Private label is a stepchild no longer.
Over the last decade it has become a significant part of the supermarket mix, industry players and analysts said. It has even become a tag on which operators hang their stores' identity, they added.
"It enables us to differentiate ourselves and tell customers that, if they like Hy-Vee-label products, we're the only place to buy them," Ron Pearson, chairman, president and chief executive officer of Hy-Vee Food Stores, Des Moines, Iowa, said. "If you can deliver quality and savings, then private label makes a specific store unique and the best place for customers to trade."
Price Chopper Supermarkets, Schenectady, N.Y., feels the same way, a spokeswoman told SN. "Price Chopper puts high importance on private label, and it's heavily promoted. We feel private label is a reflection of us, and the importance that we place on it allows us to make our stores unique."
According to Jonathan Ziegler, San Francisco-based managing director for Deutsche Banc Alex. Brown, New York, "Private label is a major sales driver, and I really believe it can create loyalty to a brand."
Debra Levin, an analyst with Morgan Stanley Dean Witter, New York, offered similar comments. "The best operators seem to have the best private-label programs. Private label is more profitable than brands, and it's a way for companies to distinguish themselves and build customer loyalty."
Private label complements the national brand assortment, Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, told SN. "Brands are still important because of their great history of innovation and new products, but there are categories that have been the same for a long time, and retailers have found they can get more margin out of a category by introducing a store label."
Private-label penetration as a percentage of grocery sales generally runs from the high teens to the mid-20s, but those interviewed said they expect sales to continue increasing.
Hy-Vee is running at 22% to 24%, and as high as 26%, depending on the store, Pearson said, "and there's every reason to believe it could go up to 30%."
At Price Chopper, private-label penetration is running "in the low 20s," the spokeswoman said, "with the potential to reach the mid-20s in the next two to three years, assuming our commitment to it remains at high levels."
Gary Giblen, senior vice president and director of research for C L King Associates, New York, said he believes private-label penetration could approach 30% or more of dollar sales over the next five years at companies like Safeway and Kroger, "though the target is 40% to 45% because the acceptance is so incredibly strong," he pointed out.
Even chains that have relied heavily on national brands in the past have begun to move more aggressively into private label. A case in point is Stater Bros. Markets, Colton, Calif., "which has always been the home of name-brand merchandise," Jack Brown, chairman, president and CEO, said, "but over the last two years we've moved private label up considerably, from about 12% of the total to about 19% now."
Brown said he believes the penetration at Stater could reach a maximum of 25% "because we don't want to lose our name-brand image. Companies like A&P lost that image in the past because they carried too many controlled labels, and we wouldn't want to do that."
Brown said Stater began increasing its variety of private-label items "because the retails on the name-brand items were moving upward very rapidly at the same time the quality of private label was also moving up rapidly. And we felt we needed to give customers a better value -- not because we felt any pressure from competitors but only because customers wanted it.
"And even as we've brought more private label into the mix, customers still have a choice because we're not shorting them -- we're giving them additional choices."
Improvements in the quality of private-label products was also a factor, Brown said. "We used to consider the quality of private label to be inferior, but now there's not much difference from the national brands in the way the products look and taste," he explained.
Steve Smith, president and CEO of K-VA-T Food Stores, Abingdon, Va., said his company has also been expanding its private-label offerings "because the quality and the packaging are better, and the margins, too, are better."
Besides carrying a top-tier line, mostly under the Food Club label, K-VA-T has broadened its private-label offerings to include a value line, called Valu Time, to try to win back lower-income customers lost to limited-assortment formats.
The Valu Time line is maintained at an everyday, low-price level, Smith said -- 25 cents on canned vegetables, for example -- and is available at about half of K-VA-T's Food City stores. Since introducing the line earlier this year, "we've seen Center Store sales grow at the locations we've targeted without cannibalizing our top-tier label, so we're very pleased," he noted.
Hy-Vee also has a lower-priced line, called Midwest Country Fair, which Pearson said is doing well, and a premium label called Hy-Vee Grand Selections, whose sales have been fair, he said.
Premium private-label lines have been an important addition to the category, especially for the largest chains, securities analysts told SN.
"Companies like Safeway do a good job in developing premium lines that might not be available in national brands, which enables retailers to segment private label within a category and increase the gross margin contribution of that category," Cerankosky said.
According to Levin, "One of the really interesting consequences of industry consolidation has been the growth of private label as part of Best Practices. For example, Kroger never developed an upscale private label, but after it acquired Fred Meyer and took a good, hard look at what its divisions were doing, it adopted the Private Selection program from Ralphs."
Giblen said the Safeway Select premium line "is the clearest example of superior quality and ever more innovative private-label products. Safeway is inventing new products, like double fruit yogurt, so the line is innovative, and it offers a superior quality at a cheaper price than the national brands, and with a better margin."
He also told SN a strong private label can enhance a retailer's income from national-brand manufacturers. "If you have a strong private label that makes it possible to delist a brand, the branded manufacturer may pay you more to keep the space. So a strong private label is good not only in terms of the store mix but also because it enables retailers to get larger shares of supplier dollars," he said.
According to Ziegler, private label also provides unique marketing opportunities. "When you control the product and there's a blank space on the label, you can advertise related products, such as jelly on a jar of peanut butter. Safeway for a time used a space on the back of private-label cereal boxes to advertise its in-store pharmacies, which was amazingly clever."