Private labels are booming

On retail shelves everywhere, private brands are making their presence known. In fact, according to a recent study by the Private Label Manufacturers Association (PLMA[www.plma.com]), products sold under the label of retailers themselves now account for more than 22 percent of all unit sales.

While many of us might think of private labels as the bare-bones, black-and-white boxes of generic products that appeared in the 1970s, private labels have been used by retailers for decades, according to Brian Sharoff, president of the PLMA. He explained that department stores first started using their own brands for clothing and housewares more than 100 years ago. Supermarkets began developing their own brands with the founding of Kroger and A&P at the beginning of the 20th Century.

“The last thirty years reflect the evolution of private labels from a purchase of last resort to what are brands in their own right sold by retailers,” Sharoff says. In many respects, he says, private brands surpass national brands in categories where national brands might not even exist. “At retailers like Wegmans and Safeway, you see categories where there is no national brand. There are only the retailers' brands that are pioneering in those categories.”

“If you are making a product with someone else's label—Kraft, Procter & Gamble or a retailer's label—then you end up with a product being fundamentally the same as what they produce in their facilities,” says John Riley, chairman and CEO of Rapid Air Systems and president of the Contract Packagers Association (www.contractpackaging.org). “Private brands have emerged to the point where leading retailer brands have very full private-label programs. If you look at shelf categories by commodities, like milk and bread, for instance, you have some categories where name brands have very small shares. In most categories, you see a healthy balance, but the growth of private label is by no means over in most categories.”

Private-label share increasing

According to Mintel USA (www.mintel.com), the long-term trends in food retailing have been toward increased share of private labels at least since the early 1990s. In an updated forecast released in April, Mintel states the recessionary collapse in 2008 accelerated this trend, with private-label share growing by 9.3 percent compared to 4.5 percent for branded sales. The study forecasts that growth will continue in 2009, with private label sales up 8.1 percent versus 2.6 percent for branded sales.

Riley attributes the growth of private labels to the economics of the market. If you look at Top 10 consumer brand companies and asked what is their marketing spend or what they spend to build brand equity, Riley estimates those numbers are around 25 cents out of every dollar.

“If you're a contract packager making a private label, you don't necessarily have any of those costs,” he says. “Other things being equal, you buy a high speed line and you buy the same film from the same supplier. There's not much else you can't get that isn't exactly what the national brand has. Except you don't have the brand equity costs. You can deliver a private label to the market for significantly less than a national brand.”

Historically, private labels have signified value for consumers, while national brands have attempted to occupy the premium rationale for purchase. Sharoff says this is no longer true once you go beyond the basic products. “Trader Joe's is not a value proposition. Whole Foods is not a value proposition,” Sharoff explains. “They have premium products just like the national brands. Value is no longer the only way in which private labels define themselves.”

Opportunities for packagers

These trends point to growing opportunities for packagers. Riley says packaging is becoming more important than ever for private-label brands. Christopher Durham, author of the blog myprivatelabel.com, points out that packaging is the face of brand marketing. “Very few retailers have a marketing spend for their private brands,” he says. “The vast majority of the experience from a private brand is at the store shelf. How the packaging conveys the message is key.”

Good packaging sells products

Sharoff says packaging was recognized in the 1990s as the first frontier in making store brands more successful and more popular with consumers. He says the primary reason private-label share has risen from 16 percent of unit sales to 22 percent today is the recognition of the importance of competitive and attractive packaging, adding he refers not only to design but everything that makes the packaging, including its functionality.

Packaging plays the same role for retailers as national brands, Sharoff says. “Good packaging helps to sell products and bad packaging helps to doom products. If you are a national brand and you've created an extraordinary product and you select bad packaging it could doom the product. The same is true on private label side.” Packaging for private brands is produced by manufacturers who fall into four classifications:

Much of the private-label production is done by thousands of companies, Sharoff says, explaining that these companies, based on contracts, also produce the product, not just the packaging.

“In private labeling, there are hundreds of companies in more than 2,000 categories that produce the products on an ongoing basis in partnership with the retailer,” Sharoff says. He places the amount of such companies between 10,000 and 20,000 in the U.S. alone, not including manufacturers from overseas.

Providing extra services

The definition of contract packaging depends on exactly what services a company provides, says Riley of the Contract Packagers Association, whose organization has grown rapidly from 30 to more than 150 members in the last four years.

Some companies are purely private-label manufacturers that sell their products almost exclusively to retailers, he says, and there is a blend of companies also making products for the national brands. Contract packagers specialize because of their equipment sets, their geography and their historical relationships, Riley explains. “The packagers have a customer base they can address, and they tend to stick with it. It might be pet foods or pharmaceuticals, but you won't find those crossing over in the same plant,” he says. Packagers will also specialize by distribution channel, Riley says, and will build their facilities and systems around around their links in the supply chain.

Once a contract packager gets an equipment set, he's more likely to try to leverage that into as many end products as he can, Riley says.

