy role in spurring growth that we predict will be a key factor in 2008."

According to The Nielsen Co., New York, 2007 private label sales in the consumer packaged goods segment in retail channels excluding Wal-Mart were $57 billion, up 8% from the previous year. This compared with the total consumer packaged goods market of roughly $360 billion, giving private label about a 16% market share. Including Wal-Mart, private label sales were at $72 billion for the year ended Sept. 29.

While some consumers might be turning to private label for a price break, Todd Hale, senior vice-president of consumer and shopper insights with Nielsen, said growth largely is attributed to the value and emphasis retailers place on it. He also said it is difficult to evaluate private label data in 2007 due to the inflation factors. While dollar sales might be on the upswing, he said unit sales across categories weren’t necessarily growing.

"There are some consumers who are turning to private label in grocery stores and other retailers, but it’s not necessarily something that’s always happening across all consumers," Mr. Hale said. "It’s more of a function of how focused retailers are behind private label and how that leads to the choices they make available to shoppers at their stores."

Mr. Hale said private label has traditionally done well in categories that use the resources of commodities, such as dairy, dry grocery and center-store products. He noted there has not been any recent rapid growth in categories that traditionally have not been strong in private label.

In addition to high food prices, high gas prices are affecting consumer purchasing patterns, according to Nielsen.

"Private label is one of the ways consumers are looking to save money because of high gas prices, but it is by far not the highest on the list," Mr. Hale said. "It tends to skew to consumers who you might expect are suffering the most because of high gas prices, and that is low and middle income consumers."

Mr. Hale said one of the key trends in private label is retailers offering a tiered pricing strategy with low-, middle- and high-priced private label offerings in an effort to broaden appeal across the shopper base. Retailers also have been stressing guarantees and offering taste tests to let consumers decide if private label offerings have the same quality as branded offerings.

According to I.R.I., consumers are seeing the quality and value in private label products.

"There is a growing revolution of value and consumer selectivity happening at our neighborhood grocery stores," Mr. Blischok said. "Once the low cost, lesser quality substitutes for name brand C.P.G. items, private labels are quickly turning into innovative, top quality and good value additions to family grocery lists."

I.R.I. said almost 75% of U.S. consumers rank private label offerings as excellent in overall quality. In addition, the research firm said price is no longer the primary factor for customer selection of private label and consumers also are considering quality, variety, packaging and the store’s reputation.

In 2007, I.R.I. said lower-income shoppers spent 17% of their overall C.P.G. dollars on private label products compared with 15.7% among middle income consumers and 13.7% for high income consumers.

"There is a huge opportunity for retailers who understand the power of private label offerings," Mr. Blischok said. "Our micro-segmenting and cross-purchase pattern analysis of lower income shoppers shows plenty of room for product expansion and a greater chance to gain market share across many key categories."

But Mr. Hale said it is more than just demographics that will contribute to the success of private label in the future.

"If you look at demographics of private label buyers today and project how they will change in importance over the next 10 years, we don’t see any differential between private label growth and branded growth on those two dimensions," Mr. Hale said. "That says demographics alone are not going to drive success of private label."

Instead, Mr. Hale said the economy and retailer focus will drive private label growth. He also sees opportunity for private label growth in 2008.

"You are going to see opportunities for retailers to focus on private label as a way to win the wallets of low to middle income shoppers who are going to feel the most impact from a soft economy," Mr. Hale said. "It’s not necessarily a way for retailers to win among upper middle and high income households."

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