A weak economy and retailers' increasing focus on private label is creating a growing threat for traditional consumer packaged goods brands.

By Pauline Hammerbeck, Senior Editor
BrandPackagingmagazine (a sister publication ofFlexible Packaging )

Is the soft economy driving consumers to store brands? The data certainly seem to indicate that it is: Over the last year, private-label sales of packaged goods have grown 9.1% to $77 billion in supermarket, mass merchandise and drug store sales.

The growth is also consistent with historical trends.

“We’ve done studies spanning decades, and what we document, very clearly, is that private label grows a lot in recessions,” says Jan-Benedict Steenkamp, a marketing professor at the University of North Carolina’s Kenan-Flagler Business School and author of Private Label Strategy: How to Meet the Store Brand Challenge. “In each recession, the national brands lose some of their customer base to private labels.”

But recent analysis from The Nielsen Co. indicates the current numbers may be misleading. While dollar sales of private-label products are up over the last year, Nielsen found that unit sales are actually slightly down, indicating that growth is being driven by higher pricing, not as a result of consumers abandoning national brands.

It is clear, though, that over the last few years store brands have been increasing their share, with retailers more strongly emphasizing them as a means of differentiation (and a path to nice margins) and consumers growing increasingly more favorable toward them. Earlier this summer, the Associated Press reported on a Food Marketing Institute study that found the number of shoppers who said they’re buying more store-brand items is up to 60%.

Even so, some experts say many brand manufacturers still underestimate retailers’ private-label threat.

“I saw this within Procter [& Gamble],” says John Gleason, a former P&G executive, now president of A Better View Strategic Consulting in Cincinnati. “There wasn’t a lot of focus to defend against them or earn that share. Brands just accepted that they’ll be there. They felt they could still justify a price difference because they did research and development, marketing and advertising.”

And while overall private-label share is still low as compared to European markets, it’s clear that U.S. brand owners would do well to study the dynamics of markets like the United Kingdom, where competition between brands and retailers is fierce.

“Our global research shows that, especially in the U.S., national brands consistently underestimate consumers’ willingness to accept private label and retailers’ ability to deliver with excellence,” says Julie Quick, vice president of account planning for Saatchi & Saatchi X. “Tesco and many other global innovators should teach U.S. manufacturers to more closely monitor the market, have response plans in place, and be constantly innovating to maintain a solid competitive position.”

'More than labels'

It’s no secret that private-label brands have come a long way from the days of black-and-white generic packaging, or even copycat packaging meant to take advantage of a national brand price gap. They truly are competing on more than price these days.

“Manufacturers need a shift in mindset to view them not as private ‘labels’ but as store brands,” says professor Steenkamp. “National-brand manufacturers will only ignore the threat at their own peril.”

In the UK, Marks & Spencer and Waitrose are known for distinct and beautiful packaging for their high-end store brands. And there are good U.S. examples in Safeway’s O Organics and Eating Right lines, and in Target’s Archer Farms brand where gourmet groceries, organics, European-style baked goods and packaging that includes quality printing and graphics puts the line on par with any national brand out there.

“[Store brands are] a significant part of our business now, and they will continue to be a significant part of our future growth,” says Greg Zimmer, group manager of owned brands at Target. “We’re investing in them and thinking about them like [consumer packaged goods companies] CPGs.”

Zimmer, who came to Target recently from P&G and 3M, says their challenge is to combine the strengths of what Target already does well from a creative and retail perspective with best in class consumer packaged goods thinking.

Improved quality. Better packaging. Sophisticated branding. And more premium positioning. That’s the face of store brands today.

“[It’s] made possible by the growing brand equity of retailers,” says Saatchi’s Quick. “Rankings that used to list CPG companies as consumers’ most loved brands now have retailers like IKEA, Target and Costco atop their lists. The leap from delivering ‘great experiences’ to ‘great products’ is easy for shoppers to make when you’ve earned their trust.”

Retailers are also targeting distinct shopper groups with niche offerings, like Wal-Mart Canada’s eco-friendly GreenLine and Safeway’s new Mom to Mom brand for kids.

Innovation staves off store brands

Simple brand economics will make it difficult for the Safeways and the Targets of the world to be innovation leaders in a broad assortment of product categories, Steenkamp says.

“And there’s one other thing,” he says. “Innovation costs real money and it’s risky; a lot of it bombs in the marketplace. The moment a retailer is behaving like a manufacturer the less the cost advantage of a private label will be, because they have to bear the costs of failed innovation. The manufacturer clearly has the best set of cards in the poker game when it comes to innovation.”

Steenkamp says studies around the world reveal remarkably robust findings that, in those categories where national brands continue to innovate, private labels are less successful and growth in private label is lower.

“The basis of all enduring success,” he says, “is innovation.”

It could be a major new product launch, a significant packaging advance like a new structure or a minor quality improvement or new packaging material or feature. “You need to play both cards,” Steenkamp says.

And brands would be smart to consider the situation on a category basis. There are clearly defined categories where national brands tend to be much weaker than those of retailers, and, in these categories, private label will see more success. According to an October 2007 IRI Times and Trends report, categories such as pasta, gastrointestinal tablets and facial tissue have seen private label secure large gains.

“It’s a variety of factors, from the size and maturity of [the category], to ease of manufacture, to the size of private label’s potential price or quality advantage,” says Quick.

The category dynamics are something Zimmer can confirm at Target.

“Consumers are less brand loyal in some categories because we have a big credibility halo with our guests,” he says. “They trust our products in certain categories as much as national brands in many instances.”

A Better View Strategic Consulting

312-726-1221; http://us.infores.com

Saatchi & Saatchi X
479-575-0200; www.saatchi.com