Private Label Food Will Likely Be King for 2009

by: Rick Shea

Private Label manufacturers recently met for a few days at the PLMA trade show in Chicago. The mood on the economy was very dour but attendees were upbeat with the prospects for the private label food industry in 2009. Private Label clearly is gaining share among price conscious consumers. Consumers hit by job losses, disappearing 401(k)s and IRAs and daily depressing economic headlines are more price sensitive than ever before. Consumers are modifying their shopping habits for food in two major ways.

First, consumers are shopping more at stores they perceive are low price retail leaders. That's a plus for Walmart Supercenters (NYSE:WMT), clubstore leaders Costco (NASDAQ:COST) and BJ's (NYSE:BJ) and dollar stores such as Family Dollar and Dollar Tree. BJ's has been performing extremely well as of late but a lot of that has to do with its high percentage of food sales driving traffic. Target's (NYSE:TGT) results have been disappointing but that is primarily because food makes up a smaller percentage of its overall business.

Secondly, budget conscious shoppers (and that's almost everyone nowadays) are increasing their purchases of private label products. Traditional grocery stores Kroger (NYSE:KR), Super Valu (NYSE:SVU) and Safeway (NYSE:SWY) are developing more premium and mid price range private label products in an attempt to offer a better value to shoppers than Walmart's everyday low prices. Kroger recently announced that its private label share of total food sales has risen to 26%. (Historically it's been in the low 20s.) Safeway has also been successful with its O Organics and Eating Right lines although the price sensitive atmosphere has dampened the growth on Organic and Natural foods. (Just ask Whole Foods (WFMI)!) Super Valu has yet to show any real success but the jury is still out on its Wild Harvest and Culinary Circle product lines.

All this leads to a very optimistic outlook for Private Label food manufacturers for 2009. There aren't many pure plays when it comes to publicly traded private label food manufacturers. Most of the key companies are mid sized private companies, usually with a majority controlled by family owners. These companies are virtually unknown to the public and have names like Gilster Mary Lee, Schwann's, Land O Lakes, Specialty Foods, Malt-O-Meal, Sturm Foods and Pan-O-Gold to name a few. In addition many branded food companies like Sara Lee (SLE) also provide private label products.

Of the public companies that are concentrated in private label, Ralcorp (RAH) is probably the best known and largest private label food company. It is a leader in private label cereal, frozen baked goods and other food categories. It recently reported a fabulous quarter but it is also in the midst of integrating a very large purchase of Post cereals. TreeHouse Foods (NYSE:THS) is a leading maker of private label soups, salsa, salad dressings and pickles. Its recent quarter was uninspiring with +3% earnings growth on +9% comp sales. Lance (NASDAQ:LNCE), a cookie and snack manufacturer with 40% of its volume in private label products, recently reported a good quarter with 22% growth in its private label products. Other companies include Diamond Foods (NASDAQ:DMND), another primarily private label food company that recently purchased Pop Secret brand from General Mills (NYSE:GIS), Seneca Foods (NASDAQ:SENEA) and Overhill Farms (NYSEMKT:OFI) and Cott (NYSE:COT), again to name a few.

All this leads to a very optimistic view for 2009 for the private label grocery category. It's one of the few spaces in consumer goods that can say that about the upcoming year. With consumers facing an economy that is likely to be the worst since the Great Depression, we can expect more growth in the private label sales making them King of the grocery industry for at least 2009 and the foreseeable future.

Disclosure: None.