Innovation to drive new private label products

by Allison Sebolt
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What success do retailers such as H-E-B, Target, Kroger and Safeway share in common? Among other things, they all have well-developed private label programs offering various unique products.

"Without private label, every supermarket is competing really only on variety and service," said Brent Baarda, director of the Center for Retail Innovation with Information Resources, Inc., Chicago. "With an excellent private label program retailers can differentiate themselves from the competition, particularly in the center-of-store categories."

Mr. Baarda said retailers increasingly view private label lines as a way of being competitive, driving sales and shopper loyalty.

According to The Nielsen Co., New York, and the Private Label Manufacturers Association, New York, sales of private label products across U.S. retail channels including Wal-Mart reached $74.2 billion in 2007, up $5.4 billion from the previous year.

According to Mintel’s Global New Products Database, 6,655 new private label products were introduced in the food and beverage segments in 2007, which was up from 4,945 in 2006 and 4,421 in 2005. The food and beverage category with the most new private label products in 2007 was bakery with 758 products. Sauces and seasonings also topped the list with 635 new products and non-alcoholic beverages came in third at 510. Between Jan. 1 and April 8 of this year, there have been 1,193 new private label products.

"Led by some of the top private retailers — like Target, like Kroger, like Safeway — over the last 10 to 15 years, they’ve made an effort to improve the quality of their private label products, and what we are seeing now is shopper recognition of that fact," Mr. Baarda said.

Mr. Baarda noted some of the most successful private label programs come from regional retailers such as H-E-B, Publix and Wegmans, as these retailers are more localized and develop a strong connection with consumers.

As private label lines have reached a quality benchmark and are developed further, there are more aspects for retailers and manufacturers to consider when developing private label lines.

"Some of the conventional thinking is it’s all about price, and we are really finding that not to be true," Mr. Baarda said.

Other important considerations include packaging and merchandising.

"It used to be that manufacturers were preoccupied with product quality, making sure that store brand products were at least equal to the leading national brand competitor," said Brian Sharoff, president of the Private Label Manufacturers Association. "This goal has now been accomplished."

According to several in the industry, innovation is going to be essential to successful private label lines.

"Private label needs to focus more than ever on building a new product development capability that effectively responds to the changing needs of American consumers," Mr. Sharoff said. "This may require significant investments in production facilities, consumer research and marketing, but it is absolutely essential to capitalize on the opportunities in the marketplace."

Mr. Sharoff said examples of innovative and creative product lines include Safeway’s O Organics and Eating Well lines and Kroger’s licensing agreement with Disney for children’s products as well as various new food products being offered by Trader Joe’s.

Mr. Baarda said one of the challenges in managing a successful private label program is knowing what categories to innovate in and what categories to play the role of fast follower on the heels of the branded manufacturers. He said Wegmans and H-E-B don’t pay any attention to what other manufacturers do in terms of category innovation as they want to set the bar in terms of innovation. Other retailers have been more hesitant to take such risks.

The P.L.M.A. said a recent study by McKinsey & Co. has identified a group of best-in-class retail private label innovators and said if other chains follow this example there could be a $55 billion shift in annual sales to private label away from national brands.

This shift has already taken place in Europe. In Great Britain, Germany, Belgium and Switzerland, retailer brands have achieved 40% market share.

Currently, one in five products purchased in supermarkets is a store brand, which totals $49 billion in annual sales, according to Nielsen.

This article can also be found in the digital edition of Food Business News, April 15, 2008, starting on Page 38. Click here to search that archive.

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