Private Label Report

When consumers go to FAO Schwarz for a signature teddy bear, they're not shopping by price.The toy retailer has worked hard to position its private-label brand as a premium offering, no matter if an individual bear is priced at $8 or $450, and the strategy is working, says Ed Schmults, chief executive officer of the New York-based store. "Anything with FAO Schwarz on it is the best of the best. It's higher quality. We have a powerful brand. We capture a higher margin as a result of that."Private-label products now account for about 15% of the company's sales, but Schmults expects that to balloon to 30% by 2009.Beyond toys, private labels are increasing in product categories across the board, giving retailers more reason than ever to promote their private-label products in-store, experts say. And that may be true, but currently, when it comes to secondary display space, private labels are not much of a threat. Most store brands are being supported more through packaging, in circulars and occasionally on "paper P-O-P" like standees, shelf signs and floor clings."I don't see a huge amount of display activity for the private labelers, because the manufacturers are paying a premium for that space. Those aisles are oftentimes locked up by national brands," says Pete Costanzo, executive vice president and principal at Marsh Inc., a Cincinnati branding consultancy. "I don't see a whole lot going on with private label off-shelf." Maria Brous, spokesperson for Publix Super Markets, Lakeland, FL, says the chain relies on packaging and the store's name to boost awareness. "I can't remember too many shelf talkers on a private-label product," she says. "Most people would tell you they don't spend a lot of marketing dollar on private label, that's how they can offer savings, but you try to heighten awareness in other ways -- endcaps, in-store circulars."The New Competition In total, store brands now represent more than $65 billion at retail and account for one of every five items sold in U.S. supermarkets, drugstores and mass merchants, according to the Private Label Manufacturers Association (PLMA), a New York-based industry trade group. Over a recent four-year period, private-label dollar volume in supermarkets rose 5% for an increase of more than $2 billion, the association reported."Private label is our major competitor," says John Faulkner, director of brand communications at The Campbell Soup Co., Camden, NJ. "We've got an 80% share and private label has the balance."Innovative private-label products are bringing a new level of competition to the national brands, says Blair McCaw, president of Constellation Management Group in Chicago, which has helped CVS develop marketing programs for its private-label and controlled-label products, such as an exclusive line of Playskool-branded toys.In the face of the new competition, national brands must continue to advertise their brands in-store to consumers, McCaw says. "But they also have to fight for attention with the retailers who are saying, 'Hey, we can make a good product and make a good buck by having exclusive brands.'"While private-label product development generally lags behind national brands, that's starting to change, experts say. And many national brands are developing custom products for retailers. Evanger's Dog & Cat Food Co., a pet foods manufacturer in Wheeling, IL, routinely changes its recipes for private labels to eliminate any potential conflict with other brands or its own Evanger's premium brand, says Holly Sher, president.A year after contaminants were found in many of the best-selling brands of pet food, Sher says she is struggling to keep up with demand for the company's private-label, made-in-the-USA products. "I'm still getting lots of calls and I'm telling them, 'Hold tight until I can answer when I'm moving [to a larger facility],'" she says.Destination BuysIn some cases, private-label products are becoming destination items, luring consumers to a given store because that's the only place they can find the private label or controlled brand, says Kathie Canning, editor in chief of Private Label Buyer, a trade publication based in Deerfield, IL.That's the idea behind Trader Joe's, a unit of Germany-based Aldi that offers a wholly unique shopping experience, where three-quarters of the company's products are private label, from fresh meat to "two-buck Chuck" wine. "They have a product mix you won't find anywhere else," Canning says. "A lot of their products appear to be one of a kind."The products carry a quality image but are offered at substantially lower prices than their national brand counterparts. "At Trader Joe's, you feel like you're buying a branded olive oil but you're paying half," Canning says.The same is true at Ace Hardware stores, where certain categories, such as builders' hardware and basic plumbing, have no dominant national brand. The company has converted these categories to the Ace brand, says Tracey Gidich, brand manager at Ace Hardware, based in Oak Brook, IL. But the decision on what to stock is left to individual stores.Ace Hardware offers more than 12,000 private-label SKUs, representing about $6 million in annual sales. "Ace has a strong name and strong brand recognition. The products we carry that bear that Ace brand name help us leverage that strength."The Ace brand comes in a vivid red package with the yellow promise seal of Ace's