Fight Fire With Fire

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Sales of private-label products continue to outpace those of branded items, and some of this growth can be attributed to grocery wholesalers who offer their own private-label lines. These brands give the wholesalers' supermarket customers a competitive advantage against the likes of Wal-Mart and other retailers that are targeting cost-conscious consumers.

Private-label brands also allow the retailers to reach niche markets, like ethnic and organic, which are often underserved by consumer packaged goods manufacturers. Retailers can respond to their customers’ taste preferences and purchasing patterns at the local level with private-label programs specifically developed for those regions.

In this month’s cover story “Private Label Resurgence” [page 20], we look at grocery wholesalers who are turning their private- label business into profit centers. For them, the most compelling reason to get into the private-label business is financial—private- label brands offer substantially higher margins than national brands since they are less costly to produce. But they are also seizing the opportunity to offer quality, low-cost product alternatives that will keep consumers from shopping elsewhere.

A recent study, “The Impact of Wal-Mart Supercenters on a Traditional Supermarket,” highlights why a strong private-label program can make or break a supermarket. Researchers from the Tepper School of Business at Carnegie Mellon University analyzed customer behavior at a suburban supermarket on the East Coast for 20 months, before and after a Wal-Mart supercenter moved two miles away.

Not surprisingly, when Wal-Mart opened, the local supermarket lost more than 17 percent of share volume, representing a $250,000 monthly decline in revenue. According to the study, 70 percent of the lost revenue was attributed to only 20 percent of the store’s customers. By analyzing purchase behavior of customers who switched to WalMart, the study determined that typical defectors were:

• “Large basket” consumers with an infant and pet in the family;
• Those who tended to shop more on weekends;
• Those who frequently bought low-priced store brands rather than higher-priced national brands.

Private label offers a great opportunity to keep those big spenders from shopping at Wal-Mart—after all, those are the customers you need to keep. The study found that customers who were less likely to make the switch to Wal-Mart tended to spend a large proportion of grocery expenses on fresh produce, seafood and home meal replacement items such as salad bars or ready-to-eat food selections. So they’re buying high-price, low-margin products, but certainly not spending anywhere near as much as price-sensitive shoppers. That’s food for thought.