Retailers put the squeeze on: downsizing by stores, rise in private labels hurts grocery manufacturers. By Jon Berry and John Sinis

NEW YORK--If you're No. 2, you try harder. But what if you're No. 3, 4 or 5? If y

For a microcosm, check the cereal aisle. Nabisco officially abandoned the category last week with the sale of Shredded Wheat and the rest of its ready-to-eat cereal brands to Kraft General Foods. Nabisco, No. 7 in the category, had been getting the squeeze for some time (its sales slipped 3% for the 52 weeks ended Oct. 3, according to Nielsen).
But the more interesting story is the No. 6 player: Private label. Its share has almost doubled, to 4.8%, in the past five years. Industry sources say Ralston Purina, No. 5 by just 0.2 points, has been putting an increasing amount of resources behind its private-label business. Ralston is already the No. 1 private-label manufacturer. “I hear from Ralston’s private-label people every month,” says one grocery buyer. By comparison, he adds, Ralston’s branded sales reps come “twice a year, tops.” (Ralston declined to comment.)
Not surprisingly, private-labels are acting more brandlike. Ralston has shrink-wrapped watch premiums onto its Magic Stars store brand and sold trial-size versions of Corn Flakes and Crispy Rice. Sovex, another private-label manufacturer, had store-brand knockoffs of Low-fat Special K on the shelf within three weeks of the product’s release.
It’s unlikely this pattern will change. Retailers are learning that pruning losers–the essence of category management–can boost profits even as the rise of club stores mitigates traditional advantages of national brands.
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