Grocery Stores Need to Add 'Private Label' Value

For years the traditional grocery stores, companies like Kroger (KR),Super Valu (SVU) and Safeway (SWY) have lost customers and market share to mass merchandisers like Wal-mart (WMT) and Target (TGT). Wal-mart and Target have expanded their food offerings because they know it drives customer traffic. Almost all store expansion at Wal-mart and Target in the last few years has been their super center concepts with expanded food sections. They have also remodeled and expanded their traditional merchandise stores to offer food and other groceries. Although food has lower margins, they realize that once they get consumers in the store they will have a better opportunity to sell them higher margin hard retail goods. Consumers have flocked to the mass merchandisers to buy groceries because they offer good locations, one-stop shopping and better pricing than the traditional grocery stores on food items.

For the last few years traditional grocery stores' overall market share has continued to trend down. Only recently has the trend stabilized with a few traditional grocers actually gaining market share. Folks at Super Valu and Kroger among others have placed a strong emphasis on remodeling their stores, being more cost competitive on their product offerings and adding value for their customers.

One of their key strategies has been to use their private label products to provide more value to consumers and help them better compete with Wal-mart and Target on price. They have also been more price conscious on branded margins as well trying to minimize the price gap on nationally recognized brands.

Most grocery retailers use a three-tier strategy for their private label offerings. The lowest tier, which is often called 'extreme value', offers products at the lowest price in the category for low income consumers who are extremely price sensitive. Unfortunately, almost all of the items are grossly inferior to the name brands.

The middle tier focuses on offering brand name knock offs at a slightly better price. In this tier, grocers try to match the best selling items in the category on quality but at a lower price.

Lastly, more and more grocers are adding a third tier. These are premium priced, sometimes unique, specialty items compete more on quality and innovation than they do on price. These items can truly expand their category sales, not just cannibalize the name brands, if done right.

While the overall strategy appears to be helping stabilize market share, it hasn't reversed the trend. That's primarily because consumers still want branded food products. There is a stigma for middle and upper income shoppers to having a cart full of private label products. Consumers want value but they also want to feel good about the products they buy for their family. Many also have discriminating teenagers who will snub their nose at private label ice cream or or other products.

The key to successful private label products is how the stores brand their items. Using just the "Kroger" brand for all 3 tiers of private label products will not work. That's because consumers view brands by category and by price. They do not want to buy the same brand for ice cream as they do for toilet paper. They also will not pay a premium price for a product if they see the same brand in another category at a bargain basement price.

The key for grocery stores is to get consumers to buy the mid and upper tier private label products without consumers realizing that they are buying private label. For this to occur, grocery stores need to think and start acting like their branded vendors when it comes to product and package design. If Super Valu, Kroger and Safeway start acting like Kraft (KFT), General Mills (GIS) and Kellogg's (K), they will have a much better shot at shifting the branded volume to private label.

Comments

[olderguy]

That would work great if Steve Burd (Safeway CEO) could understand that.