In the spotlight - US private-label consolidation heats up

By Michelle Russell | 1 June 2012

US consumer interest in own label continues to increase

US consumer interest in own label continues to increase

Private label was slower to gain a foothold in the US compared with some European countries but the market has expanded in recent years and manufacturers are keen to jump on this wave through acquisitions, Michelle Russell reports.

As the economic downturn continues to bite and household budgets continue to be stretched, traditionally brand-loving US consumers have placed more private-label foods in their baskets. This has become a golden opportunity for manufacturers and retailers - and it is not only own-label firms that are looking to expand in the category.

US food giant ConAgra Foods, previously a completely branded goods player, has made a steady move into the private-label arena through a number of acquisitions. It has not, however, been entirely successful in snapping up the companies it wanted. Recent deals have come in the wake of its failed bid last year for US private label group Ralcorp Holdings.

The group made several failed attempts to acquire Ralcorp beginning in March 2011. All offers, however, were rejected and ultimately, ConAgra walked away from the deal, refusing to further increase its offer.

Since then, the company has purchased private-label firm National Pretzel Co. for an undisclosed sum in November last year and followed this with last week's acquisition of the pita chips business of Kangaroo Brands.

And the company has made no secret of its desire for a slice of this category, insisting on its third-quarter earnings call in March it was "accelerating" its expansion into private label through acquisitions and "a strong innovation pipeline".

"Expanding into core adjacencies, growing our international footprint and capitalising on the right private label opportunities are all key parts of our growth plans," ConAgra CEO Gary Rodkin told analysts.

No doubt a statement of intent from ConAgra, a company keen to make its mark in a US private-label sector, which last year saw sales in value terms increase by 5.1% to $59.9bn, compared to 2% growth in branded. In volume terms, private label, however, was inevitably hit by the pressures on unit sales in the US and experienced a 1.1% decline. Nonetheless, this was less than the 1.4% volume decline in branded.

"In terms of actual value, store brands added $10.6bn to supermarkets total annual sales for the five-year period, compared to $8.6bn for national brands," the Private Label Manufacturers Association's 2012 Yearbook noted. "In all, private label's unit market share has gone up 2.3 percentage points since the onset of the recession, and 2.4 percentage points have been added to dollar market share."

Private label now holds a 19.5% share of the US grocery market and, alongside ConAgra, pure own-label companies are looking to expand through acquisition.

Ralcorp, which completed the spin off of its branded Post Holdings cereals business in February, is now a pure private-label player. Last week, it announced the acquisition of private-label cookie producer Petri Baking Products last week, adding further to its own-label stable.

TreeHouse Foods, another major player in the US private-label category, made clear its intent to expand when it acquired privately-owned dressings and sauces firm Naturally Fresh in March for $25m.

According to figures from Perception Research Services, more types of private-label products were purchased in 2011, more shoppers claimed to have bought more products than they did in 2010 (38% vs 32%) and more reported purchasing more product categories (7.4 vs. 4.8).

Salty snacks, frozen meals and cookies were among the largest gains for private-label penetration in 2011, according to the data.

Janney Capital Markets analyst Jonathan Feeney believes this growing interest and penetration of the category can also be attributed to an increase in the quality of private-label products.

"Trader Joe's and Costco are providing very high-quality private-label items that are comparable or even superior to branded equivalents. That has led branded companies to realise that some of their quality sourcing and manufacturing has a relevant outlet now in private label that it didn't have before when it was a no-frills, lower-quality, low-price phenomenon."

Nonetheless, Edward Jones Research analyst Jack Russo has been surprised the growth of private label has not been far greater given severity of the economic dowturn.

"Since 2008 when the economy in the US started getting pretty rugged, there was an expectation that private-label market shares would soar ... the thinking was that consumers were going to have more a difficult time affording things and be more frugal. But I think quite honestly, across the board I've been surprised that private label actually didn't do better since 2008 versus some of the branded products."

Russo believes this may be a result of a more fragmented retail environment in the US compared to the UK and Europe, and the success of branded companies in holding on to their share of the market.

"The situation in the US is different to Europe because private label has a much larger penetration in the UK particularly and a lot of that is because the retail universe has consolidated greatly, so there are fewer retailers in the UK and Europe and they have developed their own-store brand," he tells just-food.

"In the US, the retail environment is much more fragmented and that is part of the reason I think private label hasn't made more inroads and also because some of the branded food companies have been very sharp in protecting their share and turf.

He adds: "Generally speaking, I think all of us in the industry have been surprised private label hasn't gained more market share. It has done okay, but branded companies have been fighting fiercely in marketing and innovation...so whatever it is, so far, I think they've done a respectable job."

Looking at the prospect for M&A in the US private level sector, Feeney believes there is considerable room for consolidation.

"Just about every M&A deal you see announced today can be financially accretive just because of where interest rates are, but there is an additional rationale for private-label M&A and that is it's a fragmented space where there is an excellent case to be made," he tells just-food.

"There's excess capacity in some places, there are overly-fragmented distribution systems, and so there is a case to be made."

As for the scale of any potential deals, the industry is unlikely to see anything like the ConAgra/Ralcorp talks on the horizon any time soon, according to Russo. He cites economic uncertainty as a reason for the cautious attitude of many firms to make potentially sizeable deals.

"There was a pretty nice generous cash offer out there for Ralcorp that they turned down and so ConAgra really has nothing to be ashamed of, but that might have been a once-in-a lifetime deal for them and they gave it their best shot.

"Borrowing rates continue to be very low, interest rates are very low and a lot of these companies are unsure as to what the future holds, so they don't want to take a big gamble. I think we'll continue to see smaller transactions and perhaps ones to give them exposure in international markets, but smaller ones are easier to finance. I don't think you'll see any big acquisitions that are deemed very risky right now, just given the environment. The US appears to be wobbly ... so I think most companies will play it pretty conservative."

Given the growth potential of the category, it appears inevitable consolidation will continue. Whether we are likely to see any sizeable deals is questionable, but as manufacturers tighten their grip on the sector, competition is only likely to heat up. With that, and as the US private-label market develops further, it may well continue to gain ground on some of it European equivalents.

Sectors: Bakery, Condiments, dressings & sauces, Mergers & acquisitions, Private label, Snacks

Companies: ConAgra Foods, Ralcorp Holdings, TreeHouse Foods, Costco

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