Risks Inherent In Private Labeled Produce

By Jim Prevor, Editor-in-Chief, Produce Business

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 the private label is margin enhancement. Incorporated in the price of nationally 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. In 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 saving 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 the private label of only 5 percent during the last 52 weeks.

If all a private label initiative does is offer consumers such small savings, it is not clear how successful it can really be. The 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 altogether 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 the branded product, reduce the frequency with which branded product is sampled or on an 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 an 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 a 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 backward 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.