Where’s the value add?

A recent article in the November 28, 2011 issue of Business Week, “Even Better Than the Real Thing,” focused on the rise of private label sales in retail grocery during this downturn, and the increased focus these house brands are receiving from their companies. Private label or so-called house brands usually show a sales rise in a downturn. However, this time it may be different.

Major retailers, including Safeway and Kroger, are hiring product and brand managers to grow these product lines. The article notes that a 1% shift from national brand to house brand translates into $5.5B in increased revenue for the retailer.

The primary value to the consumer of the private brand has previously been adequate quality at a lower price point. “Adequate” being a relative term. More house brands are finding ways to offer “quality” at least equal to the national brand at a lower price point. (The title of the article says it all.) McKinsey notes that 75% of consumers who “traded down” to private label during the recession have no plans to switch back when conditions improve.

That’s because they actual did not trade down as McKinsey suggests. Consumers have found that in many cases the national brand does not offer added value, only added costs. The difference in price between private brands and national brands may narrow however, as the retailers add costs (brand and product managers and their needs) to the mix. If the house brand vs. national brand price gap narrows from the 20% or so that it has historically been, this will increase the need for the retailers to make sure they are “keeping up with the Jones” if they want to maintain or increase their market share.

Mitch