A weak economy and retailers’ increasing focus on private label is creating a growing threat for traditional CPG brands.

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 percent 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 Company 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 percent.


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 UK, 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.


In the case of its cereal products, Archer Farms has even innovated ahead of traditional brands. This summer, the store brand threw out the conventional “bag-in-box” cereal packaging system in favor of a slim oblong-shaped canister that stores neatly in a cabinet and features a reclosable lid.


Leading innovations like this distinctly demonstrate the retailer’s commitment to its own brands.


“[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 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.


And they’re making the most of readily available shopper marketing data and folding it back into all of their own brands.


“Retailers have the ultimate living laboratory at their disposal. They can take shopper insights, create testable propositions, immediately place them in stores, and see results data in near real time,” says Quick. “This is quickly evolving to the product realm, with formulas, packaging and merchandising. Contrast that with manufacturers trying to work through the retailer system, who may require months just to get something into test.


Target’s Zimmer concurs. “Like any retailer, we own the shelves and we have access to all the register data that we’ve captured to understand our guests,” he says. “We’re also reaching out and applying techniques that CPG companies use; we’re partnering with many of the same research providers that I used to partner with at P&G.”


Testy retail relationships


It can make for sometime strained relationships as brand owners become increasingly aware of the fact that their best customer is also becoming their strongest competitor. And some see retailers as having an unfair advantage.


“They’re presented with the lineup for the next six months, the promotions a brand will offer along with its innovations,” says Gleason. “What’s to stop Wal-Mart or Safeway from handing that information to their marketing and creative services group?” 


Gleason says manufacturers still carry some caution on what they share and how much they share with retailers, though Zimmer makes a point to say that needn’t be the case with Target.


“We value [the brand owner] relationship,” he says, “and we make a conscious effort to separate the folks who work with CPG companies and the folks that develop our proprietary thinking. Integrity is important in how we conduct our business.”


Some brands, though, throw caution aside and decide to work with retailers on their store brands, developing the products, filling the packaging and sometimes more.


“Manufacturers need to choose competition or what we refer to as ‘coopetition’,” says Quick. “Manufacturing for retailers is one ‘coopetition’ strategy that may help maximize profits, especially if private label and national brands are pursuing clearly different segments of the market. And it’s a great way to keep tabs on-or even manage-private label activity such as formulas or packaging.”


Others try to collaborate with retailers by offering an innovation exclusively for some time so the retailer has something special to tell its customers. But, overall, it seems, cooperation between retailers and brand manufacturers is weak.


“My experience is that there tends to be a minority trying to work together on something positive,” says Steenkamp.


That means both sides could be missing a very important point. Justin King, CEO of UK retailer Sainsbury, was recently quoted as saying, “Innovation should come from brands and private label. We have no agenda to push private label beyond what our shoppers want it to be.” 


Quick says his comments are right on. “We should let the shopper’s desire be our guide,” she says. “Both manufacturers and retailers have a shared stake in delivering satisfying shopper experiences, and that need can serve as a deciding criterion for brand and private label strategy.”


And while consolidation and the size of leaders like Wal-Mart tend to put more power in retailers’ hands, they also have underlying weaknesses that give brand manufacturers a key advantage in the private label landscape.


“Retailers have a fundamental problem in that they’re selling 20,000 to 100,000 SKUs, so they are active in hundreds of product categories. Large brand manufacturers may only be active in 20 product categories,” says Steenkamp. “So, the thing is, these companies, in principle, will always have more money to invest in innovation than all but the very largest of retailers. Large retailers like Wal-Mart happen to have so many product categories that even there it’s a problem.”


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.”


Invest in marketing the brand


A second, equally important element in managing the growing store brand threat is marketing, because, at the end of the day, the national brand will always lose the price game with private label.


Brand investment clearly plays a role in maintaining a leadership position. Certain categories with dominant brands and heavy brand investment in innovation, advertising and promotion tend to have lower private label share, according to IRI’s Times and Trends report.


Though, troubling reports indicate that current economic conditions are impacting brands’ marketing spending. A small-scale survey from the Association of National Advertisers Recent in August found that 53 percent of marketers said they expected a cutback in ad budgets within the next six months, while 87 percent said they had already cut back. Sixty-one percent said they plan to either eliminate or delay new projects.

Experts say that may not be the smartest strategy.


“Those companies that keep on advertising in lean economic times consistently outperform companies that do not continue to advertise,” says Steenkamp. “But brands are cutting back on advertising, cutting back on innovation-things that have proven to be the most effective weapons against private label and are most crucial in terms of economic recessions to keep people from migrating over.”


Even brands that keep up their innovation efforts and their marketing investments should expect best-in-class retailers will be attempting to do the same-and more.


A cross-discipline approach considers everything from guest insights and product development to package design and merchandising. The idea for the resealable Archer Farms cereal canister came from our packaging team collaborating with others internally, says Zimmer.


“It met an unmet need and improves the ‘second moment of truth’ experience,” he says. “Packaging has really elevated their role to do these types of projects in a way that a CPG would. Like any other CPG, though, the easier opportunities are around graphics and branding. But the next big challenge [for retailers] is in the area of structural innovation. We will do it where we think it’s important and where it meets our guests’ unmet needs.”


In California, Safeway has amassed a group of executives with deep consumer packaged goods expertise to run its store brands, and manufacturers much of them. And, in April it announced that it would begin marketing its marquis store brands to other retailers, including those in food service and international markets.


Some wonder whether it will dilute the “exclusivity” of finding O Organics or Eating Right inside Safeway stores and the loyalty such exclusivity engenders, or if the economics make sense.


“If Safeway sells at another retailer, we’re talking about splitting profits,” says Steenkamp, which, he says, eliminates the strategic advantage retailers have in pushing their own brands. “The jury is very much out on whether that’s going to help.”


A few things are clear, though. While weaker brands will certainly have difficulty as the store brand threat continues to grow, perhaps even facing delisting, there will always be a need for national brands.


“People don’t want to be in some kind of Soviet-style shop in which there’s only one brand,” says Steenkamp.


Retailers are simply saying that it’s about having the right mix.


“At the macro level, Target will always need to partner with national brands to be successful,” says Zimmer. “It’s about creating relationships where both national brands and our own brands will always meet the needs of our guests.”


And the brands that do make it in that mix won’t necessarily just be the ones with deep pockets.


“There are plenty of small brands who have won against national brands and private label by cultivating what we at Saatchi & Saatchi X refer to as ‘lovemarks’,” says Quick, “brands with loyalty beyond reason.” BP