Brands Regain Sales Momentum vs. Private Labels

by: Rick Shea

The leading supermarket industry branded foods continue to battle back vs. private labels. February data shows branded Consumer Packaged Goods (CPG) products were up +2.4% while private label products gained +3.2%.While private labels are still outpacing branded products, this is a far cry from the double digit gains posted by private label products during Q4 of 2008 and the first half of 2009. These results remind me of the famous quote by Mark Twain, "the reports of my death have been greatly exaggerated."

While private labels continue to be a significant threat to branded food products, I doubt we will see a return to the double digit private label growth anytime soon. Historical data for past recessions in 1991 and 2000 show that private label growth returns to more normal growth patterns once the recession ends.

In a more telling sign, Wal-Mart (NYSE:WMT) has restored shelf space to more than 300 branded sku's that were cut to make room for additional private label items. Wal-Mart found that their sku rationalization project was leading to reduced shopping trips."We are a house of brands. We prefer to sell national brands because that's how we can differentiate ourselves in price better," said Bill Simon COO of Wal-Mart.

Indeed, several large CPG companies have reported stellar earnings for Q4 2009 led by declines in commodity costs and improved operating efficiencies. General Mills (NYSE:GIS), Conagra (NYSE:CAG), Hormel (NYSE:HRL), Smuckers (NYSE:SJM), Diamond Foods (NASDAQ:DMND) and Del Monte (DLM) all posted strong quarters based on earnings growth. Green Mountain Coffee (NASDAQ:GMCR) has been one of Wall Street's favorites due to its growth in the single cup coffee segment.

To be sure, the competitive environment is still very challenging for branded food manufacturers. Private label products on average are 27% less in price then their branded counterparts. However, the companies with strong brands that have the ability to innovate and differentiate will continue to perform well. Additional discounts and " adding value" to their products is the key to insure that brands continue their improved sales momentum.

Disclosure: No positions