Economic Stimulus

CAROL ANGRISANI

NOT MANY COMPANIES can say 2008 was a good financial year. But Aldi is one of them.

The 1,000-unit discount grocer opened 100 new stores last year — double the number it typically opens annually. Although the company declined to release exact sales figures, it said sales performance has been strong.

Dining In: More than 150 deli, bakery, frozen and shelf-stable products are in Supervalu’s Culinary Circle restaurant-quality brand.

“We're experiencing significant growth this year with store traffic, shopping baskets and store openings,” according to John Bretz, group purchasing director for the Batavia, Ill.-based firm.

Bretz attributes that growth to Aldi's private-label-focused business model. About 95% of Aldi's 1,400 products are private label.

Aldi is not alone. Walgreen Co., for example, reported a 15% increase in the chain's private brands during the fourth quarter compared with the prior year, and Kroger Co.'s private label now represents 26% of the chain's dollar sales and 33% of unit sales.

Indeed, the recession has helped boost these numbers. Private-label sales in all outlets, including Wal-Mart, climbed 10% to $82.9 billion, up from $75.1 billion a year ago, for the 52 weeks ending Nov. 29, 2008, according to Nielsen.

Aldi's private-label strength has helped it weather the economic storm, Bretz said. The retailer aggressively touts the fact that many of its items cost about 50% less than the competition.

To make the most of its low prices, the retailer ran its first national television campaign last year. The ads promoted Aldi private labels as a solution for consumers looking for quality and value.

“That was something we planned, with what's happened with the economy,” Bretz said. “It was timely.”

The weak economy also prompted Aldi to start offering suggestions on how to bundle its products to make low-cost meal options. In November, for instance, ads touted a Thanksgiving meal for four for just $30. The meal idea included a 14-pound Butterball turkey at 99 cents a pound, or $13.86; plus a variety of sides, including Aldi's Chef's Cupboard-brand stuffing mix, 6 ounces, 79 cents each; Chef's Cupboard Gravy, 12 ounces, $1.19 each; and its Fit & Active-brand dried cranberries, plus vegetables and dessert.

“We're hoping that once people try us, they'll realize what great-quality products we offer at a such a good value,” Bretz said.

Quality and value are what consumers looked for in 2008, and will continue to look for this year, in response to the “economic transformation” that has swept the nation, said Thom Blischok, president of consulting and innovation at Information Resources Inc., Chicago.

Blischok uses the term “economic transformation” because it gives a more accurate description of what has happened over the last year or so, he said. The situation is so unique that the economic events of today will change shopping behavior for years, he said.

That's because consumers have reacted to radical increases in energy and food costs by significantly streamlining their expenses. Private label, in turn, began to play into that decision process, he said.

While consumers may be loyal to national brands in certain categories, a growing number are willing to try private labels to save money.

Cheers: Fresh & Easy works directly with a Master of Wine to develop most of the company’s 65 wines. More than half have received awards.

When asked why they chose private label, 79% of shoppers said to stretch their dollars, according to IRI research.

Consumers are searching for the best deals they can find, omitting items that aren't absolutely necessary.

“About 60% of what they have in the basket is what they really need; 40% are things they want,” Blischok noted.

So while they may prefer specific brands, many will ask themselves if they can afford it.

Even when food costs begin to stabilize, shoppers will continue to tighten their belts, he said. That's because the events over the past year have made them concerned about declining home values, job stability, debt and the ability to acquire credit. Many have depleted their savings and borrowed from their 401(k) accounts — actions they won't soon forget.

They will make additional private-label purchases in many categories where they feel they can get the same quality at lower cost, Blischok predicts. IRI research shows that 55% of shoppers say private label gives them the same quality as name brands.

This could be why more consumers in higher income brackets are turning to store brands. In the second quarter of 2008, private label grew one share point among those describing themselves as “living comfortably” and rose 0.5 share points among those who say they're “doing well.”

National brands will continue to play a majority role, Blischok said, but private label will continue to grow on an opportunistic basis, based on where consumers believe it can serve as a substitute.

“Consumers are using private label to stretch their dollars,” he said.

Private label is enjoying success as a result of the hard times, said Brian Sharoff, president of the Private Label Manufacturers Association.

