PRIVATE-LABEL GROWTH ACCELERATES IN SUPERMARKETS

MARK HAMSTRA

Sales of private-label products have surged in supermarkets this year as retailers placed more emphasis on promoting their store brands and as the array of private-label products has become increasingly diverse.

In terms of overall store market share, supermarket unit sales of private-label products through the first half of 2001 have rebounded strongly from a relatively flat year in 2000, according to market research firm Information Resources Inc., Chicago. The pace of growth is similar to the private-label growth that retailers enjoyed in the 1990s.

In the first quarter of this year, unit sales of private-label products accounted for 20.2% of total store sales vs. 20% in the first quarter of last year. In the second quarter of 2001, private-label sales were 20.3% of total store sales vs. 19.7% last year.

Leading supermarket retailers like Kroger, Cincinnati, and Safeway, Pleasanton, Calif., reported that the sales growth of private-label products in the first half of the year fueled their earnings growth as well. Safeway, for example, said private-label growth was among the factors -- along with shrink control and targeted adjustments in promotional spending -- that boosted its gross profit to 31.2% of sales in the second quarter of 2001 vs. 29.7% of sales in the second quarter of 2000.

"The growth in our line of private-label products has outpaced that of national brands for the past eight years," said Debra Lambert, spokeswoman, Safeway. "We think this is due to innovation on our part, creating new products that meet the needs of our customers."

The chain offers more than 3,500 private-label items, which it produces from its 41 manufacturing plants. Its premium private-label line, Safeway Select, is positioned not only as an alternative to national brands, but often Safeway creates products under the Safeway Select label that have no national-brand counterpart. The brand has even been extended to its in-store banks, which are operated under the Safeway Select Bank brand by an outside vendor.

Kroger also touted growth in private-label sales as being a factor in the company's profitability in the second quarter.

"Kroger's earnings growth was driven by our corporate brands, which turned in one of their strongest quarters," said Joseph Pichler, chairman and chief executive officer, in a prepared statement. He also attributed the second-quarter earnings growth to synergies achieved through the 1999 merger with Fred Meyer.

Analysts agreed that the growth of private-label products at Kroger is boosting its financial performance.

"I think it plays a key role in growing the company's operating margins," said Charles Cerankosky, managing director in the Cleveland office of McDonald Investments. "And the same for Safeway as well. It's truly an integrated part of not only the merchandising efforts of those companies, but their overall operations. Between the two companies, they've got 80-something manufacturing plants."

He pointed out that the increasing growth of private-label sales does have a downside in that the products often generate fewer dollars per unit than national brands do.

"But," he added, "they carry a higher penny profit per unit, and that's what's so appealing."

Cerankosky also pointed out that with the manufacturing flexibility that Kroger and Safeway have, they are able to quickly roll out private-label products that fill an immediate consumer need, which adds to the growth of those chains' private-label sales.

"If they determine in a certain market that, for example, a frozen swordfish steak entree is in demand, and they know it will work, they put it out there under Safeway Select and sell it," he said.

Kroger has been especially aggressive in expanding its private-label program since its 1999 acquisition of Fred Meyer. That acquisition led the company to roll out its premium Private Selection line nationally, and allowed it to have a three-tiered, private-label program featuring store brands, Private Selection and its For Maximum Value line of low-priced products.

Kroger also offers an example of the way supermarket retailers are growing their private-label programs by expanding into new product categories and niches. The chain has been having success with its Naturally Preferred products, a group of 160 natural and organic items, which it is rolling into stores that feature Kroger's Nature's Market concept, according to analysts.

Cerankosky also cited Supervalu's Food 4 Less banner as another example of a supermarket that does well with its private-label offerings.

Brian Sharoff, president, Private Label Manufacturers Association, New York, said the growth in private label during the past year and throughout the past decade has been spurred by retailers putting more emphasis on the products.

"It's retailer-driven, not consumer-driven," he said.

Although the pace of growth of private-label sales slowed in 2000, it was still a record year. Supermarkets rang up $37.8 billion in private-label sales, a 1.1% gain over 1999 levels, according to the PLMA's 2001 Private Label Yearbook.

Mass merchants, however, continued to demonstrate the strongest growth, with a 12.2% gain in 2000 vs. 1999. Drug stores, meanwhile, had negative sales growth in 2000, with volume down 1.3% vs. 1999.

