Time for supermarkets to raise their private label game, retailer says

Grocery retailers need a strong private brand offering as part of their game plan to compete in today’s fast-changing marketplace, former Kroger and Harris Teeter executive Fred Morganthall said this week in a keynote speech at the 2018 PLMA Trade Show in Chicago.

Even as conventional supermarkets address rising demand for online grocery service and prepared foods, hard-discount grocers Aldi and Lidl are expanding quickly into new U.S. markets, challenging incumbent operators and grabbing market share with high-quality private label products at very low prices, explained Morganthall, who served as executive vice president of retail operations at The Kroger Co. and as president of Harris Teeter.

“The deep discounters are clearly a disruption to the traditional grocer. Aldi has 1,752 stores today, and their own-brand quality really is equal to or better than national brands,” said Morgnthall (left). “If you’re a retailer in grocery and you haven’t taken your top 20 or 30 items that you sell today and cut them against Aldi, you’re going to be in for a surprise. It is amazing the quality that Aldi presents today, and they’re clearly a leader in the quality aspects of own brands.”

By the end of 2022, Aldi aims to reach 2,500 stores. The chain also has embarked on major programs to ramp up its selection of fresh, organic and natural items, expand meal solutions and upgrade the presentation of its stores. According to Morganthall, the opening of more than 50 U.S. stores by rival Lidl has pushed Aldi to raise its game. Around 90% of the product mix at both deep discounters is private brands.

“Own brands are going to have up their quality level,” he said. “If Aldi wasn’t as good as Lidl was before, Lidl has forced Aldi to upgrade its quality again. Aldi has looked at every Lidl item that they sell. Kroger and Walmart have both looked at the brands offered by Lidl and Aldi and upgraded quality in line with theirs — and then on price. Not only does Aldi have a great product line and great quality in own brands, but Walmart has lowered its prices to align themselves with Aldi and Lidl, and Kroger has also reacted in their own brands.

“So the entry of Lidl has really brought own brands to the forefront with respect to Aldi, Walmart and Kroger,” he noted. “Own brands have never been more important to those retailers than they are today.”

The top two things in a grocery store that generate sales are produce and private label, according to Morganthall. “If you’re a national-brand or own-brand manufacturer, I urge you to look at your quality. It’s amazing to me today that national brands have allowed Aldi and other retailers to surpass them in quality,” he said.

Private label has also led national brands in the area of innovation, he added. “I would submit to you today that most of the innovation in the grocery business is occurring in own brands and not national brands. As evidence of that, how many ketchups, mustards and mayonnaises have been introduced in the past year, and how many do you really need? That is not innovation, I must say.”

In an earlier presentation at the Private Label Manufacturers Association show, Garett Chau, senior vice president of professional services at Nielsen, reported that private brands have a lot of room to grow in the United States. Private label dollar share is now about 15%, but it has the potential to double in the next 10 years.

“There’s strong reason to believe that there’s only one direction for private label to go in the U.S., which is up,” Chau said, citing strong and growing private-brand offerings at Aldi, Lidl, Trader Joe’s, Costco, Walmart, Kroger, Amazon and other retailers.

Consumer acceptance of private label has risen, he pointed out. Nielsen research shows that 65% of shoppers find private brands as good as name brands, and 43% consider private label quality better.

“We know in the U.S. that over the last couple of years, there’s been improving perception about the quality of private label,” Chau said. “So what does this mean? Within the decade, we will see private label market share in the U.S. hit 25% to 30%. All else being equal, for national brands, that means a distribution loss of 10 to 12 points.”

What’s more, private label’s benefits for retailers are manifold, Chau noted.

“Store-brand strategies are a critical part of how retailers plan to create and capture value in the months and years ahead. Store brands improve margin; they enable differentiation versus competitors, creating a competitive advantage; they allow retailers to better delight their shoppers, since they can tailor products for them; they help prevent leakage [of customers and sales]; and they capture greater share of wallet. They also enable retailers to have more control over their costs, pricing and assortment,” he said. “And the growth trends and trajectory that we see are not cyclical. It’s not a blip on the radar. The trends are real, and they will continue.”