The Private Label Economy

Recent data is hinting at an improving US economy as jobless claims fell and producer prices rose.

Perhaps another economic barometer may come from the sales of private label products, which experienced a surge of growth during the down economy.

Born of The Great Recession and evidenced by consecutive years of declining per capita consumption was the “new frugality.” Has this become entrenched consumer behavior that is reshaping consumption patterns in ways that will persist even as the economy rebounds?

Maybe not. Credit Suisse Analyst Robert Moskov recently reported in the Wall Street Journal that private label product sales are slowing. Others disagree, stating that budget-conscious consumers have yet to see the economy improving and as a result are remaining committed to instore brands.

“The private label nutritional products market has experienced tremendous growth during the recession and this growth has increased and expanded (not declined as reported by Moskov et al.)

With the first signs of recovery,” said Kenn Israel vice president of marketing with Robinson Pharma (Santa Ana, CA).

“Just as many citizens who lived through the Great Depression adopted more frugal (read sensible) spending habits in the post- Depression 40s, 50s, 60s and 70s, there is a strong indication that consumer habits may have permanently changed,” Israel continued. “The recessions of the 70s and 80s saw a spike in private label, but the product quality was not optimal and, in many cases, poor, and sales of house brands and generic products fell sharply with the returns to prosperity. The boom years of the 90s and early 00s dominated by the ‘house as an ATM’ and ‘Wall Street equals casino’ mentality facilitated some less thanThoughtful spending—including some overpriced and over-marketed dietary supplements. Now, the private label dietary supplement products are of superior quality in many cases to the second-tier brands and private label products are, in some cases, providing leadership in product technology and ingredient introductions.” A new sophistication in privately labeled products leaves some consumers unaware, said Greg Prang, consultant with The Hartman Group (Bellevue, WA). “Consumers are still adapting to newly emerging store brand natural and organic products,” he noted. “For consumers, the line between private label and national brands is often blurred, notably in natural/ organics. For example in our recent study, Private Label 2010: Redefining the Meaning of Brand, 42 percent of consumers selected Archer Farms by Target as a national, name brand as opposed to a private label brand (this is even more strongly true of store brand names like Nature’s Promise and Nature’s Place, which are also mistaken as national brands). Overall for consumers, private label seems like just another choice among many brands: They are largely unaware of industry brand distinctions and perceive brands as ‘short cuts’ that help them acquire what they want and need.” At least with supplements, Israel noted, the key takeaway from private label growth is that the customer has been trained to appreciate value as defined by a scientifically valid product, properly manufactured using top quality ingredients, sold at a very competitive price. “While there are clearly more innovative and edgy products out there, the core commodity items that provide the foundations to our every day supplement regiments can be best provided in private label products. Examples are ingredients like omega-3, CoQ10, vitamin C, calcium, vitamin D, glucosamine and chondroitin, and multivitamins.”

The Customers

Manufacturers of private label goods are seeing sales from a range of customers and in all channels.

Peter Sokoloski, private label manager with NOW Foods (Bloomingdale IL), which has seen double-digit growth annually in private label for the past five years, said NOW’s customers are retailers in the health food channel. “We’ve noticed a trend away from brick-andmortar stores moving to more internetbased e-tailers. The consumers for private label are the same as those of national branded SKUs; they’re looking for anti-aging support and immune system function products especially.” At Nulab Inc. (Clearwater, FL), the customer base consists of two main areas: the direct response industry andNatural health professionals. “We have experienced a slow growth of about 30 percent for our company in these areas,” said CEO Hakan Johansson.

“The customer of private label is the mainstream of America and beyond,” added Israel. “Walmart, Costco, Walgreens, Rite Aid and Target all sell massive amounts of private label nutritional products. This is a growing customer base. Many people were forced to abandon their weekly trip to Whole Foods (cursing them as Whole Paycheck) and were delighted to find that they could buy organic foods, specialty foods, premium gourmet products and top-quality dietary supplements outside of the specialty channel. Even dominant natural products players like Whole Foods, Vitamin Shoppe and Swanson sell private label over the branded products they carry.” The Hartman Group’s Prang said his reports confirm that private label consumers are varied and that the economy spurred more purchases of store brands. “We see shoppers of all types purchasing store brands in a broad range of channels. Based on our recent study, we see that 43 percent of consumers say that the current economy has led them to buy private label and the majority do not intend to switch back once the economy improves. Of those 42 percent, only 14 percent say ‘I intend to reduce my purchases of store brands once the economy improves.’”