What's more, consumers will remain loyal to quality private labels long after the economic slump has ended, he said.

As proof, Sharoff pointed to the recessions of 1990 and 2001, during which store-brand share rose, and these brands held on to the gains when the nation's financial climate made a change for the better.

“In both of those economic downturns, consumers tried store brands, liked them, and stayed with them after the economy improved,” he explained.

Sharoff said the continued growth in good times reflects a strong focus on assortment and innovation.

“Consumers who are satisfied with private label will not return to national brands once the recession is over,” Sharoff said.

Sharoff pointed out that the situation was different during and after the 1980-1982 recession, when private-label market share grew rapidly but did not hold on to its growth. He attributed that to a retailer focus on budget-priced “generic” product lines, with basic black-and-white packaging and lower-quality ingredients.

“What we learned was that private-label products that don't meet consumers' needs and are of poor quality won't experience continued growth,” he said.

Tom Stephens, founder of Brand Strategy Consultants in North York, Ontario, agreed. He said the potential for private-label growth during the current recession is unprecedented.

What makes this recession unique is that private label is now more accepted and developed than it was in the past, he noted. That could propel sales even higher compared with past economic downturns.

“It's an exciting time for private label,” Stephens said.

Tom Pirovano, director of industry insights at the Nielsen Co., New York, said private label has the potential to have a good year in 2009, regardless of whether or not wholesale prices start to come down.

“Once consumers try a private label and like it, it will be hard for the national brand to win them back,” Pirovano said.

But national brands won't sit back and watch that happen. Pirovano expects these brands to offer new products and packaging to set their products apart.

Because of this, retailers need to develop best-in-class promotional plans. The retailers that will see the best results are those that will not only sample their products, but also promote them via online and offline initiatives.

As an example, Pirovano cited Walgreens' www.Wbrand.walgreens.com, a website devoted entirely to the company's store brands.

“I don't know of any other retailer that has a website completely dedicated to private label,” he said. “It shows that Walgreens had made a strong commitment to private label.”

Packaging is another point of distinction, said Pirovano, citing developments like Target's reclosable cereal and granola containers.

Indeed, Walgreens, which is based in Deerfield, Ill., attributes its positive store-brand performance to better quality and packaging.

As for product development, Pirovano gave kudos to Fresh & Easy, which generates 70% of its sales from private label. The retailer introduced more than 200 new store-brand products last year.

One way to promote private label is to bundle store-brand items into meal solutions — and highlight the price difference between meals prepared at home vs. eating out.

A growing number of retailers are doing just that. Cincinnati-based Kroger, through its partnership with AOL's Shortcuts.com digital coupons site, provides coupons for a variety of store brands that can be combined for a quick and easy meal.

A recent taco dinner meal, for instance, included online coupons for Kroger's private-label ground beef, shredded cheese and salsa.

“In this economy, customers are much more willing to try a private-label item, and we are seeing signs that this is happening more and more as the year progresses,” David Dillon, chairman and CEO of Kroger, said in a September statement when the chain announced its second-quarter 2008 results.

Another reason why a strong private-label program is important to Kroger is that it gives the retailer leverage when a supplier approaches the company with a product cost increase, said Dillon.

“This leverage becomes even more important in an inflationary economy,” he said.

Kroger's three-tier program spans more than 14,400 items. New introductions include Private Selection organic meats, Active Lifestyle breads and three-minute pizzas.

While Kroger's value brands are building share, Private Selection, a premium line that is Kroger's fastest-growing brand, was predicted to be a $1 billion brand last year.

“This line of premium products continued to do well with all customers — not just our upscale shoppers,” said Dillon.

Pirovano concurred that now is the time to focus not only on value tiers, but also premium lines.

“This is a time when retailers can show consumers they can offer them an alternative, not just in bad times, but good times too,” he said.

Consultant Jim Wisner of Wisner Marketing Group, Libertyville, Ill., agreed that the private-label industry is benefiting from a greater focus on quality organic and other premium private labels. “The growth in premium private label is adding significant volume and is driving private-label growth,” he said.

Upscale private labels are valuable because they entice consumers to try — and remain loyal to — a store brand.

“It attracts people who historically have not tried private label,” he said.

About 40% of respondents to a Wisner Marketing study said it's important for supermarkets to have unique and differentiated private labels.

