Strategy

The push on private-label brands

In a bid to boost profits, grocery chains are pushing their private-label lines at the expense of national-brand products.

Do not shop at Costco if your baby wears only Pampers. Don’t go to Walmart for Glad sandwich bags. And don’t visit a CVS drugstore for Energizer batteries. Big retailers are culling major brands from their stores in a bid to boost sales of their own in-house labels.

The latest sortie in this war on brands came this month, with Walmart’s decision to stop selling Glad and Hefty food storage bags, opting to stock only Zip-loc bags and its own Great Value brand. The disappearance of a few sandwich bags from store shelves may seem like a small shift, but analysts expect Walmart will shed other brands as the year progresses. Meanwhile, CVS drugstores in the United States announced last November it will no longer carry Energizer alkaline batteries. It now carries only Duracell and its own store brand, or private label.

These brand banishments are occasionally driven by feuds between stores and manufacturers; Costco stopped selling Coke products briefly last year over a pricing dispute. But the recent reductions come as retailers place a renewed emphasis on their private labels, recognizing store brands are an excellent way to hike both profits and customer loyalty.

“The retailers aren’t viciously trying to harm their own vendors – that’s not their goal,” says Jim Danahy of CustomerLab, a retail consulting firm. “They want more profit, and private labels generate better margins.”

Store brands offer gross margins for retailers that are roughly 10 percentage points higher than national brands, thanks to lower distribution and marketing expenses. Perhaps more important, they can burnish the store’s reputation as a purveyor of exclusive products. “One of the only ways a retailer can create a sense of loyalty is by having a strong private-label brand,” says Brent Barr, an instructor at Ryerson University’s Ted Rogers School of Retail Management. “And one of the ways that these large retailers can create that strength is limiting choice to a top brand and the alternative.”

Grocery stores are mimicking trends in other areas of the retail market. Gap clothing stores sold Levi’s Jeans up until 1992, when the company recognized the advantage of exclusively selling its own private-label product. Private labels have long enjoyed a significant market share in the European grocery market; they have been less popular in Canada and less still in the United States. The recent recession, however, gave private labels a boost in North America, thanks to prices that can be 20% to 40% lower than national brands. Walmart, Sobeys and Metro have all recently revamped or expanded their in-house offerings. Even Loblaws, an established leader with its President’s Choice and No Name brands, is testing more private-label offerings.

By reducing the number of brands they offer, stores can also shrink the size of individual sections, hiking the amount of money they make for each foot of shelf space and opening space for other categories. Nonetheless, industry watchers say companies must be selective about which brand names they drop. For certain items, like sandwich bags or ketchup, retailers probably won’t lose customers if they restrict the number of brands available. But there are some areas where retailers prune at their peril. Take away Coca-Cola or Tide detergent and consumers revolt. “People perceive a difference between Coke and Pepsi and President’s Choice. But where there’s very little difference, they can eliminate a brand from the shelf,” says Barr.

Manufacturers rarely whinge, at least publicly, when their products are ostracized, because they are not helpless. CVS’s decision to dump Energizer frees the battery maker to strike alliances with rival stores. “Energizer will take its promotional dollars and beat CVS over the head through one of its competitors,” Danahy says.

Some analysts question whether retailers can reduce their brand-name offerings without alienating consumers. “Each of these reductions can be a consumer land mine,” says Perry Caicco, a retail analyst with CIBC World Markets. He argues companies regularly cull their shelves of products of “marginal sellers,” only to reverse the process when customers complain. Asda, a British chain, recently expanded its product range after cutting some sections by 30%.

Others predict that some stores will eventually become the Gaps of groceries. “I would bet in the next 20 years, there will be retailers that only carry their brands,” Barr says. “You can see that transition happening.”