PRIVATE-LABEL WAR

BARBARA MURRAY

While private-label packaged goods have been one of the big success stories in Center Store, retailers may be in danger of resting on their laurels while mass merchants and drug chains move ahead and develop their own store brands as one more competitive weapon.

According to the Private Label Manufacturers Association, cold cereal in mass merchandisers is the second fastest-growing store-brand category overall in any channel, with an 85.5% increase in units sold in 1998 vs. 1997, from research by Information Resources Inc., Chicago. (Top growth was in candles, in the mass channel.)

Of the Top 10, the only store-brand category growing faster in supermarkets than in the other two channels was refrigerated lunch kits. It was fifth, with a 64.1% increase in units, according to IRI.

Burt P. Flickinger, managing director of Reach Marketing, a Westport, Conn.-based consultancy, says there are three "Ws" to watch: Wal-Mart, Walgreen's and Wegmans [Food Markets, Rochester, N.Y.].

What everyone ought to do, he said, is develop trial sizes, pre-pricing, bonus pricing and extended special packs of private brands, and advertise more, including on billboards and mass transit. He believes supermarkets should charge more for their private brands. According to a study published in April by Spectra Marketing, Chicago, retailers across all channels have been losing money by promoting private labels too aggressively. The study also found that private-label users have been going downmarket.

Citing a previous academic study, Spectra Marketing's Consumer Science & Modelling Group said the actual price gap between private-label and name-brand counterparts is about 45%, when consumers expect it to be more like 23%. "With too big a price gap, retailers are leaving private-label money on the table and getting nothing in return," CSMG said. It said Tellis and Zufryden (1995) concluded that "Retailers should preferably not promote private labels because their response to promotions is so low." While completely eliminating trade promotions for private label may be too extreme, CSMG said, "evidence indicates that high-profile deep-discount features may not be a good fit for what private label can realistically do for a retailer."

"Private brands' growth is not linked to recessionary times," Flickinger said. Rather, it is linked to education. "High school and college graduates clearly see the value of the Kirkland brand of Costco, Sam's Choice, Walgreen's and Wegmans private brands and the tremendous offerings President's Choice has developed with Weston-Loblaw in Canada and Harris Teeter in the U.S." He disputed Spectra's findings that private label is going downmarket, saying that "if that hypothesis were true, we'd be seeing a lot more black-and-white generics." The reverse is more likely, he said, from Whole Foods' 365 line to A&P's Master Choice representing a different hypothesis, that private brands are going upscale.

Flickinger said that most U.S. retailers could pick up an additional five points in most major categories on private brands and build their consumer business base by anywhere from one-half to two full share points "by developing classical marketing budgets, being innovative and borrowing from the best practices in apparel and health and other areas where private brands have had tremendous success."

Supermarkets need to price more closely to the national brands, particularly on superpremium and premium private labels, he said, agreeing with the Spectra report on "Do Store Brand Promotions Work?" By taking prices up, supermarkets could reinvest in things like in-store taste-testing and consumer coupons, which Flickinger said Byerly's and Lunds do well on the regional side, and Safeway and Kroger do well nationally.

Mass merchandisers and drug-store chains are major forces to be reckoned with in the private-label arena, consultants say. Sam's Club, a division of Wal-Mart Stores, operates 445 stores worldwide, and has been quite successful with its new superpremium Member's Mark label, introduced last fall. Sam's Club also has Sam's Choice private label.

BJ's Wholesale Club, Natick, Mass., now has 100 stores, and sells its own house brand, called Berkley & Jensen, in categories such as juice, diapers and baby wipes, bathroom tissue and paper towels.

Walgreen's, Deerfield, Ill., has become more aggressive lately in promoting its private brands, said spokeswoman Yvette Venable. A package redesign adapts the company's tagline, "Walgreen's -- The Pharmacy America Trusts," to "Walgreen's -- The Brand America Trusts."

Stepped-up advertising in store circulars and shelf talkers that ask consumers to compare its private label with national brands are part of the more proactive approach. While Venable would not give estimates of the percentage of Walgreen's grocery sales that come from private label, she said it was strong. Walgreen's ice cream is doing especially well, she said.

