A [Private] Affair

More. That’s what convenience store customers can expect to see of private-label brands–and what convenience store operators need to do in order to make those brands successful.

The costs are too low, opportunities to build brand equity and loyalty too high, quality is rising too quickly and the benefits are too numerous for retailers with the necessary resources not to focus on growing their private-label programs.

And for most, there is clearly room for improvement. A McKinsey & Co. study presented at the Private Label Manufacturers Association (PLMA) Annual Conference in Chicago in November revealed that $55 billion in annual sales could shift from national brands to private label if retailers concentrate their resources on the effort over the next decade. The result of the shift, the global management consulting firm suggested, could move private label’s dollar market share to 24% from 16% over the next decade.

Leading retailers–the report is based on evaluations of 70 in all, as well as both their national-brand and private-label trade partners–have an average private-label dollar share of 22%, the consulting firm found, significantly above the industry’s 16% average.

In addition, the "share leaders" have experienced higher levels of overall growth (5.3%) than the rest of the pack (3.4%) over the past 3 years. The findings were first released in a June 2007 report to branded manufacturers.

McKinsey’s research also identified a "set of capabilities" that leading private-label share players in Europe and North America have developed to build their programs. They all:

• Pursue proprietary shopper and consumer insights to differentiate stores and brands.

• Identify categories and products where private label could address unmet consumer needs, using innovative products to capture category white-space.

• Take a holistic view of category economics to grow category profits.

• Develop marketing and merchandising capabilities, creating cross-category brands, and going beyond winning with price.

• Organize for success–not just sourcing, but right strategies, business plans and incentives to drive overall profitable growth.

 

Grocery Leads the Way
According to information released by The Nielsen Co., private label’s growth has been outpacing that of national brands. Its development is greatest at, no surprise, grocery stores, with a 19% share, and supercenters, at 16%. They are lowest at convenience stores/gas stations, which came in at just 3%. In November, NACS reported that private-label products "are appearing with more frequency on the grocery and mass retail shelves," but have left some retail observers less than impressed. Quoting Marketing Daily, NACS pointed to a recent Information Resources Inc. (IRI) Times & Trends Report entitled

Private Label 2007-U.S. and Europe: Retail Branding Strategies Capture Market Potential that found in-house brands at Safeway, Target, Kroger and Wegmans "have increased in recent years, but the numbers have yet to reach the amount sold by their European counterparts."

IRI found that while most American households purchased some private-label products, "penetration is low on a category-by-category basis." Higher-income households, the group added, "tend to buy fewer private-label products." The research firm hinted that the way to increase private-label sales is "investing in product, merchandising and packaging innovation, as well as advertising the products with point-of-purchase materials."

Several c-store chains are vigorously pursuing private-label opportunities:

• When San Antonio-based Valero Energy Corp. unveiled its new 5,500-sq.-ft. Road Runner store concept in December, it also rolled out a new design for its proprietary Fresh Choices label. The new design is being used on products ranging from apples to snacks, soft drinks, spring water, vitamin water, teas, pastries and fresh food items. The company operates approximately 5,800 retail and branded wholesale outlets in the US, Canada and the Caribbean under the brand names Valero, Diamond Shamrock, Shamrock, Ultramar and Beacon.

• 7-Eleven Inc. is including its own store brand MEGA Protein Bars in its strategy to add healthier snack options. The Dallas-based giant plans to introduce a private-label nutrition bar in March (see news pg. 10). The product contains 30 grams of protein, is 70% organic and will come in two flavors: Caramel Chocolate Peanut Butter and Chocolate Chip Cookie Dough. Adweek reported that 7-Eleven "plans to increase its share of private-label sales from 4% to 10% by 2010."

• The 550-store Wawa chain has increased the number of its private label offerings to 300, CEO Howard Stoeckel recently said, with plans to add another 100. Items on he agenda include snacks, beverages, and other foodservice items.

More to Come
The carrot is most definitely dangling.

