VONS SEEKS TO RAISE PRIVATE-LABEL SALES

RICHARD TURCSIK

ARCADIA, Calif. -- Vons Cos. here is in the midst of a concerted effort to build its private-label grocery volume to 20% of sales.

Vons expects to achieve that result by expanding its assortment to include an upscale Vons Select label sourced by Safeway, increasing marketing efforts and giving its private label more prominent shelf space, according to industry observers.

According to the Vons 1994 annual report, "In the last four weeks of 1994, private label was 16% of sales, compared to 13% for 1993. The company believes 20% is attainable. Fueling the sales improvement is a program to increase the visibility of private-brand items. In 1994, the company reset its stores to give the Vons brand preferred shelf space."

Julie Reynolds, a Vons spokeswoman, told SN, "At Vons, we find private brands to be an excellent way to build customer loyalty and increase profitability. Vons is well positioned to increase profitability by improving sales in this particular segment."

Local observers said the chain has been making strides with its private label.

"Vons now has a policy that their private-label products will be set contiguous to the leading national brand on the same shelf. In the past, that policy was somewhat loosely defined," said one Los Angeles-area observer. "They are increasing their stockkeeping units and are adding upscale private label, i.e. Select," he added.

"The Vons items are now part of their marketing plan and are featured regularly in print and other advertising," another observer noted.

Gary Giblen, a securities analyst with Smith Barney, New York, said Vons is playing "catch-up ball" with the rest of the industry in terms of private label as a percentage of sales.

"Retailers can make more money on private label, and it gives them more power when bargaining with suppliers. To Vons' credit, they are way behind the rest of the industry, but at least they are catching up quickly," he said.

Vons' private-label sales average of 16% is still well below the industry average of 19.7%, said Bill Spencer, president of the Consulting division of Gage Marketing, Minneapolis.

"They are underdeveloped right now relative to the other chains, so I think they are just trying to get on the bandwagon," he said.

However, the Los Angeles observer noted, "Nobody in Los Angeles is achieving 20%. The highest share is currently Ralphs, with 17%, and Vons has 16%.

"In terms of total share, it's an interesting dichotomy. Vons is very strong in private-label frozen share. They are among the leaders in the city, if not the leader. But in dry grocery, they are what I would consider weak. Their penetration is not as great as the other chains in town," he said, noting Vons still has a way to go before it catches up with Ralphs and Lucky Stores in the premium private-label segment.

Developing a strong private-label program will give the chain more flexibility and allow it to better manage its profitability, said Edward Comeau, an analyst at Shearson Lehman Bros., New York.

"While Vons had a strong private-label program, there were a lot of areas in the store where it wasn't coordinated, and I think that is being addressed," he said.

Brian Suher, vice president of Piper Jaffray & Hopwood, Portland, Ore., said Vons hopes to ultimately have 350 private-label items, and the resetting of the shelves is helping it fit in those new products.

"One big change is that the intermediate brands are being lost, and now there is just the leading national brand and the private label. There used to be a leader, four smaller brands and then a private label. In ketchup, Heinz is there, but try to find Hunt's and Del Monte. You'll find Select ketchup and Heinz," he said.

One area where Vons has been making strides in improving its private label is salty snacks. In late February, Pacific Snax of Newport Beach, Calif., announced it had signed a two-year, $8 million contract with Vons to manufacture and deliver its private-label potato chips.

Besides potato chips, Pacific Snax manufactures lines of extruded rice cakes and pelleted potato products. It also has plans to introduce a totally fat-free natural potato product under its own Pacific Snax label that will be stocked in Vons stores as well.

"We are producing six or seven products for Vons under their label. The reason that Vons, Ralphs and some of these other companies came to us is that they are also looking for some other products. We also have a cheese curl business as well," Richard Damion, chief executive officer of Pacific Snax, told SN.

Chuck Cerankosky, an analyst with Tucker Anthony, Cleveland, said Vons is correcting a "neglected opportunity" by emphasizing its private label.

"In addition to adding more products, Vons is monitoring quality levels and improving them if they are viewed as too low. They are involving customer research in the process. It is a much more comprehensive strategy than in the past, which was really limited and done on an SKU-by-SKU basis. Now private-label marketing at Vons is part of category management," he said.

One Los Angeles area observer told SN the quality of Vons' private label is among the highest among southern California chains.

"Vons has a very strong quality-control department that places some of the highest standards on private label in the industry. In the southern California market, the two highest-quality chains are Ralphs and Vons, both of which have internal quality-control departments. The other companies in the market really don't have the same quality-control apparatus," he noted.

One securities analyst, who did not wish to be named, said Vons appears to be mirroring what Safeway did with its private-label program.

"Vons will try to cut some expenses and eliminate unproductive warehouses in an effort to try to get their costs down because they are too high for that marketplace," he said.

As private label becomes more important to the industry, price wars will develop in that segment, said Jonathan Ziegler, a securities analyst with Salomon Bros., New York.

"As the industry gets more attached to private label, I see the players using private label as a weapon in trying to take share, and therefore possibly we will see some pretty aggressive promotion come in that area as well," he said, noting that unlike name brands, private-label promotion is not backed by co-op dollars.

"Vons has come up with a great campaign, where the emphasis is largely on the value formula as opposed to pure commodity pricing. There is a market basket of what they offer to the customer to create that value, and one of the ingredients is the quality. And Vons is a quality name," he said.