Thursday, September 25, 2003

Private labels prove profitable

By Randy Tucker
The Cincinnati Enquirer

Both Cincinnati-based Federated Department Stores and supermarket giant Kroger Co. have said that introducing more private-label brands - products that carry the store's name or another name owned by the store - would be a key ingredient to future growth.

And a growing body of evidence from industry trade groups and market research firms - including a report this past week from ACNielsen - indicates that two of the biggest players in their respective industries are on the right track.

Private label sales have been steadily climbing nationwide over the past decade as retailers introduce more and more brands that they manufacture themselves or contract with other firms to produce.

The following is a list of some of the most successful private labels offered by Kroger and Federated Department Stores:

Kroger brands - Private Selection; Naturally Preferred; Splash; Spa and HD Design.

Federated brands - INC; Charter Club, Alfani, Tools of the Trade, Arnold Palmer, Style & Co., and Badge.

Consumers are now more likely than ever to choose private-label products. Growth in private-label offerings has given consumers more choices and reasons to shop at particular stores that carry those items.

For example, from 1998 to 2002, the last full year for which figures are available, supermarket sales of store brands increased 18.4 percent to $42 billion, jumping almost $1 billion from 2001 to 2002, according to the Private Label Manufacturers Association (PLMA), an industry trade group that tracks food and beverage sales.

Sales of national brand products in supermarkets over the same five-year period increased only 11 percent, PLMA said.

And while overall apparel sales have been down in the past five years, private-label apparel sales increased more than 5 percent to $60 billion last year, according to The NPD Group, a New York firm that provides sales and marketing information for retailers and manufacturers.

Private labels now represent 51 percent of total apparel sales, up from 45 percent in 2001, according to The NPD Group.

"Retailers will continue on an aggressive track to increase private-label offerings not only for apparel but for many other markets,'' Marshal Cohen, senior industry analyst at NPD, said. "There's not a category out there that won't have private label. I wouldn't be surprised to see a private-label automobile.''

By producing their own labels instead of buying from brand name manufacturers, retailers save on production costs and can generate higher profit margins, Cohen said.

Profits stay home

While retailers typically keep about 50 percent of the price of brand-name goods they sell, they are generally able to keep as much as 80 percent of the price of their own private-label products, Cohen said.

Food retailers such as Kroger launched private labels on a mass-market scale in the 1970s, offering low-price, so-called "generic" alternatives to national brands of staples such as milk, bread, cheese and eggs.

Since then, groceries have expanded private labels into a vast array of consumer categories, grabbing the largest share of total private-label sales in the process.

Kroger, for instance, sells more than 7,000 private-label products, including store brands in its floral, health and beauty, and even general merchandise departments.

"All of these areas are showing tremendous growth as we continue to refine our product offerings,'' Gary Rhodes, a Kroger spokesman, said. "Corporate brand products play a central role in Kroger's merchandising strategy and provide an important competitive advantage.''

Kroger doesn't break out total dollar sales for its private-label products, but private-label sales have been climbing steadily in the past few years and turned in another solid performance in the most recent quarter.

Rhodes said about 32 percent of all Kroger grocery items sold in the second quarter were private-label brands, and store brands accounted for about 24 percent of total grocery sales for the quarter. Both figures were up compared to the same quarter last year, he said.

More categories

The private-label growth can be seen in ACNielsen's annual U.S. Trends in Private Label report released last week.

The report from the nation's largest market research firm reveals that private-label products have grown from a presence in 69 percent of the categories tracked by ACNielsen in 1997 to 75 percent of those categories today.

Private-label brands can also be found in 88 more packaged-goods categories than in 1997 and now hold the sales lead in 25 percent of the categories in which they compete - up from 21 percent in 1997, according to the report.

In addition to increasing sales and profits, private brands provide another asset to non-grocery retailers, such as Federated.

Store brands make it clear to consumers that the store is the only place to get the brand, and that can help department stores compete in a market in which discounters like Target and Wal-Mart now carry many of the same national brands that were once exclusive to department stores.

"Offering exclusive product is one of the cornerstones of Federated's successful reinvent strategy - whether through merchandise we develop ourselves, or product we offer in partnership with others," said Terry Lundgren, Federated president and CEO.


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