HEALTHY COMPETITION 1994-11-14

NEW YORK -- Big forces are bearing down on the private-label business in supermarkets.

ter & Gamble sues a retail customer in an apparent "we're not gonna take it anymore" message about copycat packaging.

Mass merchants are selling store brands like hotcakes. Wal-Mart Stores, with a full head of steam behind its strong store-brand program, says it will open another 100 supercenters, and Kmart Corp. may be poised to accelerate its store brands as well.

But that's all likely to help supermarkets' private-label progress in 1995, as far as Brian Sharoff is concerned.

"All of it seems positive for retailers' brands," said Sharoff, president of the Private Label Manufacturers Association here, in a talk with SN about the industry developments to watch.

For one thing, he predicted, national branders' attempts to erect roadblocks in the face of retailers' private-label aggressiveness could backfire, and instead send supermarkets more assuredly than ever down the path of image-building, premium store brands.

And the mass merchants' continued aggressiveness will drive savvy supermarket operators to sharpen their own store-brand programs, he added.

Here are some more of Sharoff's expectations about the forces shaping the private-label world right now.

SN: What do you think was the most important development in the course of this year regarding private label?

SHAROFF: I don't think we are going to know the most important development in 1994 until 1995. So what are the nominations?

One nomination is David Nichol's moving into the presidency of Cott, where he now has an entire organization to support a grand design, perhaps of expanding the beverage category and into other categories consistent with beverages.

Another possibility could be the decision by Oshawa and Metro-Richelieu in Canada to follow in the footsteps of Loblaw's President's Choice line, and offer turnkey programs of high-quality products and excellent packaging to retailers in America.

A third, which we don't know about yet, is the direction Kmart is going to take. We know Kmart is very sensitive to Wal-Mart's edge, it is possible that Kmart could do what Wal-Mart did a few years ago -- suddenly shift gears from a national brand mentality to a private-label mentality.

A fourth possibility could be the scanning data published by Nielsen North America and Information Resources Inc., showing that private label grew by 31% in mass merchandisers.

That represented extraordinary growth. It could turn out to be the most important event of all in 1994. The ability of the Wal-Marts, Kmarts, Targets and others to move product is nationwide and quite significant. If they decide to do it in terms of private label, it changes all the rules of the game.

Clearly, Wal-Mart's decision to launch Sam's Choice was a landmark decision in 1993, and put tremendous pressure on all kinds of retailers. Wal-Mart going into Sam's Choice in such an aggressive way, and then announcing plans to open another 100 supercenters, is like saying, "By the way, we weren't kidding."

Generally, while there could be blips on the screen in terms of changes in data monitoring by Information Resources Inc. and Nielsen, I think the overall trends are highly positive.

SN: What are some specifics about the impacts of Wal-Mart's aggressiveness? SHAROFF: I think that what Wal-Mart does is extremely important to supermarkets. Wal-Mart's reputation as the lowest-cost retailer around has already caused the ripple effect of Efficient Consumer Response.

Every supermarket company has to look at their cost of doing business as reflected eventually in the profits they derive. Now the low-cost producer is coming into your neck of the woods, so you examine everything.

One of those things is private label, because Wal-Mart is known nationally, and their pricing on national brands is better than yours, and they have private label. Then you better decide what you are going to do that is different.

Is it fair to say that the increase in premium branding we've seen among retailers is due to Wal-Mart? Probably not.

If there had not been a Wal-Mart to challenge them, supermarkets would still deserve a lot of credit for looking at the relative importance of branded merchandise and their own brands in their stores. I think many have realized they needed to establish an image, and they decided to do it using the products that they carry. It's a fairly sophisticated decision for supermarkets in the U.S. to make.

SN: What situation is private label presenting to the manufacturing community?

SHAROFF: There are a lot of opportunities and a lot of problems caused by the direction in which private label is going. Many manufacturers now are seeing a place for them to take their upscale, better-than-average product. They are fitting in as a supplier of premium brands to the retailers.

One has to remember what a supermarket shelf looks like. Once you get past the basic commodities, there are a lot of specialty products. How many different types of pitted olives are you going to carry? If every one of them is a brand, and so few are backed by big ad dollars and allowances, sooner or later many are falling off the shelf.

In the year or two ahead, the survival of these smaller branded manufacturers will be a very important issue to supermarkets. If you want to be efficient with replenishment, how do you deal with all these brands? It may turn out to be a big opportunity for further growth of private label.

On the other hand, it has meant a very competitive marketplace. Retailers have a lot of discretion as to where they buy. Obviously, the key ingredient is who is going to give you the product at the best price. That is going to squeeze a lot of manufacturers, and in some cases may force them out of the private-label business.

When I look ahead and say private label will have 25% of market share down the road, I'm looking at expansion into new categories, like premium; but also at picking up a lot of these product lines that are fairly narrow and turning them into store brands.

Our trade show floor has expanded from 200 exhibiting units in 1982 to 1,300 units this year, and that is almost entirely a reflection of those No. 3 and No. 4 brands becoming private-label suppliers.

SN: We've seen many introductions of premium brands this year. Will that continue at a rapid pace?

SHAROFF: I think the pace continues because retailers are competitive, and if retailer A offers it, then retailer B will have to offer it. It also will continue because it is exciting, and enables a store to have more than just the branded products that everybody else has.

I certainly don't think it has reached a climax. Health and beauty care will next become a subject of premium private label; but retailers will have to get out from under low quality standards, to high quality standards.

SN: Does a greater emphasis on premium programs lead to a lessening of emphasis on the copycat level of products, such as the type of packaging approaches that led to Procter & Gamble's suit against retail customer F&M?

SHAROFF: Two very interesting questions here: One, will retailers continue to use techniques such as "compare"?

I think they will, because consumers want to see visually that two products are the same. If one product identifies itself with a yellow cap to show that it has a lemon taste, then it is not unreasonable for the retailer to use a yellow cap to signal that these two are alike.

I don't think that is going to change. Most importantly, it is not illegal, and P&G knows it.

The second question: Will some retailers decide they want to create a definite statement with their packaging that is so strong it does not pay attention to what the national brand is doing in the same category?

Some retailers will take that approach down the road, and it is a very important step, because they will have said to the consumer, "If you need a visual signal, just look for our name, and that is your guarantee of comparability and satisfaction."

When retailers do that, you are going to see a major increase in sales of private label. P&G's approach will backfire.

The law gives manufacturers loads of options to protect that which is unique to them. What manufacturers are attempting is to create a monopoly over a lemon-colored cap. I think it will be seen as a monopolistic attempt, and will be rejected.

SN: Is there a question of investment in upscale private-label brands, which presumably are more expensive to make?

SHAROFF: It is probably correct that not all retailers have the finances or the heart to go into premium private label. There is an alternative. That is where the major value of President's Choice, of the Oshawa and Metro Richelieu programs, of World Classics, of anyone offering it up in a turnkey way. In some ways, that is probably one of the major changes in retailing in the last two or three years.