satisfaction guarantee printed in the top right-hand corner, Gidich says. "It really pops off the shelf and draws attention." The company has established a set of private-label guidelines for the 250 manufacturers who make its products. "We police the brand to ensure that the presentation is uniform across all different categories," she says. "Our private label has a unified look so it makes the shopping experience for the consumer so much easier."The company also offers hundreds more products in its proprietary control brands in categories where "we don't believe the Ace brand resonates," Gidich says. They include Living Accents, offering home d cor items such as patio furniture and fans; Celebrations, offering indoor and outdoor holiday lighting; OakBrook Collection, offering faucets and fixtures for bathrooms and kitchens; and the Homeplus+ line of hand tools.The company also has its own 20-million-gallon capacity paint plant in Matteson, IL, where it manufactures its own line of Ace paint in three levels -- a super-premium product with Scotchgard in it called Ace Sensations, a premium product called Ace Royal, and its value-priced offering, Ace Quality. Its middle-level product is generally $1 less per gallon than the basic line sold at big boxes like Home Depot, says Janet Davidson, marketing analyst at Ace Hardware Paint Division. In a fiercely competitive retail environment, retailers that look to expand private label to boost loyalty and margins should be positioned for growth, experts say. "I don't think there's a major retailer in America that's not thinking about these issues," McCaw says. "The energy behind exclusive brands is increasing with each year. Retailers are getting more involved and more sophisticated."Premium PackagingNonetheless, exclusive doesn't always mean premium. Some categories lend themselves to a premium image more than others, says Canning. "It wouldn't make sense to come out with a premium store brand for sugar because there's very little difference" from one brand to the next, she says.Marketing a premium private-label product at retail is a lot like marketing a national brand, she says. It starts with a sophisticated package look. "Inferior packaging and graphics don't convey a premium message."While private labels generally don't get the marketing support of national brands, they have a similarly sophisticated look. "There's very little difference in packaging now," says Marsh's Costanzo. Often, store brands use the same type of high-end photography on their packages as store brands for impact on the shelf.It's a switch from several decades ago, when retailers purposely positioned their private-label products with a commodity image that often included generic military-style lettering in green or black. "In the past, the private labelers weren't wanting us. They didn't want to pay for a national brand equivalent look and design," says Costanzo. "It was, 'Just give me something quick,'" he says.Back then, private label was all about price. But private label in the United States has been evolving and growing during the past 15 years, Costanzo says. Price is no longer the only differential, as many retailers now offer upscale products to compete with premium national brands. It's no longer unheard of now to find a private-label product that costs more than a national brand, he says. Part of the reason is the intense competition among national brands, which can drive down prices to below the store brand. "When a national brand's product is on the shelf with a private-label product, the national brand needs to defensively promote the brand by dropping coupons or reducing the price," Costanzo explains. Kroger "aggressively promotes" its private-label line, Costanzo says. "They're investing a lot of money in private label -- it's obviously profitable for them."A big part of Kroger's marketing support for private-label products involves sophisticated packaging, Costanzo says. His company takes the same approach when designing packaging for private-label products as it does for national brands, he says. The idea is to draw attention to the product on the shelf with high-end photography and a distinct packaging look.For example, to make Kroger's house brand of frozen waffles stand out from Kellogg's national Eggo brand, which has a yellow box, Marsh suggested using purple. "We created an entire billboard that's purple. It's very dramatic," Costanzo says. "The idea is to stand out against that sea of yellow."In cereals, Marsh aimed to make Kroger's private label honey grahams and cinnamon swirl products just as fun and colorful as the national brands. The goal there is to emphasize that the private-label product is equivalent to the national brand but a better value, he says.When Marsh redesigned Kroger's line of 180 spice items a few years ago, it aimed to create a cohesive, sophisticated look that rivaled national brands, Costanzo says. No matter what the product category, he says, "You want to create something that has more impact than the national brand. That's the goal. You're trying to out-do the competition."Supermarket chain Publix has taken a similar approach, redesigning its private-label brand of premium ice cream three years ago for a more sophisticated look using more white space. "We wanted it to stand out on the shelf. We wanted customers to recognize it was a Publix private label," says Brous.By