Through July 2001, both supermarkets and mass merchandisers continued to gain, while drug stores saw their sales growth fluctuate up and down throughout the first half of the year.

Both supermarkets and mass merchandisers had a surge early in 2001 in the dollar sales growth, which might be attributable to the exceptionally favorable comparisons with the first few months on 2000. Sales of both store and manufacturer brands dropped off at that time after consumers had stocked up in the later months of 1999 in anticipation of possible Y2K-related problems.

"If you look at [canned] vegetable sales in 1999 vs. what they were in 2000, there was a significant shift in business from the first-quarter 2000 to the fourth-quarter 1999," said Craig Espelien, corporate director of store brands, Supervalu, Minneapolis. "We didn't see a repeat of that in the fourth quarter of 2000, so we had some big numbers to go up against at the end of calendar 2000. But I think that was across brands and private label."

The big supermarket chains like Kroger and Safeway are not the only ones enjoying strong private-label growth. Marc Jampole, a spokesman for Penn Traffic, Syracuse, N.Y., which operates about 220 supermarkets under the Big Bear and other banners, said the company's private-label sales have been strong and improving.

"We do better than [the national average,] and it's been growing," he said.

He cited two reasons why: the availability of new private-label products and what he described as "consumers rebelling against the 'brand tax,"' or the higher prices that are often associated with manufacturer brands.

Penn Traffic is one of the 25 regional chains that own Topco Associates, Skokie, Ill., a buying cooperative that supplies some 7,000 private-label products under the Top Care brand and other labels.

Among the private-label items that have been performing well at Penn Traffic are cookies, salty snacks, bags and wraps, paper items -- especially toilet paper -- laundry items, shelf-stable juices, candy, ice cream and pasta, according to Jampole. He also said the new private-label candy bar program from Topco "has taken off like wildfire."

Private-label ice cream sales have benefited from the addition of a new premium line and the availability of additional container sizes, he said. Penn Traffic's sales of private-label pasta also have grown this year, according to Jampole, due to the introduction of new shapes.

"I would say that our private-label program is good and improving," he said.

Wholesalers echoed that observation about their own operations.

"Private label is trending way up," said Jeff Manning, vice president, general merchandise, Fleming Cos., Dallas. "There's been a lot more emphasis on it by the whole trade, and private-label quality continues to improve."

At Supervalu, Espelien said private-label sales year-to-date are up 7% relative to total company sales.

"We've had a few categories that we've worked on over the past few years, and we've seen some solid performance," he said. "We're doing real well with diapers, salty snacks, pet food, paper products and soup."

The company has worked especially hard on driving growth of many products under its national brand equivalent, store-brand labels, as opposed to its lower-priced lines under the Shoppers Value brand.

"We've had a much more aggressive merchandising program, specifically in our Cub Foods organization, and that has put our brand in front of the consumer more often," Espelien said.

The company also is in the process of revamping many of its products under the Shoppers Value brand, he said.

Although he said the current economic slowdown could be leading to increased supermarket sales and thus more sales of private-label products, he said he was not sure that consumers were necessarily trading down to less-expensive versions of the same products.

"If it was totally economy-driven, we'd see more of the commodity sales growing," he said. "While we've done good in those, we've actually rolled out some premium, higher-quality items that have done fantastic, so I don't think you can attribute why we're doing well totally to the economic slowdown."

Sharoff of PLMA also downplayed the idea that the economic fluctuations have been influencing sales of private-label products.

"Private label has enjoyed its biggest success during times of strong economic growth," he said. "It's driven by the retailer who sees they can make more profit by selling private-label products."

Espelien of Supervalu also said he thinks the national brand manufacturers have eased up in their aggressive pricing efforts to compete with private label's growth.

"We've seen a little ebb and flow with that," he said. "We've seen the national brands take a price tack for a short period of time, then when their sales didn't increase and their revenues dropped, we saw most of them take price increases and go back to brand-building activity."

Some of the product categories in which he said national brands have lowered prices to more effectively compete are cereal, refrigerated dough and coffee.

Despite the growth of private-label product sales, some industry executives see room for improvement.

"Retailers are still missing the total opportunity by promoting packer labels instead of private label," said Manning of Fleming. "There are a lot of packer labels out there that come in at half price, and retailers will pick those up for a short time. Retailers need to focus on their private label, not splinter off into packer labels just because they have a good price."