Operation Expansion
Retailers are stepping up the pace of product development on the store brand side and have ambitious goals for future growth.
Store brands have become a primary focus for today's retailers. So it should come as no surprise that more than two-thirds of retailer respondents (68 percent) to Progressive Grocer's Store Brands' 2011 Store Brands Research Study Progressive Grocer's Store Brands' 2011 Store Brands Research Study was fielded in 2011 via a multimedia approach. The majority of the 100 respondents (81 percent) were retail executives from grocery, drugstore and mass merchandise outlets. Almost half of the respondents (49 percent) were c-level executives, and more than a guarter of respondents (27 percent) represented retail companies with more than 200 stores said they have stepped up the pace of store brand product development during the past year.
Less than a third of respondents — 29 percent — said they had neither increased nor decreased the pace of development. But very few retailers are pulling back here, with only 3 percent of respondents telling us they decreased the pace of development within their store brand programs in the past year.
Private label penetration, as a result, has increased for the majority of retailers represented in the study, with almost three-quarters of retailer respondents (71.8 percent) indicating an upward movement compared to two years ago. Of those respondents, 34.1 percent cited an increase between 1 and 2 percent, and 37.6 percent pointed to a rise of 3 percent or more. Only 5.9 percent of respondents cited a decrease.
What might be a surprise to some industry players, however, is the No. 1 reason retailer respondents cited for increasing the pace of development. Although some retailers (14.6 percent) indicated that the down economy provided private label expansion opportunities, more than half of respondents (61 percent) selected "growing consumer acceptance of store brands" as their reason for stepping up efforts here. Other retailers — 12.2 percent of respondents — pointed to the need to address their competitors' amplified efforts here as the primary reason.
Also noteworthy is the changing role store brands are playing within many of the respondents' companies. More than half of surveyed retailers (53.8 percent) said the most important role of store brands within their organizations now is to serve as a differentiator that drives traffic and builds customer loyalty. Just a little more than a third of respondents (38.5 percent), meanwhile, said store brands primarily exist to provide loyal shoppers with a lower-cost alternative to the national brands. And less than 10 percent of respondents said the most important role was to achieve higher margins.
Approach varies
Almost half of the retailer respondents to our survey (49 percent) indicated they have a two-tier core private label program. Of these respondents, the majority offer national-brand-equivalent (NBE) and value brands.
But more than a quarter of respondents (27.1 percent) said they now have a three-tier core store brand program that includes NBE, premium and value brands. The remaining respondents (21.9 percent) maintain a one-tier core store brand program, with NBE being the most common tier here, followed by premium and then value. See the pie chart, p. 20.
In terms of focus, more than a third of respondents (34.3 percent) said they are now doing more product development in the NBE area compared to two years ago, while almost an equal number (33.3 percent) said they were doing more within the value tier. And almost a third (29.3 percent) indicated they were doing more product development in the "niche" store brand area.
Premium store brands appear to be a bit less of a focus, with only 18.2 percent of retailer respondents saying they are doing more product development in this area in comparison to two years ago. It is worth noting that we accepted multiple responses, so some retailers said they are stepping up development within more than one tier. Moreover, 17.4 percent of respondents said they have not changed their store brand focus at all in comparison to two years ago.
In addition, more than three-quarters of retailer respondents (77.6 percent) said they now offer "niche" brands in one or more areas such as natural and organic, environmentally preferred, gluten-free, etc., in addition to their core brands. In general, such niche brands mesh with overall market trends.
Speaking of market trends, almost two-thirds of respondents (61.4 percent) said they are actively pursuing the "better-for-you" trend on the store brand side, while more than half of them (53.4 percent) said they currently are involved in the development of all-natural or natural products. Gluten-free and organic items also ranked high here (selected as current areas of focus by 51.1 percent and 44.3 percent of respondents, respectively). But fewer retailer respondents (23.9 percent) said they were actively pursuing environmental responsibility on the store brand side — and 17 percent of respondents indicated they were not addressing any of these trend areas. See the bar graph, p. 22.
Eye on supply
Respondents vary widely in terms of the number of suppliers they engage to manufacture their store brand products. Almost half of respondents (47 percent) said they rely on fewer than 25 suppliers, while 15.7 percent count on between 26 and 50 suppliers, and 13.2 percent use between 51 and 100 suppliers. But almost a quarter of respondents (24.1 percent) said they rely on more than 100 suppliers to manufacture their store brand goods.
To help handle expansion, 31 percent of retailer respondents said they now contract more private label suppliers to manufacture their store brand products than they did a year ago. But 57.1 percent of respondents noted no real change in terms of supplier numbers, while 11.9 percent said they actually reduced their supplier base.
When asked about the most important factors influencing their selection of store brand suppliers, retailer respondents selected "a strong quality assurance program" as the most critical factor. "A proven track record in terms of deliverables" came in a close second. Interestingly, respondents ranked "the lowest cost" fifth among the critical qualities. See the bar graph, p. 22.
But when asked directly about the importance cost now plays in store brand supplier decisions compared to a year ago, almost half of retailer respondents (46.5 percent) said cost is "more important" now. A slightly greater number of respondents (48.8 percent) said cost is "about the same" in terms of importance, while only 4.7 percent of respondents indicated cost is "less important."
Approximately a third of respondents (33.7 percent) said their companies manufacture at least some of their own store brand products. But a significant number of respondents from these companies (38.2 percent) said plans were in the works to expand manufacturing capabilities here. Key expansion areas for retailer-manufactured store brand products include refrigerated/frozen prepared foods (52 percent), center store grocery items (44 percent), "niche" products (40 percent), and bakery, dairy and deli products (tied at 32 percent each).
Spotlight on store brands
They might lack the marketing resources of the national brands, but retailers appear to be widening the range of strategies used to attract shoppers to their store brand items. In a ranking of eight different types of store brand marketing efforts, in-store signage/ displays and weekly circulars came out on top in terms of importance to companies. But retailers do not yet appear to be high on social media as a way to promote their store brands. Respondents ranked it dead last on the list of store brand marketing-related strategies. See the bar graph, p. 22.
SKU rationalization appears to be yet another strategy retailers are employing to shine the spotlight on store brand items. More than a third of respondents (33.7 percent) said they have already engaged in SKU rationalization to eliminate some third- and fourth-tier national brands to make room for more store brand products. Another 22.9 percent said they are either in the process of SKU rationalization or plan to be in the near future.
Looking ahead
Although the private label growth wave has slowed somewhat from 2008 and 2009 levels, we expect store brand products to continue making gains. During the "Great Recession," consumers really learned to appreciate value.
Our Store Brands Research Study found that more than three-quarters of respondents (78.6 percent) have a goal to increase private label penetration during the next two years — with more than a third of them aiming to increase that percentage by a hefty 3 percent or more. See the bar graph, p. 24.
The top categories/segments retailer respondents pointed to for future expansion are refrigerated and frozen prepared foods (70.5 percent), bakery (67.7 percent), center store (67 percent), deli (62.1 percent), dairy (53.8 percent) and non-food essentials such as cleaning products and laundry care items (52.7 percent). Ranking lower, but still significant were ready-to-drink nonalcoholic beverages (44.7 percent), health and beauty products (43.5 percent), over-the-counter medicines/ preparations (41.8 percent) and alcoholic beverages (29.3 percent). See the bar graph, p. 25. PGSB