Among the positives bakers have cited in evaluating how the industry has fared during the recession, the relative stable share private label has had in the past year ranks high.
While consumers have grown more frugal in many aspects of their lives, moving from branded bread to private label has not been widespread. The importance of this stability was brought to mind with the release of financial results from another food sector — dairy.
Dean Foods Co., the industry’s largest player, announced dramatically lower earnings because of the dynamics of private label in the milk business. Indicative of its difficulties, the company suspended issuing full-year earnings guidance.
The problem is not only that private label milk is gaining share but that supermarkets are trying to drive store traffic by sharply discounting private label milk.
“Pressure on regional brands remains intense as retailers continue to offer private label gallons at margins well below historical norms,” Gregg Engles, the company’s chairman and chief executive officer, said. “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.”
Mr. Engles said retailers have brought gross margins for private label milk to a range of zero to 5%. In some markets, private label gallons are priced below branded half gallons.
The woes suffered by milk offer a good indicator of the success bakers have had in their longtime efforts to de-commoditize their product. Scanner data indicate private label accounts for roughly 28% of dollar sales of bread, versus 67% for milk. Additionally, branded bread sells at an average premium of 45% above private label, versus a narrower 15% for milk. Even with this success, bakers need to continue working to build brand equity so that retailers are not tempted to engage in disruptive behavior.