Q&A: IRI on Inflation and the Premium Private Brand Advantage
More than a decade ago, the retail market faced rising prices and inflation. But amid the COVID-19 pandemic, the inflation period underway is revealing a different strategy for store brands.
Previously, the strategy was to promote value brands and the lowest price possible. The current situation is revealing an opportunity to promote premium private brand products, according to Krishnakumar Davey, president, strategic analytics, IRI, who sat down with Store Brands.
Here’s an edited version of the conversation:
Store Brands: Describe the situation right now as you see it.
Krishnakumar Davey: The price index continues to increase. This year it is running roughly at about a 4% increase vs. a year ago, and up about 8.5% to 9% vs. two years ago. That’s significant inflation because typically we run about two to two and a half points of inflation a year by price mix. Many large manufacturers have announced price increases, like Tyson and others, who are expected to increase prices throughout 2022 because there’s significant cost inflation. At the retail level the price increases have been 1% to 2.5% in terms of just the everyday price.
SB: You mentioned Tyson, which has a branded business and a private brand business. How does that play out?
KD: I think they have already added significant pricing in foodservice. In retail, they have said they have implemented it, but it's going to take a month for it to escalate down to the consumer, so I would assume their private label will also go up. So far this year, private label pricing has been more in the fresh, meat and deli department, but not as much in packaged goods, but that's also picking up because at the end of the day a bottle is a bottle, whether private label or branded.
Right now, store brands are taking prices up about one to one and a half points below national manufacturers. Earlier, there was a lot more in fresh, but I think that's moderating. The packaged goods, the center store, is what is growing right now in terms of pricing for national brands significantly and store brands also quite a bit.
SB: How does today’s situation compare to years past?
KD: We looked at the last recession when pricing really shot up quite a bit, 2008, 2009. In that period, private label, believe it or not, added about $8 billion in increase in sales, over a two-year time period, 2008 to 2010. The share grew 0.8 points and also the category grew whatever their normal growth, so they grew both from category growth but also from share growth, both in edible and non-edible. It was $3.4 billion in non-edible and the rest in edible.
What happened at that time was a lot of the mass and club retailers started building private label brands so they were growing through distribution, introducing store brands in categories that they didn't have and so on, which all helped them.
This time is different in the sense that there's a lot of stimulus money still in the system and the other factor, until recently, consumers didn’t have a lot of other avenues to spend money. They couldn’t go out to eat as much as they did before, they couldn’t entertain themselves, etc. Everybody traded up, particularly in terms of food at home and better quality of pasta sauce and better quality of beverages.
The further complication, more recently, as we all know, is this whole Delta variant, so there’s going to be continued increased consumption at home so there is uncertainty of demand. The supply situation more or less has stabilized in many categories but still not completely. You see that in foodservice still.
SB: Which categories do you see having the best opportunities for store brands?
KD: One of the things that we have studied in store brand growth over the years, the categories that already have a strong store brand development, are the ones who gain the most during the switch from national brands to store brands. That may be because of ubiquity, presence, established brand name, people may have tried it and come back to it. Even though retailers are systematically trying to introduce more store brands in more categories, they are introducing more variety and more flavors. For example, from a variety perspective, there's a lot of interest in ethnic cooking. We are seeing more premium, more variety in already established categories, and then retailers are dipping their toes in where there's no big supply constraint right now.
SB: How do retailers prepare for what's next?
KD: Our read of the situation suggests we may see price mix growth of even close to 7% to 10% by the end of the year for many categories, and that's pretty significant compared to anything that they have seen for the last 10 years. But on the other hand, foodservice, out-of-home food inflation is even higher because not only are they paying more for these things, but they're also paying more for the labor and the shortage of labor.
The labor costs are going up in addition to the raw material ingredients, so out-of-home food is already running much higher than in-home food and will continue to run. Consumers will be forced to trade down, at least a certain segment, and look for value channels, value-seeking behavior, value brands, or premium brands, which offer value. Value doesn't really mean right away lowest price point, but instead of buying two Kit Kats can I buy a bulk bag of Kit Kats?
SB: And the foodservice issue there feeds that premium store brand strategy because that's still a better value vs. going out to eat.
KD: Yes, and they’re doing a good job because that innovation also helps differentiate one retailer from another. We had Albertsons on one of our interviews and they talked about how their cauliflower pizza is really sought after. Once you have a differentiated store brand, then that just offers a number of other benefits in terms of driving the basket, attracting shoppers, retaining the shopper and driving loyalty, and also driving their price position in the marketplace.
SB: Is there an opportunity for store brands to gain share during this period?
KD: As the price gap between the national brands and store brands widens, store brands start to gain share. In the last two, three months of data, we are seeing the widening of the price gap as national brands keep taking price and store brands are not following as aggressively and widening their price gap. Some retailers have spoken openly about the fact that, "Hey, if the national brands take too much price then we will double down on our store brands to make sure our consumers still get value."
The other thing I would say, mass merchant and club retailers are the ones who are doubling down on value and on store brands. Think of Target, think of Walmart, think of Costco, Sam’s Club, and BJ’s. They have been investing in store brands for the last five years before COVID, and we see them continuing to do so now as supply stabilizes to continue to grow in that.