Rise of the Store Brands

Fortune has a great article (registration required to read more than the first page) about the increasing success of store brands.

Private-label goods are nothing new, of course, having been around since the days when A&P owned vast coffee plantations in South America. Back in 1930, a new magazine called FORTUNE, commenting on the struggle between retailers and manufacturers, noted, "No issue, except Prohibition, is more violently discussed." But there are big differences this time around—beginning with the products themselves. Picturing those no-name, black-and-white cans labeled simply beans? Picture instead a slender glass bottle of Harvest Moon asparagus spears from Texas grocery chain H-E-B, with an elegant label (a soft crescent moon, interlocking o's) that makes the Del Monte canned product sitting next to it look cheap—except that Harvest Moon is 20 cents cheaper. The quality can be better too: Take Winn-Dixie's chocolate ice cream, which Consumer Reports magazine ranked ahead of Breyers. Or Kroger's potato chips, found to be tastier than Ruffles and Pringles—for less money. Wal-Mart employs a creative team devoted to designing logos and writing marketing copy, while everyone from France's Carrefour to Wegmans in Rochester, N.Y., is developing branding programs that emphasize quality, image, and innovation—not just price. "Get rid of the term 'private label,' " says Merrill Lynch analyst Mark Husson. "They possess an independent personality. They are brands."

Retailers love this trend. Because overhead is low and marketing costs are nil, private-label products bring 10% higher margins, on average, than branded goods do. But more than that, a trusted store brand can differentiate a chain from its competitors. Shoppers will drive the extra mile to Costco to buy Kirkland cashews, filling their carts with other goods while they're at it.

The numbers look good for the retailers too. According to A.C. Nielsen, unit sales of store-brand goods grew 8.6% during the past two years, vs. 1.5% for national brands. All told, one in five items sold in U.S. stores is now store branded, which sounds like a lot—until you learn that in Europe that percentage has reached 40%. Consumers here keep warming to them. A 2001 Gallup poll found 45% of shoppers more likely to switch to a store brand, while only 31% said so in 1996.

I wonder what the long-term effect of this will be on consumer products companies like Proctor and Gamble? Innovation may keep them one step ahead of the store brands, but it is too easy for stores to copy new products, and store brands will probably begin innovating on their own sometime in the future. Marketing will become much more important for the national name brands, yet at the same time the marketing budgets may shrink along with product margins. Consumers will benefit from higher quality and lower cost, but may also be overwhelmed by too many choices.

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I don't think Sam's Choice soft drinks will put Coca-Cola out of business any time soon, but in the long-term this battle with store brands will no doubt cause some financial casualties.