Tuesday, November 3, 2009

Follow-up on Brands vs. Private Label

This might become on of the recurring topics on this blog. I wrote a piece back in August sharing my thoughts about private label (PL), why I see it succeeding and how to invest "thematically" if this is anything you are inclined to do.

A couple of things popped up today that caught my eye. One, Retailer Daily, is reporting that 7-11 is dramatically expanding its private label product portfolio. It will roll out 265 SKUs by the end of this year, and 300 more next year. The site also reports that Wal-Mart's private label is now on 750 goods, and that Target has a new label, aiming to expand it to 800 items.

Towards the bottom of the article, we see some good numbers for PL from various reports: "among all outlets in the last 12 months, private label unit share has grown 1.2 percentage points to 22.8% and dollar share has grown 0.7 percentage points to 17.6%. . .the U.S. Private Label Food Market - Forecasts to 2013,” the U.S. private label food market has expanded by almost 60% since 2003, as opposed to 23% growth for the U.S. retail food and drinks industry as a whole. As a result, private label now accounts for more than 19% of market value, up from less than 15% in 2003. In volume terms, private label has increased its share of the overall market to 24%, up from around 20% in 2003. And a study . . . indicates that in 2008, 24% of all food and beverages served in U.S. homes were store brands, up from 18% in 1999. Furthermore, 97% of all U.S. households consumed private label foods and beverages on a regular basis last year."

These are some impressive stats. 3x the growth, 20-25% share, very wide consumer acceptance.

As in my previous article, I should be clear that the discussion is on food/beverage private label, and does not extend to all branded products. Probably most similar to f/b are OTC medical products. I am a big believer in private label and its future, bigger role in a poorer America.

The second article comes from Brand Week. It underscores the combination of fear and contempt that brand people have for private label.

The problem for them, in part, is that the channel has become the leading force in the chain. WMT often accounts for 20% of revenues, and if you add the top 5 supermarket chains, you probably have 50% of the market cornered by some of the smartest merchandisers.

On to the article. Emphasis and commentary are mine.
"With private label brands currently accounting for more than one-third of all shopping cart purchases in the U.S., it’s safe to say that our depressed economy has done wonders for the private label sector.

But at what cost to name brands? A national or retail brand imbued with its own positioning, a unique selling proposition and a one-of-a-kind look and feel is a gold mine. However, the fact that retailers have access to the newest products and latest positioning by leading national brands enables them to steal valuable colors, shapes, symbols and keywords for the design of their own private label brands—a phenomenon that can and should be described as “brand malpractice.”

Adding insult to injury is the fact that many of these same retailers play God with consumer product manufacturers by selecting their own shelf placement. [How dare they do what they want in their own stores! We, the brand people, know better what the retailers need to be doing!]

Retailers would do well to acknowledge that they can’t be good at everything. With studies showing that an average of five parking lots are visited during a typical shopping day, it’s clear that consumers will cross-shop if iconic brands—and increasingly their line extensions—are muscled out of retail. [Laughable, non-sequitur argument. People don't stop at different stores to chase their favorite brands and their extensions.]

The playing field should be leveled with the understanding that it’s the customer, not the retailer, who will always be king. [Right! But reading the paragraphs above, I thought that the king is the Brand, and it is being dethroned by those private labelteers]"

There's more in the article. What you are seeing is reality interfering with the self-congratulatory world of the brand leaders. The crisis has forced people to go for value, and the retailers are responding properly. However, once the shelf space goes to the PL offerings, there is no coming back, in my opinion. These are gains that are here to stay.

Also, Kraft reported today. KFT makes many wonderful products, like Milka chocolates (we buy Austrian and Turkish Milkas locally in NY but they are not available anywhere else). KFT has a number of "billion dollar brands." And yet, they reported declining sales, largely due to currency effects. Flat "real" sales is not what the investors want to see, and the shares are off 3%.

Finally, tangentially related to brands, I wrote about Smart Balance (SMBL) last month. They were up 6% today upon announcing that they are going nationwide with their enhanced milk. This is branding done right: a truly unique product, favorable "big" trend, patent protection, too niche for PL entry and yet, probably 99% PL equivalent from a cost perspective, ex of marketing.

Update 1 11/3/2009: One of the publicly traded PL players reported after hours today. I already mentioned that I like TreeHouse Foods (THS) in my first article on the topic. They continue to deliver financially and operationally. Here is some color from the company's CEO: “Our strong third quarter results show that private label continues to be a strategic focus of our grocery customers and that consumers have not strayed from the value proposition afforded by quality products at value prices."

Update 2 11/5/2009: From today's CVS conference call: "Front store comps increased just under 1%, with more customers seeking out promotional prices and private label products in the quarter. Consumers I think continue to be conservative with their spending and they opt for higher value, certainly and are looking for lower price points and as I said, more value. In fact, growth in private label sales during the quarter more than doubled the rate of other sales in the front store. Obviously this is good for us from a margin standpoint." Clearly the gatekeepers like PL.

Update 3 11/11/2009: The Retailer Daily is reporting that "Private Label Edge in CPG Lessens" for the last 4 weeks. PL grew 4.3%, branded grew...0.1% Of course, it would be too much for the publication to discuss whether this is unit share or dollar share. The data is from Nielsen and may or may not include discounters, again not clear from the article.

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