And Now For Something Completely Different...

In the Chicago Tribune today there is a story about private labeling in grocery stores that I think deserves some thorough commentary. I hope the Tribune, and John Schmeltzer, will forgive my fair use of their article as I copy it in its entirety for purposes of this commentary. I will put my in-line comments in a different color. I apologize in advance for the length.

Some introductory comments first. Erin and I were actually just talking about this the other day. When was the last time you saw a black-and-white generic food product? Think hard, because I can't remember the last time. I clearly remember them from when I was a kid. I think I remember them in early college when I was poor and eating macaroni and cheese and ramen on a daily basis. But, I don't really remember the last time I saw an honest-to-god generic package. From a consumer's perspective this is troubling - it acted as a sort of 'negative' brand recognition. I knew when I saw the black-and-white, that the product in question was the generic. It was the baseline for comparison. I wasn't paying any extra for marketing, I was getting the cheapest product I could buy. And I mean that in every way possible. But, for some people, and in some circumstances, that's exactly what we, as consumers, want. Sometimes it's all we can afford. Sometimes we just don't care. In any event, we don't want to pay for marketing, we don't want to pay for 'prestige,' we don't want to pay for anything other than a cheap product.

And it kept the other brands honest. As consumers we knew how much the food 'really' cost because we could compare it against the generics. We still, for the most part, willing paid the premium, because frankly Kraft mac-and-cheese tasted a hell of a lot better than the generic. I could tell that just by looking at the labels and I could recognize it as such. That's the purpose of labels - fool me once shame on you, fool me twice, shame on me. I didn't buy the generic mac-and-cheese the second time. I gladly paid the premium for Kraft.

Anyway, with that out of the way, on to the story:

Generics heat up battle of brands

By John Schmeltzer
Tribune staff reporter
Published May 9, 2006

Once relegated to the bottom shelves where only the thriftiest of shoppers found them, generic foods are shedding their drab, functional black-and-white wrappers and going top shelf, so to speak.

Yes. Functional. As in "serving a function" - in this case, the aforementioned 'negative' product recognition.

From cookies to oatmeal, and just about every food category in between, "private-label" products are evolving into premium products.

This is a bit misleading. They aren't "premium" as in "better," they are just "premium" as in "cost more." Have you ever had Kroger's "Premium Select" mac-and-cheese?? It's just as vile as the generic crap.

They are commanding the attention of shoppers who are willing to spend more money for them, while giving the grocery industry an important weapon in its ongoing battle for survival, industry analysts say.

How about a better weapon like "more efficient layouts." How about a better weapon like "more informed staff." How about a better weapon like "local produce." These are all things that local groceries can offer over the big-boxes. Differentiate on service and leave the products alone.

One big sign of the transformation emerged this week at the Food Marketing Institute show at McCormick Place, where an entire pavilion and several seminars are dedicated to the topic--the first time at a show for FMI, where grocery manufacturers showcase their newest and best products in front of retailers from all over the world.

Shoppers see other signs of the shift everywhere--organic oatmeal under the "O" label at Dominick's, Whole Dairy cream cheese at Whole Foods and pasta with a red bull's-eye on the box at Target.

He should have put "organic" in quotations. Have you looked at that label?? Hardly "oats right out of the ground" that one would expect from a oatmeal product labelled as "organic." Which leads to another problem in the grocery business - false, or at least mildly deceptive labelling. Anymore, what constitutes "organic" is unknown. The FDA's definition of "organic" is extraodinarily loose. You'll notice that it merely requires that any one ingredient in the package to have been grown "without the use of chemical pesticides, fertilizer, hormones, antibiotics, or artificially-derived chemical additives." Only products labelled at least "100% organic" or "certified organic" are assured.

Where generics represented 1 or 2 percent of a grocery store's sales in the 1970s, they now account for an average of 17 percent, representing $107 billion in spending in the United States. That's expected to grow to more than $130 billion by 2010, according to ACNielsen.

Some of this was due to a loss of stigma attached to generic products. In the 1980s, due maybe in part to more wide-spread availability of big-box groceries (remember, until the 1970s most grocery stores were not huge over-blown affairs because of poor refrigeration - most groceries were relatively small, family owned operations), due in part to reduced discretionary spending in the middle class, due in part to increase consumer awareness of what they were paying for, middle-class consumers bought generics instead of paying for Kraft's marketing.