"Private label will absolutely continue to grow at convenience stores," said Mair Faibish, president of Synergy Brands Inc., a publicly held holding company involved in wholesale and online distribution of groceries and HBA in the U.S. and Canada. In fact, he added, it is "not only growing but is almost becoming the brand itself. Look at Save-A-Lot Food Stores. Also, 7-Eleven is beginning to get a tremendous amount of private label business, and it’s scaring the hell out of Procter & Gamble. We have a great relationship with P&G, and we do extremely well with them, but they’ve got to be at least a little concerned. Private label is starting to be a real threat to branded product."

Veteran retail consultant Arlene Spiegel, president of Arlene Spiegel & Associates, Inc. in New York City, agrees. Operators, she noted, are doing it for a lot of sound reasons. "Economy of scale in purchasing, branding themselves, no slotting fees and quality control are a few of them." The dollar advantages of having private brands include "basically cutting out two handoffs of the product–manufacturer and distributor–which provides significant savings in both cost and time."

Virtually all major manufacturers are looking for additional sales for their commodity products, Spiegel pointed out, "everything from chips to tomato sauce, prepared foods, detergents and paper goods." By watching supermarkets, c-store executives have learned that American consumers "are willing to buy branded products that have a higher value and also portray similar characteristics to national brands," she said.

Increasing Share
How to increase private label products’ share of the consumer dollar? Price, quality, packaging, promotion all head the list, but there is more that can be done.

In addition to those basics, supermarkets are building private brands by focusing more on lifestyle than price, Mary Delk, director of Deloitte Consulting, said in a recent interview. "Attitudes drive the shopping behavior; demographics are the descriptor." Inhouse brands, she added, are grabbing marketshare by playing to consumers’ changing lifestyles, health concerns, eye-catching packaging and high-quality ingredients.

Private-label marketers also might be wise to pay more attention to ethnic groups, especially Latinos. A Vertis Communications Customer Focus Opiniones survey released late in 2007 found that 78% of Hispanics in the U.S. have a positive perception of private-label store brands. The downside, Vertis found, is that only 61% of those who only speak Spanish at home feel the same, while 88% of Hispanics who speak English at home take a positive view of private label.

"Customer Focus Opiniones indicates that 27% of Spanish-speaking Hispanics believe they don’t know enough about private-label store brands to want to try them," said Jim Litwin, vice president of market insights at Vertis Communications. "This data indicates that retailers with private-label brands have an opportunity to market to Hispanic audiences by communicating to them in their native language. Incorporating relevant communication in marketing campaigns is imperative to establishing a connection with this influential audience."

The study also found that product label information influenced consumer purchases. While 56% of Hispanics between the ages of 18 and 24 indicated a product label’s safety guarantee was influential when considering its purchase over another brand, only 28% of Hispanics between the ages of 25 and 34 said safety messaging was important.

"I think that in certain categories, growth will continue in c-stores," Faibish said. "Categories like baking mixes, spices, dinners and things like that are primed for private-label growth." In certain other product categories, however, "I don’t think it works that well. I don’t think it works in detergents, batteries, razors or shampoos," lines in which brands are "really well entrenched. Private label will have a tough time cracking them."

Faibish is quick to add that top quality must be part of the equation, since branded will always enjoy inherent advantages. "Listen, if you produce a cheap product people will buy it because it’s cheap. But if you produce a good product, and you want to produce a private label to compete with that and charge the same amount of money or even a little bit less, a branded product in those categories will kill it."

Consumer buy-in is crucial. Too often, private-label lines aren’t consumer tested at all "but simply put on the shelves with the assumption it will sell," Spiegel pointed out. "This can work in venues with strong brands, such as Trader Joe’s or Whole Foods, as well as 7-Eleven," but probably not too many other players.

The opportunity in 2008 is "even greater as the economy is slipping and customers are looking for bargains," Spiegel concluded. "Private-label products are often cheaper and sometimes better than the original brand."

And those are the cards that convenience store operators will need to play. CSD

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