STATUS REPORT 2004-11-15 (2)

STEPHANIE FAGNANI

The private-label industry is putting the "frills" back into a category historically known for not having any.

It's no secret that store brands have grown in prominence -- and importance -- among retailers seeking ways to stand out among competitors in an increasingly congested marketplace. Supermarkets now proudly feature their signature items in circulars. In stores, they receive coveted real estate festooned with banners and colorful signs.

The effort is more than just a cosmetic makeover, however. The current generation of store brands reflects an unprecedented emphasis on quality; retailers have come to realize the potential for private label to improve margins, even as supermarkets find themselves cash-strapped on the branded side, where pricing pressures are constant and margins almost squeezed out.

"Our private-label sales growth has been exceeding our overall sales growth now for some time, translating to a steady increase in penetration," Christian Haub, chairman and chief executive officer at A&P, Montvale, N.J., said during a conference call earlier this year. "As part of our overall category management agenda, we intend to drive incremental sales and gross margin benefits from this evolving mix of national and private-label products."

While much of the emphasis on store brands has been on developing the commodity-driven perishables categories, retailers told SN there is still plenty of room to grow in Center Store. Frozen foods, particularly dinners and single-serve entrees, lack a strong store-brand presence, according to Ann Wallenius, brands development category manager at Big Y Supermarkets, Springfield, Mass.

"I would point my finger to the frozen foods aisle as needing more development or more [stockkeeping units]. That's the place where I think we have more work to do," Wallenius said.

Figures support her contention. Private-label frozen dinners and entrees generated a dollar volume of $6 billion in supermarkets in 2003, according to the Private Label Manufacturers Association 2004 Private Label Yearbook. The category held onto a 2.4% dollar share, flat from the prior year, but saw a decline of 0.1% in unit share.

Private label in the United States may never attain the level of respect it has in Europe, though there are still opportunities for parity in the brand-crazy United States. Private-label dollar volume in the supermarket channel was $42.9 billion in 2003, compared to the national-brand total of $220.6 billion, according to PLMA's Yearbook. Private-label dollar share was 16.3%, vs. the 83.7% share of the national brands last year. Edible groceries captured a dollar share of a mere 10.6%, only rising by 0.2% from the prior year.

"I think we're just at the beginning in terms of private label. I don't think anyone should be sitting back and saying, 'I've done a great job,"' said Tom Stephens, founder of Brand Strategy Consultants, a consulting firm based in Ontario, Canada. "There's a huge opportunity, and we are at a massive crossroads in terms of private-label growth."

Adding specialty items can help a retailer gain a point of distinction, sources said. Take, for example, a quirky item like organic blueberry juice, which Albertsons, Boise, Idaho, recently added under its Essensia store-brand line.

"There are markets for some of these specialty items that are cheap-chic, and that's where we can now provide leadership," said Craig Espelien, general director of store brands and strategic sourcing, Supervalu, Eden Prairie, Minn. "So it's stepping beyond the traditional [questions of], 'Am I going to sell an opening price point brand?' 'Am I going to sell a me-too national brand?' to 'Can I offer a signature item?"'

Price Chopper Supermarkets, Schenectady, N.Y., also sensed a need for a stronger private-label presence within the frozen dinners category. To that end, the retailer recently created the Central Market Classics Solutions line. Approximately 80 new items were introduced last month, with 60 more slated to hit store shelves within the next calendar year, according to Mona Golub, director of public relations and consumer services. The retailer operates a three-tier, store-brand program, which also includes the Always Save and Price Chopper labels.

By studying the choices consumers were making when dining out, and mimicking those products in the Solutions line, Price Chopper believed it has created a program that will serve as a destination for shoppers, even as their needs begin to change. One thing that isn't expected to change is consumers' desire for convenience in food offerings.

"Private label is dictated by the interest and demand of consumers, and consumers' needs and expectations are forever changing and forever evolving," said Golub. "The word 'convenience' has come back to us in many shapes and forms. So the ability to pull something out of the freezer that is restaurant-quality that you can heat and serve to your family in a short period of time accomplishes a lot."

Price Chopper also took into account the growing sophistication of the consumer palate and the increasing desire for healthier and, in some cases, low-carb food alternatives. Among the current selections in the Solutions line are low-carb side dishes like mashed cauliflower and cheese, upscale appetizers like bacon-wrapped scallops, and gourmet desserts including turtle cheesecake.

"I think we're still in a very dynamic industry. I think many of the retailers and consumers are looking for new and unique products," said Peter Brennan, president of Daymon Worldwide, a private-label sales and marketing firm based in Stamford, Conn.

"I think it's an opportunity for the creative and innovative suppliers to create differentiation for themselves if they can provide leadership in that area."

Big Y has had success offering shoppers a balance of mainstream private-label products and niche items, such as 100% maple syrup in a leaf-shaped bottle and chocolate milk with a higher fat content than average chocolate milk, Wallenius said. Yet, she told SN the chain is looking into adding more ethnic cuisines to its private-label portfolio in an effort to appease tomorrow's shopper. An Italian line from the World Classics Trading Co. label, sourced through retailer cooperative Topco Associates, Skokie, Ill., is on the agenda, as is additional mainstream Hispanic items, she said.

The move into more niche areas makes perfect business sense and helps get retailers away from the "me-too" world of cola knock-offs, said John Stanton, professor of food marketing at Saint Joseph's University, Philadelphia. Taking advantage of a national brand's weakness in a certain category is the key to private-label penetration and expansion, now and into the future, he said.

"The question becomes, 'Where do consumers give us permission to, in effect, do a better job than national brands?"' Stanton said. "I don't think I'd be interested in coming out with a private-label cola because you get a lot of incremental power from both Coke and Pepsi. They take care of the section. You're just basically going to be selling a cheaper cola.

"On the other hand, I think there are categories that the manufacturer doesn't do much other than put products on the shelf and hope consumers buy it. In those situations, there's a lot more room for the private label to come in and provide a value for consumers."

Fresh Ideas

Fresh foods represent several opportunities where area store brands have yet to make their mark. What sweetens the deal in this arena is the complete absence of solid brand leaders across many perishable departments, sources told SN.

"I think a really hot spot is the produce section," said John Stanton, professor of food marketing at Saint Joseph's University, Philadelphia. "Develop a real brand for produce. Have the regular, everyday store produce, but [also] higher-priced, hand-selected, higher-quality produce that people would be willing to pay extra for."

The same could be said for the meat department, where brand names have primarily been limited to poultry.

"There is still a big opportunity in perishables. I don't think the merchants in those categories think about developing their own brand," said Peter Brennan, president of Daymon Worldwide, a Stamford, Conn.-based private-label sales and marketing firm. "I think, increasingly, it will become important [for supermarkets] to define the quality of their produce with the quality of their meat compared to other forms of retailers. I think it makes sense that [retailers] should be branding, especially if they have a high-quality program."