September, 2013

Research Perspective and Comments & Analysis

Private Label Presence Expands In Produce

Kelli Beckel, Senior Marketing Manager, Nielsen Perishables Group

 

Private label products have played a variety of roles within fresh food categories in recent years. From a necessary recession money-saver to premium product-of-choice, the role of private label can be multi-faceted and appeal to a variety of consumers. Given its versatility, it’s no surprise private label sales are on the rise.

For produce, private label offers retailers a vehicle to communicate product value that unbranded produce cannot, but at a lower price than national branded options. Recent trends show private labels’ presence in produce is growing, particularly in packaged products where private label serves as the value player. In such categories, private label growth is even surpassing total category growth.

To effectively leverage private label produce, it is important for retailers to understand the context in which this growth is occurring and why it is valuable.

 

A Growing Trend

The fresh departments, and especially produce, are unique because of the presence of “unbranded” products. Unbranded products bare no store or brand name, while private label items are branded with a store’s own label and compete with products that are branded with supplier labels.

Examining the entire store perimeter, private label accounted for one-fifth (19.9 percent) of total perishables dollar sales nationally during the 52-week period ending June 29, 2013. Private label’s contribution to total perishables sales is big and still growing, fueled by departments such as the bakery and deli (accounting for 42 and 30 percent of sales, respectively) where there are more opportunities due to the high volume of packaged products.

At the other end of the spectrum, due to the high volume of unbranded product in produce, private label accounted for just 10.9 percent of total produce department sales during the 52 weeks ending June 29, 2013. Unbranded products’ dominance within Produce reflects the challenge retailers face for branding (whether through private label or owned brands) bulk, unpackaged product. However, unbranded share in produce has been stagnant over the past two years.  During the latest 52-week period, unbranded products’ share of total produce decreased 2.3 percentage points.

During the past year, private label produce sales growth not only surpassed unbranded, it outpaced total produce growth (up 13.7 percent compared to produce’s 7.6 percent increase). Private label also kept pace with branded growth, which was up 13 percent during this time.

Private label maintains a strong presence in staple categories including potatoes, onions, tomatoes and packaged salad. For certain heavily packaged produce categories, private label not only maintained a respectable presence, it drove growth. Celery, lettuce, packaged salad, mushrooms and value-added vegetables posted solid share gains compared to the previous year. In fact, only seven of 44 produce categories monitored decreased share of private label sales during the past year. Apples, carrots, cooking greens, pineapples, stone fruit and beverages were most notable among the seven categories.

 

The Value Proposition

Packaged salad is generally a higher-priced produce item, and the category is saturated with prominent national brands, creating a scenario that is ripe with opportunity for a lower-priced option. Branded packaged salads had an average 5 percent price premium over private label during the latest 52 weeks. As the lower-priced option, private label accounted for 40 percent of packaged salad sales (compared to the produce department average of 10.9 percent). Moreover, dollar sales of private label packaged salad increased 19.8 percent, while total category sales increased just 8.4 percent in the past year. Other high-value categories with similar sales movement included lettuce and value-added fruit, for which private label product accounted for 16.6 percent and 11.2 percent of category sales, respectively. In both cases, private label growth outpaced category growth.

Packaged salad exemplifies a category with a highly developed private label program, but opportunity for retailer branding still exists for packaged produce varieties that do not have a well established private label presence. For example, private label has a small contribution to total berry sales at less than 1 percent; however, private label sales within berries are far surpassing total berry growth. During the latest 52-week period, dollar and volume sales of private label berries increased more than 25 percent, respectively. Focusing on categories where private label is less developed but is showing growth potential, like berries, can be advantageous for retailers looking to attract the value-focused consumer.

 

Risks Inherent In Private Labeled Produce

Private label efforts in the fresh produce department are generally a disappointment for produce retailers. The problem is simple: for most retailers, the real motivation behind private label is margin enhancement. Incorporated in the price of national branded goods is an allotment to cover a multiplicity of costs, such as research and development as well as marketing and advertising. For most retailers, the idea with private label is to cut out those costs, give consumers a better price and keep some for enhanced margin.

It is a powerful proposition. On a category such as dry pasta, one can see dramatic differences. Professor Ed Mclaughlin, Director of the Food Industry Management Program at Cornell University, did a presentation that incorporated Wegmans’ private label pricing, and he reported that while Ronzoni spaghetti is sold at $1.49 a pound, the basic Wegmans private label offering is sold for only 89 cents a pound. That is a big savings to consumers and yet, probably, provides equal or better margins for Wegmans.

Yet this very dramatic example — almost 43 percent off for private-label spaghetti — points out the limitations of private label in the produce department. Even in packaged salads (the category most similar to grocery items) there is no large expenditure on research and development or advertising and marketing that can be eliminated by moving to private label. This is why the Nielsen Perishables Group study shows that branded packaged salads had a price premium over private label of only 5 percent during the last 52 weeks.

If all a private label initiative does is offer consumers such a small savings, it is not clear how successful it can really be. Growth of private label sales in raw numbers may be strong, but mixed up in that data are many retail decisions. On some products, say a coleslaw mix, a retailer may eliminate the branded option all together and just sell its private label SKU. In other cases, the retailer may sell both, but the addition of a private label program can reduce facings given to branded product, reduce the frequency with which branded product is sampled or on ad. In other words, many things other than consumer preference for branded versus private label can be reflected in statistics indicating that private label is increasing.

While financial liability can be limited by contract and with proper insurance, for the retailer a decision to private-label its products — especially those with higher food safety risks such as bagged salads — holds out the potential for severe reputational damage. It is bad enough for a retailer to be cited in local news reports for selling product that caused severe illness or even death; it is another thing entirely for the retailer’s own name to be implicated on a product that caused illness or death. We suspect this alone would lead many retailers to say it is not worth it to use a private label on these products in order to offer consumers a few percentage-points discount or pick up a little margin. After all, how much can be lost in just one food safety incident? This is the reason why Paul Newman pulled his salad line when he realized what his name could wind up being associated with.

Of course, today private label offerings are often about more than discounts. In fact, Professor McLaughlin’s report indicated that the same Wegmans that sells the inexpensive private label spaghetti also offers an “Italian Classics” private label that is 30 cents more per pound than Ronzoni. There also is a Wegmans “Super Pasta” that is $1.99 for the package and, because they cut the weight of the package to a little more than 14 ounces, it is actually $2.20 a pound!

So sometimes, private label can be used to sell premium products. Yet it is not obvious how applicable this approach is to fresh produce. Costco is famous for selling excellent product under its Kirkland brand. We have been told that Costco sells better packaged tuna than any branded supplier but it is, once again, not obvious how to apply this to packaged salads and certainly not to, say, apples.

Trader Joe’s is famous for using private label on proprietary products such as sauces to differentiate itself. This is a powerful strategy but, once again, it is difficult to know how to do this with a banana. Even a salad mix is hard to do in such a dramatically different way that establishes totally different flavor profiles to drive consumer preference.

This leaves most produce private-label efforts as legacies of broader corporate branding strategies. In other words, retailers offer private label produce to have the same brand in every department. This is a rather backwards approach, however. The world has changed since gourmet meant little jars and bottles from Europe. Today “fresh” is the new upscale, so produce-centric branding could be the key to the halo effect for the whole supermarket. For the moment, though, supermarket CEOs seem focused on margin-enhancement, so private label in produce will be a source of endless disappointment.                       pb