The power of private labels
July 6, 2010
by Eric Schroeder
Even as the economy slowly awakens from its slumber and consumers’ willingness to spend more in the marketplace picks up, all signs point to continued strength in private label products — at least that’s what several manufacturers, retailers and ingredient suppliers are counting on.
The power of private label is evident in many forms, ranging from two corporate acquisitions to new product launches to consumer surveys to research data that bear out the momentum that has continued in earnest since spending habits first slowed several years ago.
During the past few weeks, several companies put their trust in private label by acquiring businesses with strong footholds in the segment.
Ralcorp Holdings, Inc., St. Louis, on June 21 made the biggest headlines when it announced its agreement to acquire Kansas City-based American Italian Pasta Co., the leading provider of private label dry pasta in North America, for $1.2 billion.
“This transaction strengthens our position as a diversified provider of private label and branded food products, and we anticipate that by adding AIPC’s No. 1 position in private label dry pasta, strategically located production facilities, solid brands and top-tier customer base to Ralcorp’s capabilities, we will be able to better address a broader spectrum of customer and consumer needs,” said Kevin J. Hunt, co-chief executive officer and president of Ralcorp.
In a June 21 conference call with investment analysts, Mr. Hunt elaborated on the potential adding AIPC brings to Ralcorp.
“Importantly, we will be able to add our existing customer base across market brands and products from Ralcorp’s businesses to both new and existing customers, including leveraging
customer relationships and category management capabilities within the private label and food service segments,” he said. “Combined with lean manufacturing practices and a focus on higher margin products, including better-for-you pasta products, we expect to create additional market share gains while driving organic earnings growth. We also have the opportunity to enter new pasta categories such as refrigerated and frozen pasta.”
Meanwhile, the same day Seneca Foods Corp., Marion, N.Y., agreed to acquire Unilink, L.L.C. and its affiliated company, Lebanon Valley Cold Storage, L.P., which primarily sell frozen fruits and vegetables in the packaged private label retail and food service channels.
“We believe Unilink is an excellent fit for Seneca as we expand our frozen private label and food service businesses,” said Kraig Kayser, president and chief executive officer of Seneca Foods. “The company has been growing very rapidly over the past several years and operates a state-of-the-art facility that opened in 2008.”
In addition to the acquired business, Seneca offers a range of private label products, including a “glass line.”
“Glass packaging gives the image of premium products and Seneca Foods’ private label glass items are certainly known for high-quality,” the company notes on its web site. “Further, these products are attractive in appearance, and for convenient serving are packed in microwave-ready jars.”
The company’s private label glass lines includes gravies, beets, onions, cabbage and corn relish.
Grocers growing corporate brands
Beyond mergers and acquisitions, many retailers are expanding their private label offerings.
Winn-Dixie Stores, Inc., Jacksonville, Fla., recently added to its private label offerings with the launch of Winn-Dixie Organic Active Yogurt. The yogurt includes probiotics and prebiotics to help support digestion. In addition, the yogurt is certified organic by the U.S. Department of Agriculture and certified kosher.
“We are always looking for new ways to provide healthy products for our customers,” said Mary Kellmanson, group vice-president of marketing for Winn-Dixie. “Our organic line continues to expand with new products geared toward improving and maintaining a healthy lifestyle.”
Another leading retailer, The Kroger Co., Cincinnati, indicated in a June 17 conference call to discuss first-quarter financials that private label will be an important part of its long-term strategy of growing market share.
“Our strong corporate brands strengthen customer loyalty,” said Rodney McMullen, president and chief operating officer for Kroger. “We serve millions of loyal households. All but 5,000 of these households purchased at least one corporate brand item during the quarter.”
Mr. McMullen said corporate brands represented approximately 26% of Kroger’s first-quarter grocery department dollar sales and approximately 34% of grocery department unit sales.
“We are pleased that we have maintained a share at this level because we have expected some adjustments in customers’ purchasing behavior as the economy improves,” he said. “Kroger now has more than 20,000 corporate brand items.”
Increasingly, he said the items Kroger is introducing are fulfilling an unmet need.
“One example is our line of Fresh Selections bag salads with food tracing technology,” he said. “The HarvestMark technology we use on these salads allows customers to trace the origin of the salad through information listed on each bag. One other new entry includes two cereals without high-fructose corn syrup. We developed these cereals based on feedback from parents who wanted cereal options that are free of high-fructose corn syrup and include whole grain.”
A study published recently by the W.P. Carey School of Business at Arizona State University said private labels — in addition to offering value — also are becoming a more common way for grocery stores to differentiate themselves in a crowded industry. If the stores are able to develop great store brands they are more likely to keep customers coming back, said Timothy Richards, professor and Marvin and June Morrison Chair of Agribusiness and Resource Management at the W.P. Carey School of Business.
“Many stores also offer good, better and best labels, like a super-premium brand, to help cater to a wider variety of consumers,” Mr. Richards said. “All store brands offer the grocery chain a higher profit margin than the brand-name products.”
Supplier stays a step ahead
Suppliers, as well, see potential in the private label market.
Pyure Brands, L.L.C., Naples, Fla., in June received a “no objection” letter from the U.S. Food and Drug Administration for its line of stevia extracts, stevia blends and stevia tabletop sweeteners.
“The F.D.A. authorization is further testament to the purity and safety of the stevia solutions Pyure Brands has developed,” said Benjamin Fleischer, c.e.o. and founder of Pyure Brands. “We pride ourselves on being the only private label stevia company that has an F.D.A. GRAS notification. Pyure Brands can guarantee quality and consistency, which other private label stevia suppliers fail to do.”
The Pyure retail division is divided into private label stevia, food service and organic stevia products. Pyure said it is developing private label stevia programs for retailers in the United States and expects the Pyure brand to be seen across the United States, South America, Europe and Asia in the near future.
Data show strength vs. branded
Among major food categories with the highest share of sales held by private label, the top three food categories were shelf stable mushrooms, at 73.2% private label share; frozen fruits, at 71.1% share; and fresh milk, at 70.4% share, according to data published by The Nielsen Co., for the 12 months ended May 15.
The ability of branded products of baked foods to stave off private label inroads stood out within the mega-categories of store brands — products with private label sales totaling $1 billion or greater. Of the four products in this category — fresh milk ($3.2 billion), fresh bread ($1.5 billion), eggs ($1.2 billion), and fresh produce ($1.2 billion) — bread was the only category in which branded gained share on private label.
The potential importance of this strength for the category was evidenced in extraordinary difficulties suffered by Dean Foods Co., Dallas, in recent months. In a conference call earlier this year, Dean Foods chairman and c.e.o. Gregg Engles said private label pricing was the principal cause of depressed earnings.
“Pressure on regional brands remains intense as retailers continue to offer private label gallons at margins well below historical norms,” Mr. Engles said on May 10. “The reduction in private label margins has widened the price gap at retail between regional brands and private label to the point where trading down, and thus private label share gains, have accelerated. Not surprisingly, our most profitable brands with the largest price premiums have suffered the most.
“While total volumes have been largely unaffected, this mix shift from brands into private label is eroding our gross margin. Our ability to directly impact this erosion in the short term is limited, as neither of our choices is attractive. We can reduce the price gap by lowering our branded pricing, thereby reducing our branded margins. Or we can hold price and continue to lose branded share into private label.”
The Private Label Manufacturers’ Association published a report earlier this year that indicated a growing number of consumers are shifting to private label in product categories in which they previously had bought a national brand.
“Some 43% report they have recently forsaken a familiar national brand for a private label counterpart, a marked increase since June 2009 when only 35% said they had done so,” the P.L.M.A. said.