NEW YORK -- Premium store brands are shaking up the supermarket soft-drink aisle.
Store-brand colas carrying the Safeway Select, A&P Master Choice and Winn-Dixie Prestige labels, to name a few, have become increasingly popular with value-conscious consumers.
And now retailers, who are under pressure to increase profits in a slow-growth sales environment, may have even more reason to consider adding premium store brands to their soft-drink category.
According to a recent research report by J.P. Morgan Securities here, supermarket operators can "drive profitability" and take control of a given category by rationally promoting premium store brands within that category.
"Private-brand retailers stand to make 15% more net profit from a premium private-brand cola sale than they do from national brands," the investment bank said in its report.
The J.P. Morgan analysis of the premium store-brand beverage category, however, is at odds with recent comments by executives of Coca-Cola USA, Atlanta. (Coke estimates its market-leading share of the carbonated soft-drink category at about 33%.)
Coke executives are urging retailers to consider a number of factors in addition to gross-profit dollars -- including discounts and promotions, and warehousing, labor and transportation costs -- in their analysis of store-brand vs. national-brand profitability.
"When you net all of this on a direct product profitability basis, you see that the profit per case [eight 2-liter bottles] on private
label is about 79 cents and about $1.16 for national brands," Charles Frenette, a Coca-Cola USA executive vice president and general manager, said in a recent speech to beverage-industry analysts in Atlanta. SN obtained a copy of Frenette's speech.
In his speech, Frenette said a Coca-Cola study of 20 chains supplied with Cott's premium private-label beverages revealed "the only way they could move the product" was by lowering its price. Cott, based in Toronto, is a leading supplier of store-brand beverages.
"They all launched the product with the idea of premium pricing to cover higher costs," Frenette said. "In fact, over time they were not able to achieve price realization and the prices continue to drop."
The Coke study also showed that when the Cott-supplied chains tried to increase sales of its premium private label, "they have suppressed total category size and value," Frenette said.
Still, the J.P. Morgan report disputes Coke's net-profit estimates and it also contends premium private-label growth "is secular, not cyclical." (J.P. Morgan securities analysts currently have no rating on the stock of Cott or Coke.)
In support of its contention there is a role for premium private brands at retail, the Morgan report cited Cott sales results as evidence of increasing consumer demand. Cott, according to J.P. Morgan, achieved sales at wholesale of $381.7 million last year in the U.S. market, a 141% increase from the previous year.
Cott supplies syrup used to produce private-label colas for more than 45 major U.S. retailers, including Wal-Mart, Bentonville, Ark., and recently agreed to supply the Denver division of Kroger Co., Cincinnati. This will be the first Kroger division to work with Cott, according to J.P. Morgan.
In its report, J.P. Morgan said it believes "sophisticated retailers" will continue to develop premium private-label programs. These premium store brands enable a retailer to "reestablish control of the merchandising strategy and to escape from the mentality that selling Coke and Tide at cost is the core of good retailing."
The investment bank said it believes successful retailers in the 1990s will be those who "understand that they are promoting a strong, differentiated supermarket brand, not merely serving as passive landlords of shelf space."
