U.S. STORE BRANDS MAY OUTSELL NATIONALS

Lucia Moses

MIAMI -- Store brands in the United States could overtake manufacturer brands in market share, if trends abroad are any indication, the head of a leading private-label maker said.

Far from being cheap and low-value, retailers' own labels are starting to outpace manufacturers' in some categories in the United Kingdom and the rest of Europe, said Mike Handley, chief executive of McBride, a $1 billion (U.S.) maker of European personal care and household products, speaking recently at Information Resources Inc.'s Reinventing CPG Retail Summit here.

Handley told the gathering of packaged goods makers he intended his message as a wake-up call. The retail consolidation that's enabled private label to gain ground in the United Kingdom is happening in the United States as well. "You're in the vulnerable area," Handley said.

The United States has historically trailed Europe and the U.K. in terms of private-label penetration: Private label's share of unit sales in U.S. supermarkets stood at 20.6% in 2003, according to data compiled by the Private Label Manufacturers Association.

A December survey of 806 primary shoppers conducted for the Grocery Manufacturers of America underscores the importance of brands. Fifty-two percent said that when buying food, they choose national brands always or most of the time, and 40% buy them some of the time. Asked about brand vs. price, though, 53% said they were more concerned with getting the lowest price, while 35% were more concerned about buying a national brand, even if it's not the lowest price.

It's a different story in the United Kingdom, where private label accounts for about 40% of grocery sales, up from about 24% in 1977, driven by consumers' propensity to buy them, the concentration of retail industry, growth of hard discounters, and profit incentive for retailers, Handley said. Bakery is the category with the highest penetration, 65%.

Throughout Europe, too, the march toward store brands continues. One of four products sold in France, Germany and Spain are private label, for instance. In Spain, 50% of all paper products are private label. In France, 34.5% of chilled desserts are. "It's not just a U.K. phenomenon," he said. "There's no resistance to buying private label."

Handley said private label's growth in the U.K. was a natural and permanent outcome of a power shift from manufacturers to retailers in the 1980s, as the latter consolidated, sought control of the shelf, centralized bargaining with suppliers and set up distribution networks.

Today's economy is retailer-based, not manufacturer-based. Shoppers "don't walk into your factories or my factories, they walk into our customers' stores. There's where the intimacy is."

As retail has evolved, so, too, have their store brands. In the 1970s, Handley said, they were low-quality, functional products. A decade later, retailers were confidently introducing their own versions of high-volume products and slapping their name on the package.

By the 1990s, store brands were appearing in all products, with quality matching -- or beating -- the leading manufacturers' brand, and serving as a retailer differentiator. "They're not just in there to be second."

As their quality and acceptance has improved, their price gap with manufacturers' brands has narrowed. In the 1970s, private label sold at a 40% discount to name brands. By the 1990s, the price gap had shifted down to 5% to 20%, Handley said. In the U.S., private label's discount averages 39%, according to ACNielsen.

No longer are private-label products limited to national-brand knockoffs. McBride produced a soluble laundry detergent in a soluble sachet ahead of the branded manufacturers a few years ago, Handley said, "and three of them came up knocking on our door to see if we'd license it. These are not third-rate companies." Mega U.K. retailer Tesco sells caviar under its own name, and "they charge a really big premium," he said.

Handley said the U.K. experience has a lot to teach the U.S. Once a "nation of shopkeepers," he said, retailers there today have "built strong fascia brands. You can bank at Tesco. You can buy your mobile at Tesco. You can get your car insured at Tesco, your credit card. They're ubiquitous. People trust Tesco."

Store brands' growth will continue as retailers improve their quality and expand them to more categories, he predicted.

"Structural changes in law and the retailer universe will encourage retailer brand growth as retailers focus on consumer and shareholder value," Handley said.

Manufacturers must offer consumers something of value if they expect to be able to charge the premium required to support their enterprises, he warned, adding, "If you're not cost-conscious, then private label will eventually get you."