THE FRESH VIEW

NEW YORK -- The growth of private-label grocery products, one of the biggest retailing success stories of the 1990s, may soon be replicated in the perishables departments of supermarkets.

by supermarket retailers.

In an era in which private labels are evolving into private brands and supermarkets are becoming "finely tuned machines," it is reasonable to expect other innovations as well. Some of the things to look for include greater use of strategic packaging and a broader application of economies of scale as supermarkets consolidate; changes in distribution channels and supplier relationships; and innovative approaches to niche marketing.

On the eve of the annual meeting and Leadership Conference of the Private Label Manufacturers Association, SN spoke with Sharoff, who addressed these issues, and briefly reviewed 20 years of private-label history. This year's conference is being held this week in Naples, Fla., from March 25 through March 28.

SN: In this decade, private label has attained the level of creating serious competition for national brands. What has been their response?

SHAROFF: In the 1990s, the brands are trying to figure out how to salvage their place on the shelf. So you get category management, which is intended to protect my turf against the other brand's turf, or two brands against the others. But it all had the wrong effect. The more you protect your turf, the more the No. 3 and 4 brands go out of business. But they don't go out of business. They come back making private label. Which upgrades the quality of the private label available to the retailer.

SN: So the 1990s have been marked by brands trying to preserve their market share?

SHAROFF: But in effect all they have been doing is preserving the market share of the Top 25 brands. And that doesn't change the equation. Here, at the end of the decade, you are hearing very dangerous bells being rung. You hear Coca-Cola is not making the profits; Kellogg's is not making the profits. Even attempts by the very biggest and best to protect themselves aren't going to work.

SN: Aren't brands still a lot bigger than private label?

SHAROFF: We say that private label has a 20% unit share. But that doesn't mean the brands have 80%. In fact, the big brands, the 10 largest companies, account for 33% of the units in the stores. Much of the rest of the units are small brands. Companies that make pitted olives; the guy who makes a certain type of "no-preservatives added, special flavors brought in from Asia" potato chips. What is amazing about American supermarkets is the diversity of products.

SN: Are the brands in jeopardy then?

SHAROFF: No. Every supermarket has as its objective to give the consumer choice. No one is going to move in the other direction. What's happening is that we give the consumer choice. We also have to make a profit. So we are going to make sure we maintain that profit by getting it from private label, which is the only sure choice for us in terms of profit.

SN: What are the growing categories in private label in the next year or two?

SHAROFF: Most of the retailers are either starting programs in perishables or doing research in this area. The area of value-added perishables is wide open. It's a terrific profit market for them. There really isn't a lot of competition. Brands have not gotten into this arena in a big way. Private-label companies can build that area, even if it takes five years: value-added meats, fish, dairy, bakery and produce.

SN: You've said that for retailers the big money is in economies of scale. Can you elaborate on that?

SHAROFF: Economies of scale apply not only in operations, but also in marketing, in demographics. If you are a retailer located only in the Northeast, you may have a hard time building private label for a Latino/Hispanic audience. But if you are a retailer that also happens to be in Texas, California and Chicago, as well as the Northeast, economies of scale allow you to build private label in areas where previously there were none. Thanks to demographic analysis and scan data, retailers have the ability to plan out purchasing, procurement and marketing. These retailers are aiming to be finely tuned machines.

SN: Niche marketing seems to be looming larger on the horizon. When consolidation is over, will the big stores be giving birth to smaller formats, and how will that affect private label?

SHAROFF: There are a lot of trends taking place at the same time. Many retailers are trying to reinvent themselves, not as sellers of Coca-Cola, but rather as sellers of niche products with their name on it. Trader Joe's is a good example of that. That's very good for private label. What is showing is that the smaller retailer, when faced with a threat of a Kroger or a Wal-Mart, may find salvation, not in being just like them, but in becoming a niche retailer, and in so doing using their own brands to identify who they are.

We definitely are seeing changes in formats, both here and in Europe. In England, you see the Metro Sainsbury stores. Here Wal-Mart is trying smaller neighborhood stores. These are smaller versions that are trying to get to a different part of the shopper's experience. In Europe you are seeing petrol stops that bear the name of the supermarket chain. In the U.S. you are seeing supermarkets opening gas stations in their parking lots. Everyone is looking at different formats to establish a niche for themselves that is either going to salvage their business because they are small or is going to grow their business because they are large.

SN: Previously we talked about strategic packaging as a strategy that retailers use to "blanket" the store with their brand, but aren't there other approaches to strategic packaging?

SHAROFF: The simplest form of strategic packaging is to take the company logo and put it on every package. Some retailers have decided that the best thing they can do is to create a brand name within their store for their private label. So they have a family of brands: in the bakery or in fresh areas, they may use one brand, and in another area something else. That's an attempt to strategically use packaging.

Retailers are beginning to realize that in a store with 20,000 stockkeeping units, they have control over 8,000, 9,000 or maybe 10,000 SKUs. To the extent that you can create a strategic look for your packaging -- if it's different in the canned area than it is in cereals, that's OK -- it means that you have strategically linked the products together. That creates an advantage for yourself in the store.

You are going to see more retailers developing strategic packaging concepts over the next five years.

SN: How will the supplier scene change over the next few years?

SHAROFF: Manufacturers of private-label products can't charge based on brand equity, but according to what the retailer is willing to pay for the product. And the retailer is a much tougher consumer than the consumer. A lot of manufacturers are feeling very concerned that they won't be able to compete with the demands of Efficient Consumer Response, electronic commerce, promotional allowances; all the things the retailer needs to sell his product. And the manufacturer, because it has a smaller profit margin, is wondering, "Hey, am I big enough to do all this?" As retailers face consolidation and distribution issues of national scope, it's going to be very competitive times for manufacturers, and they know it.

SN: Will there be opportunities for smaller companies, even as some manufacturers consolidate?

SHAROFF: For the long-term answer, we can look at the chocolate-chip cookie example. When it became obvious that a market could be created selling private-label chocolate-chip cookies that were as good as or better than national brands, all kinds of other companies jumped in to make specialty cookies. There will be more niche players, and there's going to be consolidation. So the major change will be that niche manufacturers will pick up perishables, ethnic and other new categories we have been talking about.