Private-label merchandise fills store aisles, boosts profits and image

Where’s a good place to look for the latest shopping trends? Try the grocery store, right next to the French’s yellow mustard. That’s where you’ll find a growing number of private-label mustards, like Target’s own Archer Farms brand of Brown Sugar and Pecan. Fancy stuff, eh?

Grocery stores and a wide variety of other retailers are increasing their mix of private-label merchandise to lure consumers with unique and perhaps more affordable products, to improve their bottom line and to strengthen their own store’s cache, according to recent studies.

“Retailers continue to use private label merchandise to highlight their ‘value message’ and also support gross margin improvements,” concluded Retail Systems Research (www.retailsystemsresearch.com) in a study released in May. The study included data from large and small retailers in a wide variety of markets, including “fast-moving consumer goods,” such as food items, plus general merchandise and apparel, and hardware goods.

The RSR study showed that since 2008, large retailers as well as mid-sized and smaller retailers, have continued to add more private-label items to their overall mix.

Here are some key findings of the research:

>> In 2010, 11 percent of larger retailers (those with more than $1 billion in revenue) who responded to the RSR survey said that 50 percent to 75 percent of their merchandise was private label. That’s up slightly from 2008, when 10 percent of larger retailers said private label was 50 percent to 75 percent of their mix.

>> From 2008 to 2010, there was a 3-percent increase in the number of large retailers who said that private-label items make up more than 75 percent of their merchandise.

>> About half of smaller retailers (those with less than $1 billion in revenue) have kept a steady mix of private-label and national brand merchandise. Of the smaller retailers, 44 percent said their percentage of private-label items has stayed the same, while 35 percent said they increased their private-label offering by 10 percent. Also, 30 percent of smaller retailers increased their private-label offering by 10 percent to 25 percent. Only 5 percent of smaller retailers increased their private label offering by 25 percent to 50 percent.

RSR is not the only research firm that concludes private-label sales are rising. According to a study from the Nielsen Co. (www.nielsen.com) released in March, U.S. retailers said that private-label items grew to a 17.3 percent share of dollars and a 21.9 percent share of units at the end of March. That’s up from a 15.2 percent share of dollars and 20 percent share of units in 2007.

Look around the outdoor, sporting goods and fitness markets, and you’ll also find companies looking to profit more from private-label products.

Dick’s Sporting Goods (www.dickssportinggoods.com) has increased its private-label offering to represent about 15 percent of its sales, and this has been key to the company’s success, according to an April 17, 2010, report from Fortune titled, “Retail’s rising star.” Dick’s has licensed the adidas brand and “produced a line of adidas baseball bats and gloves that didn’t exist before,” the report stated. Dick’s also licensed a line of Livestrong-branded fitness equipment from Johnson Health Tech in 2009. (Click here to see an Oct. 26, 2009, SNEWS story.) Dick’s also makes products and sells them under the brands Maxfli, Slazenger and Field & Stream.

In the outdoor market, REI (www.rei.com) is known for its wide selection of store-branded gear, and it has seen a gradual rise in sales of private-label merchandise, which includes tents, sleeping bags, packs and apparel.

“REI-branded gear and apparel and Novara private-label sales have been in line with our expectations. We are seeing continued growth in the single digits,” said Kelly Kraus, director of sales and marketing for the REI gear and apparel category. “In the last few years, REI-branded products have represented approximately 20 percent of REI’s overall sales.”

She added, “While anecdotal, we believe our members and customers come into our stores seeking REI and Novara-branded products.”

Other outdoor retailers who have carried extensive collections of private-label products include Eastern Mountain Sports and Adventure 16, although Adventure 16 president John Mead said the store shut down its private-label gear manufacturing in 1994 due to low margins and the fact that its brand image was eroded by having its name on lower-priced items. Mead said that private-label manufacturing is still a challenge for smaller specialty retailers.

Dealers in the fitness industry, also mostly smaller, normally rely on known brands, also because of cost and logistics. But some may soon be able to stock their showrooms with their own store-branded ellipticals, treadmills and bikes from Hansen Technologies. As SNEWS® reported in April 2010, Hansen Fitness has launched its line of Hansen-branded, patent-pending fitness equipment, and by the fourth quarter of this year, other retailers will be able to sell the equipment as a private label of their own, even with personally requested specifications to suit their own customers’ needs. Others with a successful private label include Workout World in Australia with its brand, Avanti Fitness, in its 35 stores.

Price just part of the equation

Brian Kilcourse, managing partner at RSR, said consumers are choosing private-label items because they are “more demanding about value.” Due to the recession, shoppers have less to spend, and are seeking things that are good quality, meet their lifestyle needs and are also affordable. Kilcourse said that price is an important part of the mix. “Many things go into value, including price,” he said. “When they don’t have a lot of money, price becomes more relevant.”

Retailers are able to put lower price tags on private-label items because they don’t have to invest the marketing and advertising required of national brands. Kilcourse said private-label products also allow retailers to improve their margins.

But price and margin are not the only driving factors. Many retailers have turned to private-label merchandise to raise the profile of their store brands. “Grocery stores like Kroger and Safeway are changing from private label being a margin play to being a brand play,” said Kilcourse. He said grocers are no longer just trying to serve consumers basic needs and deliver food at the lowest price, but trying to offer unique, private-label items to enhance the store brand (think of the Brown Sugar and Pecan mustard). Kilcourse pointed out that department stores and other apparel retailers are upping their private-label offering for the same reason.

“Private label is no longer just a price play,” said Kilcourse. “Retailers understand that ultimately the brand they are trying to protect is the name of their company. Private label is an integral and increasingly important part of that brand message. Retailers want their brand to be more compelling to the consumer.”

From fancy mustard to ellipticals to tents, retailers are spicing things up with their private-label concoctions.

–Marcus Woolf