Eye on growth

Research by Debra Chanil Analysis by Kathie Canning
To get a handle on the current \"state of store brands,\" Private Label => Store Brands surveyed both retailers and suppliers on topics ranging from 2012 sales results and short-term penetration goals to high-interest categories and trends influencing product development. What follows are some highlights from both the retailer and supplier portions of the survey.

Differentiation a retailer focus
Retailers commitment to store brand product differentiation as a means to drive traffic and build shopper loyalty appears to be a trend with staying power. Almost half (44.7 percent) of retailer respondents to Private Label => Store Brands 2013 Research Study* selected differentiation as the most import role of their store brand program. Forty (40) percent of respondents, meanwhile, said providing shoppers with a lower-cost alternative to the national brand is the most critical role, while only 17.6 percent chose the opportunity to earn higher margins.

Moreover, the pace of store brand product development continues to escalate for many retailers, with 61.7 percent of respondents reporting that they stepped up development here in 2012 in comparison to 2011. Only 3.7 percent of respondents noted that they had reduced the level of store brand product development in 2012. Retailers reasons for stepping up the pace of product development ran the gamut from \"margin, differentiation and loyalty\" to \"more demand from consumers and better quality from vendors.\" The emphasis on product development could be behind many retailers reported increases in private label unit sales. The majority (63.3 percent) of total respondents said store brand unit sales increased in 2012 in comparison to 2011. And in the supermarket channel, 70.5 percent of respondents reported unit sales gains. Whats more, 35.4 percent of respondents pointed to gains of 3 percent or greater. See the bar graph, p. 36.

Tier structure, focus vary
Although more than three-quarters (81.7 percent) of retailer respondents said they have a national-brand-equivalent (NBE) private label line or lines, tier structure varies widely across the respondents stores. Approximately one-fourth (28 percent) of respondents companies boast a three-tier private label program that consists of NBE, value and premium offerings, with more retailers from the supermarket channel (35.1 percent) reporting this structure than respondents from other channels. Respondents from companies having more than 10 stores also were more likely to report this structure (35.2 percent) than those with fewer than 10 stores (19.4 percent).

Almost half (47.3 percent) of retail respondents have a two-tier program, while 21.5 percent offer only one tier. See the pie chart, this page.

As far as the pace of product development in each of the three tiers goes, the value tier leads the way, with 37.9 percent of respondents indicating their companies now are doing more here than they did two years ago. Nearly a quarter (24.2 percent) of respondents said their companies were doing more in the NBE tier, while 17.6 percent pointed to stepped-up development within the premium tier. Almost a third (28.4 percent) of respondents, however, said their companies had not increased their focus on any one of the three main tiers.

The pace of store brand product development continues to escalate for many retailers, with 61.7 percent of respondents reporting that they stepped up development here in 2012 in comparison to 2011.

Outside the three main tiers, many retailers also offer niche store brands such as natural and organic foods and eco-minded cleaning products. More than three-quarters (78.9 percent) of respondents from the supermarket channel said they offer a niche brand or brands, while 20 percent of the wholesalers and 30 percent representing the other channels reported the same. And 21.1 percent of respondents indicated niche brands represent a bigger focus for their companies today than they did two years ago.

Within new store brand product development, health-and-wellness-themed trends trump other current trends (such as those toward premium/gourmet and environmental responsibility). Topping the list of trends respondents said their companies are actively pursuing are all-natural or natural (39.8 percent), better-for-you (39.8 percent), organic and gluten-free (tied at 35.2 percent).

On the marketing and promotion side, in-store signage and displays lead respondents list of most important strategies (58.3 percent), just as they did in our 2011 study. But broken down by channel, weekly circulars are most important to the wholesaler channel (64.7 percent). See the bar graph, this page.

Collaboration is important, but ...
When it comes to relationships with their private label suppliers, the majority (61.4 percent) of respondents said collaboration is more important now than it was a year ago. But in a ranking of six criteria for supplier selection, respondents ranked \"the ability to partner with us on everything from store brand product innovation to in-store merchandising and promotion\" only fourth in importance.

More important to supplier selection, the respondents indicated, are a strong quality assurance program, the lowest cost and a proven record in terms of deliverables, in that order. Moreover, 42.5 percent of respondents indicated that cost was more important to supplier-related decisions than it was a year ago, while only 1.3 percent indicated it was less important.

And although 65.9 percent of respondents reported that their companies rely on \"about the same number\" of suppliers now as they did a year ago, about a quarter (25.9 percent) of respondents said they have added suppliers since then. The number of suppliers currently manufacturing products for respondents companies varies dramatically from retailer to retailer, with 47 representing the mean.

