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Private label penetration could reach 25-30% in US retail market in a decade, predicts Rabobank

By Elaine WATSON , 12-Oct-2012
Last updated the 12-Oct-2012 at 16:19 GMT

Private label penetration could reach 25-30% in the US retail market in ten years, according to a new report by Rabobank’s Food & Agribusiness Research and Advisory group.

While store brand penetration rates in US food retail (around 18%) are still well below those of many European countries, US retailers are increasingly recognizing that private label can help them boost profitability, differentiate themselves and improve consumer loyalty, says the report.

“This projected growth, which would put the U.S. retail brand segment on par with Europe in terms of market penetration, translates as one in every three food product purchases in the U.S. being a retailer branded product by the year 2025.

“Retailer brands have grown 6% over the past five years, compared with the sales of national branded packaged food manufacturers which have grown just 2%. 

National food brands need to follow the creative model of other industries

The report, ‘What Would Apple Do?  How Can U.S. Branded Food Companies Withstand the Retailer Brand Onslaught?’ was written by analyst Nicholas Fereday, who argues that national brands have got to up their game if they want to regain the initiative.

“Many national brand owners need to be bolder in their thinking and strategizing. Instead of opting for low cost, low risk, conservative solutions, they need to think and act more like the Apples of the world, innovating new game-changing food products and entering new categories. 

“National food brands need to follow the creative model of other industries, funding research that will lead to radical new products which address unmet consumer needs, or create wholly new categories. Currently more than three quarters of new food products are line extensions or product derivatives.” 

Alternatively, he says, they should consider getting into private label themselves, and leverage their strengths in R&D, operational knowhow, food safety, and category management to help retail customers develop more innovative store brand products.

Smart retailers now act like brand managers

More recently, there has been rapid growth in multi-tiered private label programs (good, better, best) and the development of unique and far more innovative products and packaging that give retailers a real point of difference in the marketplace, he says.

“Smart retailers now act like brand managers, following a multi-tiered approach…  In 2011, retailer brands were estimated to account for nearly one third of new food and beverage items in the US.”

And some retailers are now beginning to put genuine marketing muscle behind their store brands as the power balance in the market shifts from consumer packaged goods companies to food retailers.

“Retailer brands have matured from their original positioning as ‘cheap and cheerless’ generic products into a more diverse range of national brand equivalents and, more recently, highly innovative premium products."

Meanwhile, retailers also have the advantage of having data across all categories at their fingertips that can help them see exactly what products and categories are growing and where the opportunities are, Fereday told FoodNavigator-USA. "They can use this information to their advantage."

Store brands gain during recessionary times, and rarely cede back ground in good times

Several key factors are driving store brand momentum, claims Fereday, including:

  • Innovation and investment in brand management by retailers.
  • Retailer brands win on value in recessionary times, and rarely cede back ground in good times. 
  • Retail consolidation and concentration increases the degree of retail brand penetration and power.     
  • Changing dynamics in the retail model: The rise of retailer brands in convenience stores, drugstores and online retailers; and the emergence of hard discounters and dollar stores that offer retailer brands among a limited range of SKUs. 

Where do the retailers stand on private label?

According to a white paper recently published by Trace One and Planet Retail, private label represented an estimated 25% of 2011 food sales at Safeway, 18% of food sales at Costco and Walmart, 27% at Kroger and 20.5% at Walgreens.

Many of these retailers have also invested heavily in premium private label ranges (Safeway SELECT) and introduced new everyday lines to target cash-strapped shoppers (Kroger’s Home Sense).

There has also been a lot of consolidation, with Kroger consolidating Naturally Preferred and Private Selection Organic into one brand (Simple Truth) and SuperValu consolidating instore brands under the Essential Everyday banner.

Others have set ambitious growth targets, with Walgreens aiming to double private label sales over the next five to seven years and Costco setting a long-term goal for private labels to reach 30% sales penetration.

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