Private Label Growth Slows

Since the recession began, private label has become a major threat, biting into food earnings among companies like Kellogg and Kraft. Now, with signs of an economic recovery on the horizon, price increases abating and consumer confidence on the rise, sales of store branded products—though still growing—are tapering off, analysts say.

Unit sales of branded goods dropped steeply during the first four of six (4-week) periods ending May 16. The fourth period posted the sharpest drop, 7.2 percent, but reverted to 2.2 percent growth as consumers bought national brands during the Easter season. (The sixth, or last period in that Nielsen Scantrack cycle, which includes Walmart sales, posted a one percent drop, but still better compared to the earlier declines of 3.8, 4.7, 4.3 and 7.2 percent, respectively.)

Moreover, in a research note published May 29, J.P. Morgan food analyst Terry Bivens wrote that private-label share gains, while up on a year-on-year basis in most categories, “remain relatively steady” rather than growing quickly as they had previously.

At least one food marketer is expressing some relief. In Heinz’s fourth-quarter earnings call last month, CEO Bill Johnson noted: “Private [label’s] growth, while still a major concern, does appear to be easing somewhat, albeit at higher sustained share levels.”

Indeed. While most of the nation’s largest food purveyors aren’t dropping their guard against private label anytime soon, certain socioeconomic and market factors are lessening private label’s menace—if only a bit. The Congressional Budget Office, for instance, now expects an official end to the recession by the second half of 2009—and that’s without the trillion-dollar stimulus.

Though consumer confidence and the economy go hand-in-hand, Matt Arnold, a food analyst at Edward Jones, argued that perception aside, not much has really changed.

“A few months ago, there was so much uncertainty in terms of how bad the economic picture could get…at one point, there was a lot of fear that the bottom could fall out,” he said. At the moment, the economic and financial factors that enable consumers to trade up are still “off the table,” Arnold said, but compared to a few months back, “there is a bit less of a rampant mind-set where the consumers’ wallets are completely shut.”  He added:“It’s gotten a lot better in terms of people trading down at all costs.”

Arnold, who also covers Costco and Wal-Mart, said that in reality, retailers’ private label sales are still soaring. (However, Wal-Mart’s first-quarter net sales were down 0.6 percent to $93.5 billion, the company said.) The nation’s largest big-box retailer is simultaneously expanding and reintroducing its Great Value line and just last week announced it was adding 22,000 jobs to coincide with new store openings. Granted, Costco and Wal-Mart aren’t “the entire industry, but they are decent proxies” of the current grocery and merchandise snapshot, Arnold said.

Perhaps the biggest surprise is how soon this relief actually came. “Two to four months ago, there was this concern that private label’s [threat] was going to keep going on and on,” said Christopher Growe of investment banking firm Stifel Nicolaus. The fact that private label lost some of its steam so quickly is actually “a good thing,” the analyst added.

Food analyst Alexia Howard, who covers Kraft, Campbell Soup Co. and Hershey’s at Sanford C. Bernstein, however, poses another theory: Private label’s uptick has no direct correlation with economic circumstances, though consumers may be more prone to trade down in times of financial duress. Instead, much of private label’s gains stem from “sticker shock” to rapid and sudden food price increases. And, with price growth slowing down, many economically stressed consumers are now returning to branded goods, Howard said.