The Store Brand Experience

Retail is becoming a place of discovery rather than a place to simply fulfill household requirements, Prang explained. Increasingly, retailers act as a partner for consumers when it comes to providing product information, making quality distinctions and cultivating dietary supplement, food and lifestyle knowledge.

“The private label halo [positive brand image] is created and proven in the retail experience: store brand halo is based on relational and experiential attributes,” Prang said. “For shoppers, the store experience and store brand halo is formed by evaluations of the people who work in the stores as well as the product offerings. In supplements this means that ‘core’ health and wellness consumers (e.g., those most active in health and wellness lifestyles) seek out retail settings, which they view as stocking authentic, high-quality dietary supplements. Frequently there is strong interplay between the retail halo and a belief by core health and wellness shoppers that ‘the store’ is monitoring purity and efficacy in its supplements.

For more mainstream consumers who are still developing opinions and knowledge about dietary supplements (what we call ‘mid-level’ health and wellness consumers), mass market retailers (drugstores, discount and grocery stores) are looked to for providing high-quality supplements, but not necessarily with the same stringent views on purity and sourcing as made by core health and wellness consumers, who look to channels like specialty vitamin stores and specialty health food stores.”

Packaging Considerations

Private label packaging is maturing in the use of clean and contemporary designs, while store brand marketing is increasing in sophistication, Prang noted. Along diverse packaged goods continuums, green packaging is seen as a benefit and cue to quality by the most active health and wellness shoppers.

However, manufacturers say they are only just beginning to see requests for it.

“Some retailers are looking for ‘greener’ packaging, but this is usually when their customers are asking for it,” said Sokoloski. “The most common but relatively recent requests are for bottles and lids that are BPA-free. The only other packaging requests are for different color bottles or lids, but this isn’t anything new.” At Nulab, Johansson said the company has seen more requests for singleserving packets that people can carry around with them. “Yes, there have been more requests for recyclable plastic jars, bottles, etc., but there have not been many.” However, a precedent may have been set since Walmart is demanding green action from all of its vendors. “Walmart has established a rational and fair system that demands constant improvement and innovation from vendors, and forces competition against very tough and objective metrics,” Israel pointed out. “Their system has vendors competing against each other, and themselves.

Their model delivers your sustainability score to the customer and allows them to vote—with their dollars—for the companies most effective at delivering the best product, at the best price, with the most sustainable model and lowest carbon footprint.

Quality and Effectiveness

For manufacturers, the challenges are always to come up with effective formulations that have strong consumer benefits.

“We have been putting attention on products that apply particularly in the weight-loss field,” said Johansson.

“We have been doing full clinical trials for safety and effectiveness in order to offer high-quality products to our consumers.

Quality control is also something we put a lot of attention on in addition to expanding our capacity to deliver, along with concentrating on implementing the new FDA regulations for our industry. By doing so we have definitely made much advancement and improvement of our ability to create and produce high-quality products for our customers.” Israel agreed with the notion of creativity, noting that private label has shifted from the last stop on the value chain for products to a place where real innovation happens. “It used to be true that all you had to do to win in the private label game was copy the most popular product and make it cheap.

This is no longer true. Private label is now where the world’s most successful retailers compete for customer loyalty.” Ultimately, the retailer and, in turn, their customers, want to be seen as smart, value driven, premium quality, innovative, sustainable, compassionate and ethical. This translates into the need to deliver all of these values in each product. It is a brutally competitive market where the vendor needs to deliver the total package.

“Quality is the singular dividing line,” Israel added. “When a retailer puts their name on the product they are risking their entire brand—a mistake can have massive implications to their business, the product must be correct. After quality, ability to deliver enough product, on time and to the right location is critical— the best price won’t help you if you are out of stock.” Choose a company with the ability and infrastructure to produce a highquality product in a timely manner for a reasonable price, Johansson added.

The company must follow all GMPs in its manufacturing process and put a lot of attention on good quality control. It should also have implemented the FDA regulations for the industry.

Ultimately, when choosing a private label partner, the most important criteria should be a focus on quality, both in the manufacturing and overall finished item production, said Sokoloski. “You want to know that when you’re putting your company name on a vitamin line it’s something that you can stand behind with confidence. There is a much greater focus on quality and regulations than ever before, so it’s more important than ever to have a manufacturer that has the experience and know-how to do the proper testing, production, packaging and label set up.”