Wisner said Supervalu, Minneapolis, is catering to that desire with its new Culinary Circle line. Introduced in September, the premium chilled assortment is positioned as restaurant-quality. Available at Acme, Albertsons, bigg's, Cub Foods, Farm Fresh, Hornbacher's, Jewel-Osco, Lucky, Shaw's/Star Market, Shop 'n Save and Shoppers Food & Pharmacy, the line includes on-the-go meals, hors d'oeuvres and gourmet spreads — all priced 20% to 25% below casual restaurant food and about 10% to 15% lower than other premium national brands.

A year-old Wisner Marketing study showed that 60% of consumers feel private label is the same from one retailer to the next. Wisner said that percentage has probably become a lot lower now that retailers have differentiated their programs with improved packaging and unique products.

“Private label is every bit as sophisticated as its national-brand counterparts,” he said.

Along with the products themselves, retailers have polished their marketing efforts by offering in-store materials that support over-the-counter medicines, customized packaging, consumer research and retail-specific promotions.

“Private label is not simply imitating what's on the shelf anymore,” Wisner said.

He sees private-label share in the U.S. growing to 25% in 10 years, from its current 15.2%.

To keep sales on the growth track, retailers need to show consumers what store-brand offerings taste, smell and look like, said Marcia Mogelonsky, senior research analyst with Mintel International Group, Chicago.

Sampling, for instance, can help sway the opinion of those who remain cautious about buying private-label items that are not significantly lower in price than the national brands.

“Product labels certainly aren't cheap, so people don't want to risk a less expensive private label just to disappoint their family and have the product go stale in the pantry,” Mogelonsky said.

This is especially true for older consumers, who remember the no-frills private labels of years past.

“Older people are more suspicious, because they remember when private label wasn't good,” she said.

Wegmans Food Markets, Rochester, N.Y., not only samples its private-label products, it even pits them against their national-brand counterparts in blind taste tests.

The tests are conducted in-store by shoppers. Store brands that win over national brands are highlighted in-store with shelf tags reading “Great Taste Wins.”

In another strategy, once a year Publix Super Markets, Lakeland, Fla., offers a buy-one, get-one-free deal for selected national-brand products matched with the Publix-label version of the same product.

It's an attempt to convince shoppers that Publix brands are as good as popular national-brand rivals sold on the same shelf at a 20% to 30% higher price.

Publix promotes private label in other ways. For instance, it includes private label in its five-month-old Essentials program, where the cost is held down on basic commodities like milk, bread, cereals, meat, poultry and other items.

Publix spokesman Dwaine Stevens said Publix's brands meet or exceed national-brand standards.

“Typically, our private-label brand [prices] are several percentage points lower than the national brands,” he said. “For example, in the cereal category you can realize a 30% savings.”

CHANGING TIMES

Private-label dollar sales are experiencing double-digit growth. Unit sales are also on the upswing.

SOURCE: Nielsen; based on 52 weeks ending Nov. 29, 2008, compared with the same period in 2007. All outlets includes supermarkets, drug stores and mass merchandisers, including Wal-Mart, with more than $2 million in sales

TOP PRIVATE-LABEL CATEGORIES
in Dollar Gains

TOP PRIVATE-LABEL CATEGORIES
in Unit Gains

TOP PRIVATE-LABEL CATEGORIES
in Dollar Declines

TOP PRIVATE-LABEL CATEGORIES
in Unit Declines

SOURCE: Based on categories with private-label sales over $100 million at U.S. supermarkets, drug stores and mass merchandisers, including Wal-Mart, with more than $2 million in sales for the 52 weeks ending Nov. 29, 2008

CONSUMER CONFIDENCE

More consumers feel they save money but get the same quality by buying private label.

SOURCE: Mintel/Greenfield Online

FOOD FARE

The majority of new private-label introductions are in the household, food and personal care categories.

SOURCE: Mintel, based on private-label introductions as a percentage of all introductions between 2005 and October 2008

STORE-BRAND SUCCESSES

A PLMA analysis of private-label performance over the years found that consumers who shift to private label during economic downturns are likely to stick with them once a recession is over. This is shown by private-label growth in times of improved gross domestic product.

SOURCE: Private Label Manufacturers Association