This represents a serious problem for big food companies like Glenview-based Kraft Foods or Downers Grove-based Sara Lee, whose business models are based on the idea that shoppers will pay a premium for a widely known product. Both companies are restructuring their businesses to remedy flat earnings growth and sagging stock prices.

While generics have traditionally been cheaper, price doesn't appear to be driving shoppers toward them now. Consumers have shown a willingness to pay as much or more for an upscale generic than for a nationally advertised product.

Or maybe it's just that consumers have duped into buying generics. Again, the product hasn't changed, the groceries are just putting a different label on the box. And, if you go somewhere like Kroger, they misleadingly price everything with their damned "store card" shenanigans that the store brands always appear cheaper, even though they aren't. More on this later. I promise.

"Sales of private-label foods are no longer limited to the historic profile of the low-income and middle-income blue-collar shopper," said Todd Hale, an executive with market research firm ACNielsen. "It is now spreading to high-income households."

Again, see my above comment about increased consumer awareness. Why pay more for a boxed product that is just going to one part of a larger meal where you can't taste the difference in quality? If I'm making beef stroganoff does it really matter if I buy the generic egg noodles? No. I'm not really going to taste them anyway - the cream and butter and ground beef are going to override any taste of the noodles. So why pay a premium for Kraft egg noodles?

In fact, many private-label products are created to be higher-quality options than the national-brand competition, according to Peter Brennan, president of Stamford, Conn.-based Daymon Worldwide, which closely tracks sales of store brands.

"What has changed is the quality of the product," he said. "This is where grocers will have to move if they are to compete effectively."

Horseshit. Prove it. I've had Kroger's Premium Select brand. It's shit. Grocers aren't improving the product, they are re-labelling and re-pricing the old product. And, even if they are improving the old product - WHY?? Consumers want the cheap crap - particularly for low-end, bulk products. And, you know what? Fine, make your fancy "premium" store brand - but leave me the cheap generic so that I can buy it if I want it.

Growing percentage of sales

With the wider customer base that comes with targeting both premium and low-cost shoppers, private-label sales at some mass supermarkets represent as much as 35 percent of sales, according to Brennan.

So? The financial gap in this country is growing. The rich are getting richer, the poor are getting (relatively) poorer. Marginal discretionary income is dropping. Workers are losing real money to inflation and cost-of-living increases all around the country. So, consumers are getting smarter with their money. So what? He also doesn't address deceptive pricing by the likes of Kroger and the other large grocers with their "store cards."

Some grocers, such as Cincinnati-based Kroger Stores and San Antonio-based HEB, have diligently developed store brands in an effort to help them take back market share lost in recent years to Wal-Mart Stores Inc., Costco and Trader Joe's--all of which have invested in private labels.

Ninety percent of the products sold at Aldi Foods are private label, while 70 percent of Trader Joe's sales are of private-label products. Two German billionaire brothers own both stores.

Have you ever eaten anything from Aldi? Have you ever been into an Aldi? 90 percent of all Aldis are in economically depressed and blighted areas. Before private brands existed, a stroll through Aldi was only generics. That's what Aldi's is, that's what they do. They sell generics. Except now they put pretty pictures on the box.

With so many retailers in the game, U.S. sales of store brands have more than doubled the growth rate of manufacturer brands--5 percent compared to 2 percent--in the last two years, according to Nielsen.

It's called market saturation. Are you familiar with the concept?

Currently, 25 percent of the U.S. population buys 50 percent of the private-label products being sold. But that is quickly shifting.

And the trend is expected to continue for at least the next five years, Hale said, noting that rising oil prices are going to begin squeezing more than just those people living on fixed incomes.

"Value retailing is winning today and it will be the driving force for the next three to five years," he said.

Hmmm...a semi-intelligent comment. I knew you had it in you.

Retailers that have strong private labels will be able to compete and hold their own against the big boxes, Virginia Simmons, a consultant with McKinsey & Co., told an overflow crowd of supermarket executives at one of the many private-label sessions staged by FMI and Daymon Worldwide.

"Private label is a brand in its own right and needs to be marketed just as the brands," she said.

"Compete and hold their own against big boxes." Let's look at that a little bit. Why are grocers trying to compete against big boxes? Just because Wal-Mart puts food in the store doesn't make it a grocery store. Have you looked at the products in a Wal-Mart? More sodium and shelf-stability than any one person should ever have to consume. That crap will, literally, rot your insides. And grocery stores want to duplicate this? I went in to a Kroger recently and they were selling porch swings. Who the FUCK buys a porch swing at Kroger?!?

