Brand Killers : Branded Products vs.Private Label and Store Brands in Retail and Foodservice

Spot the Branded Product!

Let's play a game.  Here are links for two of the largest foodservice distributors in the United States - SYSCO and US Foodservice.

Together, they serve about 650,000 customers (restaurants, hotels, hospitals, etc) each day.

Here's the challenge.   Are you ready?

How quickly can you find branded manufacturer product on each web site?   Go ahead - give it a try! 

SYSCO

US Foodservice

Tick-tock, tick-tock, tick-tock, tick....

I'm waiting. 

Take your time.  Try again.

This is quite a challenge, because as of today's date, I'm unable to find ANY manufacturer branded product listed on their web sites.

If I'm a foodservice operator coming to either of these sites for the first time, I'm under the impression that they carry nothing but their own brands.

This is the foodservice industry, where brands are HIDDEN behind kitchen walls. If distributors COULD swap out branded product for their own, without any discernible difference in taste or quality - wouldn't they do it in a second?

The Rise of Private Label Brands. Then and Now.

THEN

1. Limited media outlets meant that manufacturers could reach a large percentage of the American public through the "Big 3" - ABC, NBC, and CBS, driving home a message of value or prestige in purchasing branded product.

2. Retailers were fragmented.  Grocery stores were independent (mom and pop) or part of much smaller chains than today.  As such, retailers did not have the purchasing power or clout to influence manufacturers.

3. Due to the strength of their brands, manufacturers could dictate placement and price with retailers.  Retailers who didn't comply would find themselves without key brands.

NOW

1. Fragmented media means that manufacturers must work harder and smarter to effectively market product through a myriad of distribution channels via television, radio, publications, billboards, and interactive advertising.

2. With retail mega-chains like Wal-Mart, the mom and pop stores were slowly driven out of business.  As the retailers grew, so did the purchasing power. 

3. Retailers won the hearts and minds of consumers nationwide with rock-bottom prices. 

With every new big box retail store came even greater market share.  Soon manufacturers found themselves beholden to retailers, who represented a very large percentage of their branded product sales.  In an effort to continuously drive out cost, retailers began to squeeze manufacturers, demanding cost reductions in key areas.  Those who did not comply were dropped, and many went out of business.

4. In a constant effort to drive revenue and reduce cost, retailers began to explore private labeling certain products.  They started with commodity items (milk, butter, tissue), but began expanding into other product categories.

5. Unlike branded manufacturers, retailers don't have the added marketing expense, as they already have a captive audience walking their aisles.   Some retailers emphasize value (Wal-Mart's Great Value Brand), while others emphasize quality (Target's Archer Farms brand).

Store Brands and the Recession: What Happens When Recovery Kicks In?

I’m always a little suspicious of surveys that are sponsored by organizations that will directly benefit by the results being skewed a certain way, but this seems to be consistent with other reports.

This particular survey was commissioned by the Private Label Manufacturer’s Association.

1. Well into the recession, shoppers continue to forsake national brands for

store brands.

 

The poll found that 35% of shoppers are trying store brand products for the first time in categories where they had previously only purchased national brand items. Among this group,

94% say these store brand products compare “favorably” to their previous choice.

 

2. Nine in 10 shoppers will stick with store brands when recession is over.

 

91% of shoppers in the survey say they believe they are going to continue buying store

brand products even after the recession ends. Only 8% of the consumers polled said they

intend to stop buying private label.

Download the Survey

Private Label Sales up 7.4% for the Year

Recessions are good news for private label brands.   Consumer purchases were up by 7.4% to $85.9 billion for 12 months (ending July 11, 2009) – according to ACNielson.

Market share for private label products is now at 16.9 percent – a growing figure, but one that is still much lower than many other countries.

The top growth categories were pizza and snacks, followed by flour, dry vegetables, and grains*. 

Store brand performance continues to be strong in commodity categories – and is lowest where manufacturers have differentiated through product innovation and strong brand support.

 

*All sales are counted in food, drug, and mass-merchandisers, with the exception of Walmart.

The Taste Test Challenge: Store Brands vs. Manufacturer Brands

For years, manufacturers have discounted store brands as low cost, low quality alternatives for budget-minded consumers.   In fact, store brands traditionally haven’t been considered true competition, often ridiculed as a cheap and nasty substitute.

But what about reality? 

The October edition of Consumer Reports puts store branded products head-to-head against the traditional brands in blind taste tests.

If concern about taste has kept you from trying store-brand foods, hesitate no more. In blind tests, our trained tasters compared a big national brand with a store brand in 29 food categories. Store and national brands tasted about equally good 19 times. Four times, the store brand won; six times, the national brand won.

What's more, the store-brand foods we tested cost an average of 27 percent less than big-name counterparts—about what you'd find across all product categories, industry experts told us. The biggest difference: 35 cents per ounce for Costco's vanilla vs. $3.34 for McCormick's. (Prices are the averages we found across the country.) Price gaps have less to do with what goes into the package than with the research, development, and marketing costs that help build a household name.

Clearly, the writing is on the wall, and it has been for quite some time – in big, black indelible ink. 

Traditional branded manufacturers must take the rise of private label brands seriously.

Who is the true competitor?   Another branded manufacturer who must also fight for shelf or warehouse space– or the powerful retailer (or distributor) who can slowly push the traditional manufacturer out by offering a product that matches or exceeds its offerings?

The real kicker?  Many of the branded manufacturers are actually producing the retailer’s products. 

More on that later.

Private Label Brands Shine with Design

Remember when store brands looked more like this? 

I distinctly remember a dedicated aisle of nondescript  products with black lettering that simply stated the product type.

BEER.  TISSUE.  MAYONNAISE. CORN FLAKES.

Today, private label packaging matches and often surpasses traditional brands in design.  Archer Farms (Target) and O Organics (Safeway) come to mind.

Store brands are no longer limited to being a low cost, low quality alternative.   The packaging now accurately represents a level of quality that the retailer has positioned head-to-head with manufacturer branded products.

Foodservice Private Label vs. Traditional Brands

The foodservice industry represents nearly 50% of the food dollar consumed in America.  The market is both immense and important to branded manufacturers.

SYSCO is the number one foodservice distributor in the nation, reaching over 400,000 customers through 170 facilities nationwide.

Manufacturers invest in future foodservice sales by paying distributors sheltered income for elevated product placement and sales emphasis by the local DSR (sales rep) as they visit with foodservice operators nationwide.

But who are they really promoting?  Kraft?  Nestle?  General Mills?

Well, take a look at one of their many delivery vehicles.  It's all about Block and Barrel, one of SYSCO's private label lines.

This is nothing new, but a constant reminder that private labeling is not limited to retail.

If it was possible to match product quality with manufacturers, what would keep SYSCO from slowly eliminating branded products from the master catalog?

Wouldn't this be even easier in foodservice - where product packaging isn't exposed to consumers?

Private Labels ARE Branded Product

Here's something that caught my eye during a recent trip to Target.  Note the Target's brand of jelly (Archer Farms) next to the tradition brands like Smucker's.

What do you notice?  

The first thing that caught my eye was the beautiful packaging and branding that Target has selected.

The square jar suggests "gourmet", while the label is inviting and intriguing.

But here's the kicker. 

Look at the price.  It's HIGHER than our traditional branded products. 

Target is positioning Archer Farms not as a low cost alternative, but as a product of higher quality!

Add this to the fact that the margins are much higher for internally branded products, and it's easy to see why branded products are in for one hell of a battle.