Private-label sales surged 25% to 35% in such categories as diapers and batteries and showed strong double-digit growth across more than a dozen others, according to JP Morgan Securities and AC Nielsen, for the 13 weeks ended March 24, as compared with the same period a year earlier. According to Banc of America Securities, private-label sales rose at least 6% to 7% in 20 of 35 package-goods categories the firm tracked.
The rise didn't extend to the food category, however, and while value brands such as Dial Corp.'s Purex detergent, Unilever's Suave and Rayovac Corp.'s batteries saw sales jump, analysts said factors beyond the softer economy helped fuel the growth. They include aggressive price increases in paper products, strong new private-label programs from uber-retailer Wal-Mart Stores and a slowing of new-product innovation.
Not since 1992, when Philip Morris USA cut cigarette prices in the face of private-label competition and Procter & Gamble Co. was launching everyday low pricing to combat private label, have store brands posed such a serious threat.
Banc of America analyst William Steele blames private-label gains on lack of genuine innovation in the past year. "The No. 1 mistake I've seen is that in order to make short-term [earnings numbers], publicly held companies have cut spending behind their brands-innovation, advertising and sales promotion," he said. "These are all potentially commodity categories if you don't innovate and you don't advertise."
The disposable diaper category may be the poster child for brand marketers charging more, innovating less and being punished by private-label as a result. P&G and Kimberly-Clark Corp. raised prices 6% to 8% last year through package-count reductions. Meanwhile, major product improvements, which had been coming every 9-12 months for diaper brands in the late 1990s, have slowed to a crawl. Since its launch of Pampers Rash Guard two years ago, P&G's only new diaper products have mimicked existing Huggies items and K-C has only made relatively minor absorbency and leak-guard improvements in Huggies to match Pampers.
Retailers like Wal-Mart have also been smart in their private-label strategy. When P&G and K-C raised diaper prices, Wal-Mart held the line on White Cloud pricing. The result is that the brand, originally priced between P&G's value Luvs brand and Pampers, is now 7% cheaper than Luvs.
Both P&G and K-C executives acknowledge they need to improve products to combat private-label, according to Jim Gingrich, analyst with Alliance Capital Management's Sanford C. Bernstein & Co. unit. Yet the improvements haven't arrived.
Instead of adding to the diaper line, P&G is expanding the Pampers name into another baby care category with Pampers Bibsters disposable bibs, which begin shipping this week. At K-C, which is focusing on Cottonelle RollWipes and improvements to Scott towels this year, President-Chief Operating Officer Tom Falk didn't impress analysts last week with his company's latest diaper innovation-Winnie-The-Pooh designs.
New product activity has also slowed at Clorox Co. and Dial, which in recent years entered several new categories or launched new brands, and this year turned to fix problems with more established brands and categories. Those companies, along with Unilever and P&G, are also moving to shed "non-core" businesses. Mr. Steele pointed to P&G's move last week to divest Crisco and Jif so it can focus on core brands such as Pampers, Pantene and Tide. "If Procter does focus on their core brands-and focus is just a euphemism for innovation and advertising-that will be their response to private-label," he said.
In fact, strong marketing efforts combined with new products contained private-label in some categories, such as razors, toothpaste and skin cleansers.
In the $1.9 billion shampoo category, private-label sales and share were flat even as P&G raised prices 8.9%, launched Physique at $6 to $7 a bottle and re-staged Pantene and VS Sassoon in the past year.
P&G's shampoo share fell 0.4 points to 32.6%, but that loss came entirely from the failed effort to take VS Sassoon upscale in September, which has sent the brand's sales plummeting 49% and its share down 0.9 points to 1% even as its price soared 72%. With Pantene, where P&G raised prices a more modest 10.7%, sales rose 0.4%.
If there's good news in the numbers for beleaguered P&G, which is trimming 17,000 jobs to help fund price rollbacks, it's that private-label growth was contained in beauty care categories that reflected plans laid by A.G. Lafley, who headed P&G's global beauty care business before becoming president-CEO last year. He's vowed to run the whole company like he did beauty care-focusing marketing on big established brands and key new ones.
Mr. Steele also sees hope for the industry in sales gains announced last week by Dial and K-C both of which have stuck with ambitious marketing plans, the latter despite taking earnings forecasts lower. K-C has "done something very few companies [in package-goods] do," he said, "think for the long-term benefit of shareholders vs. the short-term benefit of Wall Street."