emphasizing the Publix name on a popular premium product, the retailer hopes to boost its overall brand awareness. "We want to make the connection to the consumer. We want our name to be prevalent, reinforcing our identity," Brous says.Still, Publix knows convincing some consumers that a private-label product is as good or better than a national brand requires getting them to taste it. To that end, Publix launched the "Publix Brand Challenge," a six-week program conducted once last year and once in 2006, where shoppers received a Publix-brand item for free when they purchased a comparable product from a national brand. Even after the program ended, Brous says, "We continued to get feedback about the quality of our private-label brand." The Publix Brand Challenge was touted on endcap signage and in weekly circulars.The retailer's primary goal is to offer consumers a choice. "Some will be willing to try a new product and others will be brand loyal," she says.Shelf StrategyBesides using packaging to market products on shelves, retailers often rely on shelf talkers for price comparisons, particularly when private-label products are merchandised right next to similar national brands, Costanzo says. "Here's the national brand of cheese crackers and here's private label with a shelf talker that says, 'Look at our price,'" he says. "It literally slaps you right in the face."But some retailers place a grouping of private-label products together on the shelf, on the theory that there's strength in numbers and consumers might be more likely to buy several private-label products if they don't have to hunt for them.The soup aisle is one example. Many retailers use Campbell's gravity-feed shelving for both Campbell's and private-label soups, making it easier to keep the soup aisles stocked and within consumers' reach. "The retailer is also selling a lot of Campbell Soup, so we partner together to make the soup aisle an easier place to shop," Faulkner says.With the new shelving, Campbell also encouraged retailers to stop "checkboarding," or placing their private-label products directly next to comparable Campbell's soups. Instead, retailers now "block" their private-label brand of soup together. Blocking is becoming more common among retailers striving to emphasize the quality of their private-label products, experts say. FAO Schwarz puts all of its FAO dolls together in a separate boutique, for example. But the approach doesn't work in all categories, Schmults says. In plush toys and the infant area, for example, FAO products are mixed in with other brands. But their quality allows them to compete head-to-head.Similarly, Target blocks its exclusive "controlled brands," such as Woolrich bedding, while Best Buy has its own home theater brand, Magnolia, which it has established as a boutique within the big box, says McCaw of Constellation Management Group.Retailer ResearchFueling private-label innovation is retailers' new reliance on consumer research, McCaw says. "Retailers are doing primary research with their customers to understand what consumers' needs are and then meet that need," he says. "Now the retailer has an opportunity to think more like a traditional marketer and develop premium brands to meet good, better and best."Target uses consumer research just like the national brands for new product development. The result is a growing line of Archer Farms organic products, from whole-grain pizza to complete dinners. The company also announced plans to eliminate trans fats from the entire Archer Farms line, which includes more than 2,000 items and some distinct offerings, such as cheesecake bites."They don't copycat people," Private Label Buyer's Canning says. "They take the initiative to try something unique and different."A growing number of manufacturers also are devoting resources to research and development of private-label products because they recognize the enormous potential for innovative store-brand products. For example, Chicago-based Gourmet Kitchens Inc.'s Just Toss It line of seven fresh salads was named one of the best new products of 2006 by New Products Magazine.The product's clear packaging, designed to increase shelf life and provide a crisp, fresh salad, keeps the greens separate from the toppings to enhance product quality, says Kristin Sutter, marketing manager. The clear package lets consumers see the freshness, she adds.The line is most often marketed under retailers' private label. "In fresh food, private label is such an advantage for stores. Consumers don't want to think it came shipped from California and has been sitting in the back," she says. "When they see the store's label, they say 'Oh, it was made here. Maybe it was just made in the back.'" Gourmet Kitchens closely watches consumer trends, which increasingly emphasize freshness, she says. "It's a huge trend. People are demanding nutritious meals but also want the fresh taste."Publix, which manufactures its private-label dairy products at its own facility, also listens to consumers, Brous says. "We're in constant feedback with our customers. This is the way we choose to serve them, with private-label products that meet and exceed expectations."For example, Publix has introduced the Publix GreenWise line of organic and natural items, often advertised in its in-store circular, because more consumers are looking for them.

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