Eye on the future
Looking into the future, the top five categories of interest for store brand product development respondents pointed to are center-store grocery items (62.2 percent), health and beauty products (56.5 percent), non-food essential such as cleaning products and laundry care items (56.2 percent), ready-to-drink beverages (51.1 percent) and refrigerated and frozen prepared foods (49.5 percent). See the bar graph, p. 36. They represent a considerable departure from the top five categories retailers identified in our 2011 research study – which were, in order, refrigerated and frozen prepared foods, bakery items, center-store grocery items, deli items and dairy products.

Within new store brand product development, health-and-wellness-themed trends trump other current trends.

Breaking it down by channel, the highest-ranking areas of interest are center-store grocery items for the supermarket channel (76.5 percent); a tie between health and beauty products and non-food essentials for the wholesaler channel (both 65 percent); and health and beauty products for other channels (54.5 percent).

Of the 22 percent of respondents who indicated that their companies currently manufacture at least a portion of their own products, 60 percent of respondents (and 100 percent of those from the supermarket channel) reported plans for expansion here. The top self-manufacturing categories of interest are center-store grocery items (48.3 percent), bakery items (37.9 percent), and refrigerated/frozen prepared foods, fresh prepared foods, and ready-to-drink beverages, excluding alcoholic beverages (tied at 31 percent).

Key store brand product marketing vehicles

In terms of private label penetration, the majority (81 percent) of respondents said their companies were working to increase that number in 2013. Almost half (45.6 percent) of respondents pointed to an increase of 1 to 2 percent as the goal, but 35.4 percent cited growth of 3 percent or more as the goal. Although the goal of 19 percent of respondents companies was to maintain existing private label penetration, not a single respondent pointed to a desire to decrease penetration.

Still, retailers face some obstacles in the quest to attain their goals. When asked to reveal their companys greatest challenge going forward in the store brand arena, respondents cited issues ranging from \"building an organizational capability around private brands\" and \"competition from national brand funding\" to the \"escalating cost of raw materials\" and an \"inadequate supplier base.\"

Suppliers make strong gains
In supporting retailers increased emphasis on store brands, many private label suppliers saw strong dollar and unit sale gains in 2012 in comparison to 2011. In fact, 78.3 percent of supplier respondents reported dollar and unit sale increases. Fifty percent of respondents realized dollar sales gains of 5 percent or more, while 47.8 percent achieved the same thing with unit sales. Less than 10 percent of respondents pointed to dollar (8.7 percent) and/or unit (8.7 percent) sales declines.

Supplier respondents pointed to \"too little promotional/merchandising attention on the part of retailers\" as the most significant challenge to future growth.

And many of the supplier companies have set lofty sales goals for 2013. In fact, 64.4 percent of respondents said their companies aim to increase dollar sales by more than 5 percent. See the bar graph, this page.

The vast majority (95.7 percent) of supplier respondents expect sales of store brand products to continue to grow in 2013, although they dont agree on what that growth will look like. More than half (55.3 percent) of respondents expect them to grow \"at a much slower rate\" than what the industry has seen in recent years, while 40.4 percent of respondents believe store brands will rebound in 2013 to make strong gains. Only 4.3 percent of respondents believe they will lose ground.

Recognizing that a number of store brand suppliers offer products under their own brands as well, we asked respondents how important the store brand side of their business will be to their companies operations in 2013. More than half (51.1 percent) said it would be \"very critical,\" while 40.4 percent said it would be \"somewhat critical.\" Only 8.5 percent of respondents reported that the store brand side would not be very critical to operations this year.

Theyve got issues, too
Retailers are not alone in when it comes to facing obstacles that potentially could thwart store brand growth goals. Supplier respondents pointed to \"too little promotional/merchandising attention on the part of retailers\" as the most significant challenge to future growth. Coming in second was \"inadequate marketing efforts on the part of retailers.\" See the bar graph, this page.

They also pointed to specific challenges in working with retailers to bring new products to market. When asked to select the greatest challenge here, 37 percent of respondents pointed to \"the retailer bid process,\" followed by \"cost over quality emphasis on the part of the retailer\" (30.4 percent), \"talk of collaboration, but no real action on the part of the retailer\" (21.7 percent), \"other\" (6.5 percent) and \"retailer preference for short-term contracts\" (4.3 percent).

*Private Label => Store Brands 2013 Store Brands Research Study was fielded in January 2013 via a multimedia approach. Approximately half (48.9 percent) of the 107 retailer respondents are c-level executives and other senior executives from the supermarket, wholesaler/wholesaler-supplier independent, club store, convenience store, dollar store, drugstore and mass merchandise channels. Of these respondents, 38.9 percent represent companies with more than 200 stores. More than half (54 percent) of the 50 supplier respondents are c-level executives and other senior executives. More than one-third (35.7 percent) represent companies with annual sales of more than $80 million.