INDUSTRY TRENDS HOLD PRIVATE-LABEL PROMISE

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ORLANDO-Supermarket industry consolidation, growth of "supercenters" and heightened product marketing are poised to strengthen private-label brands. But they'll be fighting aggressive pricing from brands and legal tactics to drive down profits and sales for private labels, executives told attendees at the recent Private Label Manufacturing Association meeting here. Those tracking private-label performance need look no further than the U.K., where industry consolidation and aggressive marketing went hand in hand, and the top five food retailers account for 62% of all grocery sales, said Mark Husson, VP with J.P. Morgan & Co., New York. In the U.S., the top five retailers account for 21%, he said. While some claim that economic stability would drive consumers toward brand loyalty, trends show otherwise, Mr. Husson said. Consumer product purchasing habits in Europe and the U.K. during the 1980s trended increasingly toward private labels, though the countries were enjoying economic prosperity, he said.

"It is naive to believe that just because the economy is approaching full employment consumers will rush out to pay an extra 20% for a branded product after they've been weaned onto a perfectly acceptable private brand alternative," Mr. Husson said. "Private brand growth is a trend, not a cycle."

Nowhere will the trend be stronger than at supercenters, where private labeling will drive much of the $400 billion in total U.S. food sales in coming years, said James Degen, president of James M. Degen & Co., a Cayucos, Calif., consultancy.

Higher efficiency, greater emphasis on category management, lower costs and an emphasis on profits made through selling product over buying it will lead supercenters to dominate the retail market during the next few years, he said.

The news is not good for traditional grocery stores, added Chris Hoyt, president of the Hoyt & Co. retail consultancy in Stamford, Conn. Grocers are losing market share to supercenters that are selling traditional grocery products, including package goods, health and beauty supplies, and pet supplies at cost. With the supercenters' introduction of perishables, competition will only heighten, Mr. Hoyt said. To remain viable, grocers will need to focus on differentiation: strong, premium store brands that replace dependence on lower-tier national brands' trade promotion dollars; destination categories focused on attracting young, affluent shoppers; and product selection that satisfies graying baby boomers and health trends.

Grocers also will have to eliminate their reliance on trade promotion dollars, Mr. Hoyt said.

"The U.S. grocery industry is the only $400 billion business in the world that makes almost 50% of its profits on extracting money from its suppliers," Mr. Hoyt said.

Those retailers that focus on being the cheapest, the biggest, the easiest or the trendiest will withstand the onslaught of the supercenters in the future, said Jerry Metcalf, former chairman-CEO of Scrivner.

Increased consumer and media interest, and improving product quality and image, also are helping boost private-label retail gains to the point that store brands make up one-fifth of all purchases, said association president Brian Sharoff. If brand marketers intend to combat private labels through pricing or legal issues, the industry is ready, he said.

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