Contrasting responses to US private-label growth

The recession has fuelled further growth in the already developing private-label sector of the US food market. But while the trend has helped to bolster the fortunes of supermarket chains, Ben Cooper writes, it has given branded food companies cause for concern.

Amidst the toil and tribulation of recession, there appears to have been one area of the US food market that has done rather well, though it has to be said that the prime reason for the apparent rude health of the private label market is in itself recessionary.

However, this apparent silver lining is not greeted as such by the entire food sector. The responses from food retailers and branded food manufacturers are not surprisingly somewhat divergent.

Last month, US retailer Kroger reported better-than-expected first-quarter results, attributed in no small part to strong private-label sales.

Kroger's first-quarter profits rose by 13% to US$435.1m. CEO David Dillon said the increasing popularity of private-label goods was fuelling market share gains, while consumers were increasing their shopping trips to Kroger because of the lower-priced private-label products on offer.

"During the recession, as consumers were hunting for value, they would go to cheaper private-label products, and having the largest percentage of private label goods of any of the food retailers, Kroger clearly had an advantage," Daniel Coker, senior analyst with the capital markets research group at Moody's Analytics, told Reuters last week.

Meanwhile, StreetInsider.com has ranked private-label specialist Ralcorp at number three in its '10 Stocks with Explosive Earnings Growth'. "With consumers moving to private label and value brands at the supermarket, this will have a direct benefit for Ralcorp," StreetInsider.com said earlier this week.

However, there is another side to the coin. Earlier this year, UBS analyst David Palmer downgraded his rating on Kraft, citing the company's "relative private-label risk" as one of the factors. Last month, speaking to just-food, Edward Jones analyst Jack Rousseau pointed to "some private-label impact" at General Mills, though he said whether this would continue, increase or flatten out would depend to a significant degree on the economy.

In a conference call with analysts in May, David Moran executive vice president, president and CEO of Heinz North America, described private label as "a real threat". The long-term trend, he added was "clear", that "private label is a big player and we're going to have to deal with it as an organisation and as an industry".

It has to be said, however, that this trend is nothing new for branded food manufacturers. Having been far less developed in the US than in Europe, private label has been growing in the US for some time. While the trend has undoubtedly been exacerbated by the recession, branded food companies have been grappling with that reality for a number of years.

According to a recently published report from just-food, the US private label market has expanded by almost 60% since 2003, compared with around 23% growth for the US retail food and drinks industry as a whole. As a result, private label now accounts for over 19% of market value, up from less than 15% in 2003.

While it has been slower to gain a foothold in the US than in Europe, US consumers are now turning to private label foods in the face of the economic downturn, with demand also increasing as a result of food-price inflation and the wider availability of a greater range of private-label foods, the report continues.

"More US consumers are now less inclined to view private-label goods as inferior to their branded equivalents," the report states. "Most studies indicate that more people are now buying into the category on a frequent basis, while more than 70% of US shoppers feel that private labels are as good as, if not better than, branded products. Other consumer studies undertaken recently indicate that fewer shoppers associate private label with cheap-looking packaging, while a declining number believe that branded products are worth paying extra money for."

However, some analysts feel that the recession-induced upswing in private label has now slowed. According to UBS analysis published earlier this month, looking at around ten different packaged food categories such as ketchup and cheese, in the four weeks to 16 May, private label's share grew at an average 11%, compared with the 21% growth in February.

However, while the sudden spike may be abating, few expect the general trend to be interrupted. In May, David Moran said Heinz believes "that consumer frugality will stay even when the economy turns". However, he said brands could battle it out with private label. "Leading brands can win and win big in this environment, but they must do what brands do. They must innovate, talk to the consumer, and also add value to retailers, which private label cannot do".

The scale of that challenge is underlined by the just-food forecasts for private-label growth. According to the report, between 2008 and 2013, the private-label sector in the US is expected to increase its share of value sales from under 20% to 23.6%. "It is possible that this percentage may rise even higher, should the trend towards higher-quality private-label foods continue," the report states.

In addition to claiming a larger share of the premium market, other product categories where private labels are forecast to make inroads in the next few years, according to the report, include organic and natural foods, and healthy and functional offerings.