Fresno / CA. (rba) Rabobank forecasts that U.S. retailer food brands, in example private label brands, are on track to achieve market penetration of between 25 percent and 30 percent in the next decade, up from their current market share of under 20 percent. This projected growth, which would put the U.S. retail brand segment on par with Europe in terms of market penetration, translates as one in every three food product purchases in the U.S. being a retailer branded product by the year 2025.
In a new report titled «What Would Apple Do? How Can U.S. Branded Food Companies Withstand the Retailer Brand Onslaught?», Rabobank´s Food + Agribusiness Research and Advisory group looks at drivers behind the rising power of U.S. retailer brands – that is, brands developed and sold by supermarkets and other food retailers. The report also proposes strategies for consumer packaged goods companies to defend their national brands and/or to compensate for the loss of market share to retail brands.
«Many national brand owners need to be bolder in their thinking and strategizing», says Nicholas Fereday, Rabobank analyst and author of the report. «Instead of opting for low cost, low risk, conservative solutions, they need to think and act more like the Apples of the world, innovating new game-changing food products and entering new categories. Alternatively, national brand owners should consider downsizing brand-building efforts and diversifying their manufacturing into B2B activities».
No Longer «Cheap and Cheerless», Retailer Brands Are Powerful Competitors
Retailer brands have grown six percent over the past five years, compared with the sales of national branded packaged food manufacturers which have grown just two percent.
Rabobank says the increasing competitive strength of retailer brands reflects a power shift from consumer packaged goods companies (CPGs) to food retailers, as well as the growing trust and loyalty consumers have to today´s innovative and high quality retailer brands.
«Retailer brands have matured from their original positioning as ‘cheap and cheerless’ generic products», says Nicholas Fereday, Rabobank analyst and author of the report, «into a more diverse range of national brand equivalents and, more recently, highly innovative premium products. On grocery shelves around the U.S., from convenience stores to up-scale supermarkets, retail brands now compete successfully and often win against national brands, earning consumer trust in terms of pricing, quality, image and value».
Rising Consumer Acceptance and Loyalty for Retailer Brands
Fereday points to several factors driving retailer brand momentum:
- Innovation and investment in brand management by retailers. Successful retailers have developed premium products, employ sophisticated packaging, or have expanded into new categories such as the fast-growing chilled ready meats segment. Retailers have also started to move into branded categories once thought impenetrable, such as candy and snack food. Smart retailers now act like brand managers, following a multi-tiered approach by offering value brands, national brand equivalents, and value-added premium brands. In 2011, retailer brands were estimated to account for nearly one third of new food and beverage items in the U.S.
- Retailer brands win on value in recessionary times, and rarely cede back ground in good times. At the height of the 2008 recession, retailer brand sales grew 14 percent, compared to three percent for national brands. Even after the official end to that recession, consumers remained cautious and value-oriented, and growth in retailer brand sales has stayed two percent to three percent ahead of national brands since 2010.
- Retail consolidation and concentration increases the degree of retail brand penetration and power. Market share of the top ten national retailers is just over 50 percent, although there is much more regional concentration. Retailer brands, an integral part of Walmart´s sales strategy, account for about 20 percent of Walmart´s grocery sales, which in turn account for over half of the chain´s total sales. For other leading supermarkets, retailer brands make up between 19 percent to 26 percent of total sales.
- Changing dynamics in the retail model: the rise of retailer brands in convenience stores, drugstores and online retailers; and the emergence of hard discounters and Dollar stores that offer retailer brands among a limited range of SKUs. Stores like Target, which now derives 20 percent of sales from food, recognize the value of food as a driver of foot traffic and, in turn, discretionary non-food purchases.
Survival Strategies for National Brands and Consumer Food Manufacturers
All national brands are feeling the retailer brand squeeze, to varying degrees. Besides traditional avenues to shore up brand strength (ad spend, for example), two other options appear promising for consumer packaged goods companies in the U.S. market:
- Real innovation. National brands employ a continuum of options, from promotions and co-branding to reformulations to technological breakthroughs, but bold innovation should be part of the repertoire. National food brands need to follow the creative model of other industries, funding research that will lead to radical new products which address unmet consumer needs, or create wholly new categories. Currently more than three quarters of new food products are line extensions or product derivatives.
- Go to plan B2B – diversify into B2B manufacturing for national brands and/or contract manufacturing for retail and foodservice channels. A number of CPG companies who make national brands also make retailer brands, leveraging strengths in R+D, operational knowhow, food safety, and category management to realize benefits of scale, increase output and sales, and maximize profits.
