Private-Label Growth Undergoes Slight ‘Correction’

JON SPRINGER

NEW YORK — Penetration of store brands in April fell to its lowest level since the economy collapsed in September 2008, but the dip is more of a correction than a long-term trend, predicted Tom Pirovano, director of industry insights for the Nielsen Co., speaking at the Citi Investment Research Food & Drug Conference here last week.

According to Nielsen, store-brand unit share of total store sales at food, drug and mass retailers in April fell to just above 21% — the same place it ranked in September 2008 and down considerably from penetration of nearly 23% Nielsen recorded early this year. “That number is shocking,” Pirovano acknowledged. He said, however, that he anticipated that private-brand sales would settle in above pre-recession levels — just under 22%, he said — and grow from there.

Pirovano attributed some of the decline to retailers adjusting assortments after overaggressively culling items in SKU rationalization programs in recent years. Wal-Mart Stores, for example, recently said it would restore about 300 items to its shelves it had pulled as part of its “Project Impact” resets that began last year.

Store-brand penetration had been rising steadily, exceeding the 20% barrier in 2007, but is “at a crossroads” today, Pirovano said.

“Some say [the recent decline] is a speed bump, a minor detour, and that private label will go back to the huge growth we've seen in the last few years. Some are saying, it's doom, and we're going back to pre-recession levels of 20% or 19%,” Pirovano said. “I believe it will be someplace in the middle, leveling out close to 22% and growing from there. And the reason I believe that wholeheartedly is that retailers are showing a commitment to it, and product quality is getting better. And we're also seeing a lot of retailers choose private brands and delisting branded items.”

As for Wal-Mart, Pirovano showed figures illustrating how Project Impact reduced branded items by 12% overall compared with 2008 assortments, led by a 24% decrease in the general merchandise categories and a 23% reduction in frozen food. He noted, however, the changes have yet to yield a sales increase.

“They say they've improved the store experience and improved inventory. But in top-line sales they haven't made an impact,” Pirovano said.

“Wal-Mart's done a good job of trying things, then making adjustments as they go forward,” he added. “Last year was just not a great a year for them, but they did a lot of things right, I believe. We just aren't seeing the impact.”

Wal-Mart's reintroduction of 300 products — “I suspect it will be more than that,” Pirovano noted — should be “an invitation to all brands to say, ‘I need to be on the list of those 300 items,’” he added. “And it's not only a message to manufacturers but to buyers for every other retailer who's delisted products.”

Among the big successes in private brands have been retailers like Safeway that aligned their private brands to other emerging trends like organics. Sales of organic foods have leveled off since the recession but have not declined, Pirovano said. Share of private-label organic foods in that time increased from 17% to 25%.

Organics and other foods with a wellness cachet have allowed retailers to “sell up” and push average item prices higher, Pirovano said.

Pirovano also identified online product reviews as an emerging opportunity for food retailers.

“I don't think we've scraped the surface of how we can use this yet,” he said. “Every negative review is an unmet customer need. And any consumer need is the birthplace of innovation in any category.”