SCDigest editorial staff

The News: A new report from food industry researchers The Hartman Group finds private label retail brands continue to gain consumer momentum, offering new opportunities for retailers to create “premium” store labels.

The Impact: Has potentially significant implications for the business and supply chains of both consumer goods manufacturers and retailers. The food category especially seems to offer opportunities for retailers to create premium private label brands, the research notes, challenging traditional branded manufacturers. Retailers growing their private label offerings will need a whole new set of supply chain roles and competencies.

The Story: A new report of this week from The Hartman Group (Pulse Report: Private Label from a Consumer Perspective) illuminates the continue growth in consumer perceptions in private label products, especially in food categories, and suggests there is a growing opportunity for retailers to create “premium” private label brands that compete effectively at the high end with manufacturers branded products.

This promises to be a critical issue for both manufacturers and retailers over the next few years. The report also notes that Wal-Mart is especially well positioned to expand in the private label food category, which of course has big implications for branded providers.

The report notes, for example, that as branded products have reached ubiquitous distribution in grocery stores, drug stores, and many other channels, they have in effect commoditized themselves, or created a feeling of “sameness.” Conversely, a grocer like Trader Joe’s, which sells a large variety of private label goods, often exclusively so in a given category, can create a more unique brand perception. “If they only have Trader Joe’s black beans, the [consumer] thinking goes, then that means they don’t believe a better option exists anywhere,” the report states.

The theme of the report is in part that retailers have the opportunity to create “brand parity” at the high end with private label offerings. There is no question consumer perception of private label brands continues to rise. According the research, 86% of shoppers buy private label, and 33% of them believe these products to be “as good as national brands.” Thirteen percent (13%) of consumers think private label products are “better” or “superior” than national brands. However, it is important to note that in the mind of consumers, private label goods are most closely associated with food products, so the general answers need to be considered with that in mind. (See chart below.)

Source: The Hartman Group Pulse Report

When it comes to food, the report notes that consumers often create their own “myths” about the products. For example, one common one is that is that private label goods are, in fact, the exact same products produced by national brands, with just less expensive “labels and packaging.”

The research also shows across several dimensions that consumer perceptions of private label quality against branded products have improved considerably in the past two years.

However, the report finds that consumers want more private label options in categories beyond food. The top five categories where respondents wanted more private label choices were (1) over-the-counter health related products, (2) beauty products, (3) organics, (4) women’s apparel and (5) cereal.

Among respondents, Wal-Mart dominated the perceptions of consumers related private label offerings. For example, when asked by open-ended question to say “Which private label product they were most likely to purchase next,” shoppers overwhelmingly described Wal-Mart and its associated banners and store brand names. Given Wal-Mart’s well-publicized and so far successful entry into private label organic food, this should be a worrisome sign to CPG manufacturers.

However, the news is not all bleak for branded manufacturers. 67% of respondents thought it was very important or somewhat important for retailers to offer a branded product to compare against the private label goods.

The report contains a wealth of other insight on this issue, all of which in general shows growing support for private label brands, indicated, for example, by the high percentage of consumers who would recommend the brands to others. Consumers who don’t buy or don’t like private label brands are most likely by far to feel this way because of negative quality perceptions versus branded products.

Of course, the move to private label goods brings on a whole new set of supply chain challenges for retailers, who now must increase expertise in sourcing, manufacturing, inventory control and other issues beyond merchandising and logistics.

As the report notes, “We are reminded of a major grocer in the American Southwest that had to recall all of its store brand baby food (both conventional and organic) in early 2006 when a piece of glass was found in a jar. While food and beverage manufacturers are familiar with the damage incurred by food safety and recall issues, the threat to a retail banner posed by store brand “problems” cannot be underestimated since these products represent the company overall. The role as manufacturer, therefore, brings new responsibilities on retailers in terms of research and development, marketing, food safety and quality control.”

In the end, innovation will be critical on both sides. Branded manufacturers will need to innovate to maintain distance between themselves and the private labels. However, the time between branded label innovation and private label knock-off continues to shrink. Moreover, the report notes that even mass retailers such as Target are innovating in their own private label offerings.

For a related discussion, see SCDigest’s “Supply Chain Case Study 2006,” which in part describes the tough spot many consumer goods companies are in right now relative to retailers and private labeling.

What do you think the growth of private label goods means for retailers, consumer goods manufacturers and their supply chains? How do you see this playing out? Let us know your thoughts.