"What Walgreen's and other drug stores have always done is take HBC and OTC and 'compare' them, and they have been successful," said Neil Stern, a partner at McMillan Doolittle LLP, Chicago.

"They are moving into snacks and candies now, more Center Store, and baby products," Stern noted. "All alternative activity has an impact on the supermarket's ability to grow, particularly in Center Store."

The supermarket is under attack, from Dean & Deluca and EatZi's at one end of the spectrum, and from C-stores on the other. In the middle are the mass stores, like supercenters and clubs, Stern said. "It is the total impact of all these encroachments that hurts."

Although the Big K format does not have private brands, the new format gives about 6,000 square feet to branded grocery products (Kmart Pantry). "Their strategy is to use branded product at very aggressive pricing, as a draw. For them at this point, a private-label program would be counterproductive," said Paul Kelly, principal at Silvermine Consulting, Westport, Conn.

By focusing on the big size packs, discounters "are trying to drive more traffic into their stores, and get more frequency of visits. Adding more food is their way of getting you to come there more, but they're also inducing customers who are already there to spend more," said Stern.

Private label generally has been gaining, reaching almost 20% of overall sales in all channels for 1998, according to the PLMA.

Shaw's Supermarkets, East Bridgewater, Mass., claims 40% of its sales are attributable to private-label brands. Kroger is next, with 22% or so of total sales, with ShopRite and Pathmark probably in the same range, according to industry observers.

"Twenty-four to 25% of our product is generating about 40% of our total sales," said Bernie Rogan, spokesman for Shaw's. "The only place you'll find our Shaw's private label is in our stores -- we don't even give it to food banks."

He said Shaw's, which is owned by J. Sainsbury of the United Kingdom, follows the European formula, which is to design a product for Shaw's clientele, then seek out a vendor to produce it. In this way, the company deals with no middlemen, and the product is exclusively Shaw's. "That gives us good margins, and enables us to answer to both masters," Rogan said. "Sure, we're confident, but we're always looking over our shoulder."

"Wal-Mart has the Great Value program in its supercenters, which is consistent with its go-to-market position," Mark Husson, an analyst with Merrill Lynch, New York, observed. However, it also has Sam's American Choice, the premium, according to Jessica Moser, a spokeswoman for Wal-Mart, Bentonville, Ark. "It was really brands that gave Wal-Mart its start," she said. "In private label, we have high-quality merchandise that our customers seem to appreciate. However, most of our business is on name brands."

Costco's Kirkland Signature brand runs 7% to 8% of sales, according to Husson. "It's quite a strong private-brand program, but the clubs run very small numbers of products inside their stores. They don't have room for a lot of private brands, [so they] just run it in areas where they can't find a brand to do the job," Husson said.

According to Kelly of Silvermine, Wal-Mart has always been very measured in its private-label offerings. Known as a discounter, a big part of what it does is aggressively price major brands. "In a food store, where you're buying meat and produce and all, you have a different relationship with the store, so a private label there is a natural temptation. In discounters, the retailer has to be more careful with it," he explained.

Private label also requires a strong branded franchise to make the "compare-and-saves" worthwhile, he said. "A lot of drug stores have in-and-out -- a customer goes there for shampoo and sees an endcap with Campbell's soup, and so they buy it. But food stores have a leg up, since customers already think of them as the destination for food products."

Nonetheless, Wal-Mart is unique as a discounter, since it is also a food store. While its business has been built on brands, to offer private label is the next extension, said Stern. "They have a very well-done, two-tier private-brand program. They have done a very effective job of setting up a private-brand alternative structure within their environment," said Stern.

He explained that the chain began with the premium Sam's American Choice, and then created its more conventional private label -- Great Value -- afterward. "Wal-Mart now is very comprehensive in private brands," Stern continued. "It has it in every category -- crackers, coffee, juice, cookies; you'd be hardpressed to find a category that it doesn't offer. In some cases, Sam's American Choice uses the same source as Loblaw's President's Choice, so it's designed to be at that quality."

These developments are a threat, Stern said, because it is one more reason for customers to shop somewhere else besides the supermarket.

"We know these other channels are slowly taking away share," he concluded. "Certain categories have been hurt more than others. But supermarkets during the same time have increased their general-merchandise, HBC and prepared foods. There are other ways to fight."