PRIVY TO PRIVATE LABEL

STEPHANIE FAGNANI

Beverage manufacturers have burst forth with a wave of innovation in recent months, from line extensions to package redesigns, but many retailers have yet to make a splash with store-brand thirst quenchers.

While some beverage categories lend themselves more to private-label success than others, all are equally ripe with opportunity, according to industry reports.

"Store-Brand Drinks, U.S., October 2003," a study released earlier this month by Mintel International suggests that one factor determining the future success of the store-brand beverage arena could be a movement away from a copycat strategy -- waiting to gauge a national brand's success in a particular product line before even dipping a toe in the water.

"The problem with store brands is that they are enthusiastic imitators instead of cutting-edge innovators," said Marcia Mongelonsky, senior market analyst at Mintel Consumer Intelligence, Chicago, and main author of the report. "Except in certain cases, like some of the Trader Joe's and some of the old [Loblaw's] President's Choice stuff, it's rare that a store brand comes out before a national brand."

Using data from market research firm Information Resources Inc., also in Chicago, the Mintel report examined the milk, juice/juice drinks, carbonated beverages, bottled water, and coffee and tea categories, and found that overall sales of store-brand beverages declined by 4.6% from $10.6 billion in 2001 to $10.1 billion in 2003, in the food, drug and mass market channels, excluding Wal-Mart.

However, this decline in store-brand sales is in direct contrast to the overall beverage market, which witnessed a sales increase of 1% during the same period, suggesting that retailers are not keeping pace with national-brand success in many beverage segments. Of the categories looked at, milk occupies the largest private-label presence, with more than 60% of sales generated through store brands (see sidebar on Page 56). Following milk is juice/juice drinks, with about 16% of store-brand sales; carbonated beverages with slightly more than 10%; bottled water with over 6%; and coffee/tea with about 3% (see chart on this page).

No doubt, investing in a product line that has not already been proven to spark consumer interest is a risky proposition for grocers who oftentimes have far less financial capital to back development plans than consumer packaged goods manufacturers. They need to be even more sure of a product's long-term appeal due to these budgetary constraints.

The Boston Consulting Group, also headquartered in Chicago, has developed a five-point checklist of factors that influence the success and failures of both national and store brands, according to Barbara Hulit, a vice president and director who leads the global packaged goods sector for BCG. This list includes creating and investing in the brand; having a steady stream of true innovation; merchandising support like display activity; distribution mode (categories that have direct-store delivery tend to have lower private-label development, she said); and scientific price management.

"If you stack up the different beverage categories and put check marks around where brands are doing these things and where they aren't, you get a pretty good sense for where private label is likely to have greater penetration," Hulit told SN.

For example, carbonated soft drinks as a category include national-brand players that spend a lot on advertising, are pretty up-to-speed on innovation in terms of flavors and packaging, have a lot of activity on merchant support, have DSD, and are different market to market on whether or not there is a big price gap between private-label and national brands.

"By and large, they do a pretty good job on all five levels, which is why you see the category as a whole doesn't have a lot of private-label activity. The retailer who has the highest has about 22% market share, the lowest is close to zero, and the average is something less than 10%," she added.

While it's true that total store-brand beverage sales declined by two percentage points between 1998 and 2003 (see chart on Page 56), retailers still have an edge in terms of where shoppers purchase store-brand beverages. According to the Mintel report, 95.6% of store-brand beverage purchases were made in the supermarket channel this year, which represents a decline of 5% from 2001 to 2003, as more alternate channels come into play.

Being fully committed to private-label programs is the starting point for retailers looking to stem the flow of consumers to other channels, sources told SN.

"It's not just a one-hit wonder; it's something you have to work on day in and day out. It needs to become a core corporate initiative," Edmund O'Keefe, vice president of investor relations and corporate development, Cott Corp., said. Cott, based in Toronto, is one of the leading suppliers of retailer-branded beverages, focused mostly on CSD development.

Cott has primarily been emphasizing different flavors in its most recent product lines, taking its cue from the growing Hispanic population.

"Private label is very strong in flavors -- orange, root beers, things like that. Hispanics are looking at pineapple, red-type soft drinks, mango -- different types of combinations. We've done some interesting work on cranberry, blueberry, very unique flavor formulas," O'Keefe said. "From an innovation perspective, if you look at the evolution and the demographic profiles of the U.S., there are tremendous opportunities going across different parts of the country to create specific flavor profiles," he added.

Stop & Shop, Quincy, Mass., kept those flavor profiles in mind when it developed its recently launched Mi Casa line geared toward the Hispanic market. As previously reported in SN, the line includes three-liter sodas in coconut, pineapple, grape, and cola champagne flavors.

Topco Associates, Skokie, Ill., has also been receiving flavor-related requests from its retailer members, and is currently working on variations of the vanilla colas and those infused with lemon, according to company executives. In terms of packaging trends, the cooperative recently converted its tomato and pineapple juices to polyethylene terephthalate (PET) packages. And, while Topco sells 20-ounce bottles of soda only in multi-packs and not single serves, it has seen that size range emerging into the category.

Aside from flavor and packaging innovations, the one phenomenon that will undoubtedly affect shares of private label in the beverage world going forward is the economy. On the one hand, the Mintel report suggests that a recovering economy could hurt private-label sales as shoppers who view store brands to be lower in quality worry less about saving money on groceries. On the other hand, the overall private-label industry tends to blossom in weaker economies. In any event, advances in the quality of store brands take place every day, helping to sway otherwise-skeptical consumers.

"There is a consumer willingness to try and accept private-label brands that didn't exist 10 years ago, and there's a lot of momentum behind consumer behavior. Once the consumer has a positive experience, they are more willing to try another category," Hulit said.

"From that perspective, it makes the environment much more ripe for private-label development. Having said that though, the same tenets of strong brand management still hold. And private label will tend then to develop out into those categories where brands aren't being invested in as heavily."

Store-Brand Beverages as a Percentage of Overall Beverage Sales (1998-2003)

Year: Total Sales of Beverages $million; Total Store-Brand Sales of Beverages $million; Store-Brand Beverages Share %

1998: 38,257; 9,722; 25.4

1999: 40,198; 10,319; 25.7

2000: 41,582; 10,296; 24.8

2001: 42,750; 10,579; 24.7

2002: 43,350; 10,224; 23.6

2003 (est.): 43,159; 10,097; 23.4

Wal-Mart data not included.

Source: based on Information Resources, Inc. InfoScan ® Reviews Information/Mintel