Off brands get respect

Once relegated to the bottom shelf and only the thriftiest shoppers, generic foods have shed their functional black-and-white wrappers and evolved into premium, "private label" products that could save traditional grocers in their battle for survival, according to industry analysts.

One sign of the transformation emerged this week at the Food Marketing Institute show at Chicago's McCormick Place, where an entire pavilion and several seminars are dedicated to the topic - the first time at a show for FMI, which has close ties to the nation's largest branded food manufacturers.


Shoppers see other signs of the shift everywhere.

Whole Dairy cream cheese is available at Whole Foods and pasta with a red bull's-eye on the box at Target.


Where generics represented 1 or 2 percent of a grocery store's sales in the 1970s, they now account for an average of 17 percent, representing $107 billion in spending in the United States.

Purchases of private-label brands are expected to grow to more than $130 billion by 2010, according to market research firm ACNielsen.

This represents a serious problem for big food companies like Kraft Foods or Sara Lee, whose business models are based on the idea that shoppers will pay a premium for a widely known product.

Both companies are restructuring their businesses to remedy flat earnings growth and sagging stock prices.

While generics have traditionally been cheaper, price doesn't appear to be driving shoppers toward them now. Consumers have shown a willingness to pay as much or more for an upscale generic than for a nationally advertised product.

"Sales of private-label foods are no longer limited to the historic profile of the low-income and middle-income blue-collar shopper," said Todd Hale, an executive with ACNielsen. "It is now spreading to high-income households."

In fact, many private-label products are created to be higher-quality options than the national-brand competition, according to Peter Brennan, president of Stamford, Conn.-based Daymon Worldwide, which closely tracks sales of store brands.

"What has changed is the quality of the product," he said. "This is where grocers will have to move if they are to compete effectively."


With the wider customer base that comes with targeting both premium and low-cost shoppers, private-label sales at some mass supermarkets represent as much as 35 percent of sales, Brennan said.

Some grocers, such as Cincinnati-based Kroger Stores and San Antonio-based H. E. Butt Grocery Co., have diligently developed store brands in an effort to help them take back market share lost in recent years to Wal-Mart Stores Inc., Costco and Trader Joe's - all of which have invested in private labels.

Ninety percent of the products sold at ALDI Foods are private-label, while 70 percent of Trader Joe's sales are of private-label products. German billionaire brothers Karl and Theo Albrecht own both chains.

With so many retailers in the game, U.S. sales of store brands have more than doubled the growth rate of manufacturer brands - 5 percent compared with 2 percent - in the past two years, according to ACNielsen.

Currently, 25 percent of the U.S. population buys 50 percent of the private-label products being sold. But that is quickly shifting. And the trend is expected to continue for at least the next five years, Hale said, noting that rising oil prices are going to begin squeezing more than just those people living on fixed incomes.

"Value retailing is winning today and it will be the driving force for the next three to five years," the ACNielsen executive said.


Retailers that have strong private labels will be able to compete and hold their own against the big boxes, Virginia Simmons, a consultant with McKinsey & Co., told an overflow crowd of supermarket executives at one of the many private-label sessions staged by FMI and Daymon Worldwide.

"Private-label is a brand in its own right and needs to be marketed just as the brands," she said.

But the need to spend on marketing eats up some of the modest difference in the profit margins.

The average profit margin on private-label products is 33 percent, before store expenses, while the average profit margin on brand-name products is 29 percent.

Regardless, private labels are likely to keep growing, if markets in European countries are any indication. European private labels represent 23 percent of sales, on average, or about $246 billion in spending. ACNielsen projects that will grow to $317 billion by 2010.

In Switzerland, 45 percent of the products sold by that country's food stores are private-label. In Germany, 30 percent are.


With the growth of private labels growing around the world, many food makers are starting to produce for both markets. Mainline manufacturers including spice maker McCormick & Co., Sara Lee Corp., ConAgra Foods Inc. and Associated Brands, which manufactures Knox Gelatin, are producing foods bearing labels other than their own.

Ray Borooah, president of Anaheim, Calif.-based Harris Tea Co., said all the major supermarket chains are counting on high-quality private-label products, including tea, to drive their profitability and build customer loyalty.

Rather than the typical Lipton, Celestial Seasonings or Twinings, Safeway and Kroger have their own specially blended teas, he said. "The Safeway green tea has a Japanese blend, while Kroger's is from China," Borooah said. It's a way stores try to tailor their blends to their customers' tastes.

John Schmeltzer writes for the Chicago Tribune.