Packagers keep running

Flexibility is key to a contract packager, Riley says. They must balance capacity and they don't want downtime. Seasonality becomes an issue. He also says picking up products to run in the off-season is very preferable. “Contract packagers who can run at high capacity rates do quite well and, in the long run, end up being the ones who are more successful and have more facilities.” Increasingly, contract packagers offer additional services, such as processing, package design and logistics management.

“I think there is a trend for branded customers to shift the inventory liability to the contract packagers,” Riley says. If the contract packager is prepared to take the investment risk in the commodity—whatever the raw material is—as well as in sourcing the packaging, then that is becoming more preferred by the brand owners for economic reasons, especially in this downturn.

Providing these services makes the relationship more “sticky” and helps the brand owner deal with a project in a compressed timeframe, Riley says. “Due to their size, many brand owners will have lots of projects going on at the same time. It's not necessarily the key projects that are being outsourced. However, packaging is key to anything that's outsourced.”

Many services, but packaging is focus

Packaging is the focus for a contract packager. “Picking up on this situation and running with it is where the contract packager's opportunity lies,” Riley says. “It's a little difficult to trade out a supplier if they're buying your inventory, specifying the packaging and, in a lot of instances, helping you design the packaging.”

More contract packagers are getting into packaging design, Riley says, depending on their relationship with the customer. While many private labels have been developed by large, national retailers, there are also many owned by smaller regional retailers, Riley says, especially in sectors such as food.

Ultimately, the contract packager competes to be the best to stay engaged by brand owners, Riley says. “Depending on the product category, a contract packager will have other packagers to compete with, but the contract packager's limit is itself. The contract packager sets its own limits.” Many large brands have very developed contract-packaging guidelines and certification systems managed by the brands. The brands may have a pool of perhaps 30 contract packagers they deal with every day or every week. Riley says that relationship will be very different than one where it's a new product from a customer who doesn't even know if he has market for the product, and he's asking someone to make a limited run and can't guarantee them volumes. “The way those two customers behave will be quite different even though it's the same co-packer. Co-packagers often are dealing with both of those situations at the same time.”

Sharoff says a packaging specialist's ability to make a product successful is worth a great deal. “I think where there is a problem is that the specialist in the packaging company has to understand the differences between private labels and national band packaging. They are not the same.” “If you are making packaging for national brands—including the design, materials, and closures — the packaging needs to scream out at the consumer, 'Look at me.' You have an important creative challenge.”

The packaging specialist must understand the role of private label in the retailer's mind, Sharoff points out. “Adopt and adapt the packaging to that role. Some retailers have created a single look that is similar in any number of SKUs throughout the store. They offer 50, 80, 500 SKUs to accomplish that incrementally.”

Packaging is just first step

While packaging is the consumer's first image of a product, Sharoff notes, once past the packaging, ingredients and quality of product become the most important element. “Good packaging not withstanding, nobody is going to buy garbage a second time,” he says.

According to Sharoff, innovation is what makes private labeling exciting. He says private branding has built a reputation to the point where most major retailers use their own brand, and consumers are accepting the trend. He points to a recent Roper survey in which nearly three quarters of consumers say private-label products are as good or better than national brands. “When you have that level of acceptance, the next step is for private-label brands to be more innovative,” he says. Private-label brands have attempted to stay current with what brands are doing in packaging and are not falling behind, Sharoff says. Outside the center store is where more innovative products such as fresh-frozen products in groceries or off-patent medicines in drugstores provide an opportunity for innovation, he says.

Brands offer tiered products

One area of innovation for private branding is the development of multiple tiers of products targeted to different audiences. National brands have often had multiple tiers in a variety of price points depending on what the customers were willing to spend. The notion of multiple tiers—branded or private label—is quite the prevalent norm in merchandising, he says.

Producing tiered levels of packaging often depends on the contract packager's machinery, Riley says. Quality issues run more to the blending and raw material. Often, the packaging can distinguish the product and give the impression that the product's quality is remarkably higher than it actually is, Riley says.

“Those are functions of the equipment set. They either make the products or they don't. Then they'll manufacture up and down the quality chain and across as many packaging forms as they can.” Riley says while private labeling has contributed to the growth of contract packaging, other factors include outsourcing of entire product lines by the national brands or the customization of packaging for different retailers.

“The brands run the product in high volumes and then outsource the assembly into two-packs, three-packs or end-caps. So labor-intensive, shorter-run business can also be outsourced, even if the national brands have the best equipment sets making the finished product.” SKU proliferation has been great for contract packagers, Riley says, as long as you' don't carry the inventory. Many of these packages have a shelf life and a seasonality. “Retailers want to be able to differentiate themselves from the guy across the street, but you don't want to be caught carrying too many packages.”

The Mintel report says the current economy and consumer mindset is “a golden opportunity for private-label manufacturers to gain new customers. The goal will be to ensure that they are sufficiently impressed with the cost/quality that they continue to come back once consumer confidence returns.”

Durham sees the changing retail patterns between private labels and national brands as a shift, not as a giant battle. “If you view it as a battle, it's a civil war. Do national brands really want to battle with the people distributing their products? At the end of the day, we all just want to drive sales,” he says. “Private-label growth may slow, but it won't stop.”