Marketing costs also soar

But the need to spend on marketing eats up some of the modest difference in the profit margins. The average profit margin on private-label products is 33 percent before store expenses, while the average profit margin on brand-name products is 29 percent.

Ah. My favorite part - private label pricing; I could write a whole post on this, but I'll try to keep this part short. Let's look at how Kroger does this. You go into Kroger to buy something, let's call it "cheese." I live in Wisconsin (at the time I lived near Wisconsin) so cheese is a pretty popular item. You go find their cheese aisle. And here's what you find: most of it is "Premium Select" brand. Let's say I was looking for a cheddar cheese - it's a semi-soft cheese, that should have some give in the texture, but should be firm. It should have basically two ingredients: milk and yeast. The "Premium Select" brand is soft. Not just "some give" but like firm pillow soft. The "ingredients" are extensive. I manage to find, in the back, a single Wisconsin brand cheese - it is one of the cheaper, lower-quality cheeses, but it looks and feels like real cheddar - and it only has two ingredients. So, I compare the prices. They are priced identically. BUT, the "Premium Select" has a "price reduction" for using the "store card" (you know, that card where I give them all of my personal data so they can track everything I buy and inundate me with crap that I might want because Erin bought some Tampax using my card one day? It's also the personal data that they sell to the highest bidding "partner"). This "price reduction" makes the "Premium Select" cheaper than the Wisconsin brand. I would estimate that 80-90% of humanity will purchase the cheaper of the two - whether through ignorance, or not caring, or some ill-conceived notion of "value" (I mean, they are the same weight, look similar, there doesn't appear to be a difference - only someone who knew what it was supposed to look and feel like in the first place, and cared would even know that they weren't the same). But, if I go to an independent grocer, like "Woodman's" or "Treasure Island" (I know, Woodman's and Treasure Island aren't truly independent, but it's as close as you're going to get these days), you will see that the identical Wisconsin cheese is priced at the exact same price as the "Premium Select" brand with the discount. So, Kroger is over-charging on their non-store-brand products and getting to people to buy their store brand by offering "discounts" via the "store card." So, why do people go to Kroger? Because it's usually closer and people are lazy.

Regardless, private labels are likely to keep growing, if markets in European countries are any indication. European private labels represent 23 percent of sales, on average, or about $246 billion in spending. ACNielsen projects that will grow to $317 billion in 2010.

In Switzerland, 45 percent of the products sold by that country's food stores are private label. In Germany 30 percent are.

Why, particularly, would markets in Europe be any indication? Are they more advanced grocers than us? They don't refrigerate eggs there. Why would I trust what they do in their grocery stores as indicative of what will happen here??

With the growth of private labels growing around the world, many foodmakers are starting to produce for both markets. Mainline manufacturers including Sara Lee Corp., ConAgra Foods Inc., the spicemaker McCormick & Co. and Associated Brands, which manufactures Knox Gelatin, are producing foods bearing labels other than their own.

This should be illegal. Perhaps some other day, I will detail why. Suffice to say if product A and product B are both the exact same product, they should bear the same label to prevent consumer confusion.

Ray Borooah, president of Anaheim-based Harris Tea Co. said all the major supermarket chains are now counting on high-quality private-label products, including tea, to drive their profitability and build customer loyalty.

Rather than the typical Lipton, Celestial Seasonings or Twinnings, Safeway and Kroger have their own specially blended teas, he said.

"Their own specially blended teas"??????? Has the author tasted that crap?? Blending tea leaves with sawdust does not make it a "special blend!"

"The Safeway green tea has a Japanese blend, while Kroger's is from China," he said. It's one way stores try to tailor their blends to their customers' tastes. But experts warned that grocers should not attempt to just copy what the brand names are putting on the shelves of their stores.

"It is not about duplicating brands, but it is about truly innovating," said Simmons. "Distinctive private labeling is a weapon in driving store loyalty."

How about driving store loyalty by offering a knowledgeable, friendly experience in a store where I can buy high-quality, local foods at a reasonable price? I know it can be done - there's a shitload of trucks at every farmer's market in the country that proves it.

----------

jschmeltzer@tribune.com