Opportunities in Organic Private Label
By Ron Rash, Bob Johnson and Graham Mitchell
Value and Values…
One means getting the best quality for your money. The other is a reflection of your lifestyle and ethical beliefs.
Today, these two major trends are coming together like never before to set the stage for the dynamic growth of organic private label. With the current economy, consumers are pinching pennies, but that doesn’t mean they are willing to sacrifice quality. And despite the fact that the economy is weak, consumers’ health-conscious and ethical values are still strong. For these consumers, organic private label may be the answer.
Organic private label is also the slow-economy solution for many retailers and manufacturers as well. For retailers, organic gives their private label products a healthy/premium halo and allows them to take their store brand to the next level. For manufacturers, it offers a way to increase volume and sales without putting dollars toward brand marketing. All together organic private label is a win-win-win situation for everyone involved.
The Market for Premium Private Label
Consumers are spending more on private label today than ever. According to Private Label Manufacturers Assn.’s 2008 Private Label Yearbook, compiled with data provided by Nielsen research, sales of store-brand products across the major U.S. retailing channels increased by $5.4 billion last year to reach a new all-time high of $74.2 billion. Compared to five years ago, annual sales of private label products in supermarkets are up $5.8 billion, an increase of 13.3 percent.
While a large part of this recent dollar growth can be chalked up to rising raw material costs, the biggest reason there has been an increased draw to private label over the years has to do with the fact that store brands have undergone a complete makeover, including everything from their overall quality to their marketing approach. Gone are the days of no-name, generic products with sub-par ingredients—today, private label has gone premium.
“There was a time when consumers bought private label for price, and retailers grabbed excess capacity from vendors to fill the need. That paradigm has morphed into today’s high expectation environment, where the consumer expects and demands national brand quality or better, and at reasonable prices. They want value with a capital “V,” said Kim Greenfeld, a long-time product developer for Trader Joe’s East and currently the principal at Campo Verde Solutions. “Retailers are rapidly adapting to this important consumer trend, and are appreciating that high quality natural and organic private label fills that bill and enhances customer loyalty.”
Increasing demand from organic consumers. Organic consumers are noticing these efforts to create higher quality products and they want more. In the Hartman Group’s “Many Faces of Organic Report 2008,” a strong majority (71 percent) of organic consumers consider store brand organics to be of the same quality or better than national brands. Furthermore, interviews and surveys conducted with consumers by Organic Food International, a consulting group, revealed that most organic consumers are excited about the growing availability of store brand organics. In fact, 365 Organic, Trader Joe’s and Safeway O are among the most popular organic brands with surveyed consumers.
Increasing opportunities for manufacturers. Several organic companies have seen tremendous success with private label. Once Again Nut Butter saw their private label sales grow by 14 percent in the first six months of 2008, resulting in millions in revenue. “Accounts are growing because consumers are looking for the best value. I keep reading about how consumers are being driven to buy private label because of the economy and we are seeing the real-life results of that to be true,” said Lisa Blatz, director of sales and marketing.
But again, with organic and premium private label products, it’s not just about price. One of their greatest successes has been with their no-stir organic peanut butter, which proves that consumers are responding to innovative products.
Innovation has also been a key to success for Weetabix North America, the parent company of Barbara’s Bakery, which does organic private label as well as ingredient sales and co-packing for other branded companies. “Some retailers just want to match national brands, but others like the Safeway O brand, are not just looking for knockoffs anymore. They are a formidable brand and they are looking for innovation just like any branded product,” said Ken Spalding, director of sales and marketing.
Spalding said the company’s goal is to become a resource for private label, bringing together best practices for organic manufacturing, from sourcing to packaging. To do this, Barbara’s Bakery often hosts workshops with their retailers to brainstorm ideas and troubleshoot issues.
Many companies are also seeing interest in private label from other parts of the world. According to Karl Halpert, the owner of Private Label Select, a personal care private label manufacturer that works with companies like Estée Lauder, he is receiving a great deal of interest in his company’s services from Asia, particularly Korea, Japan and Hong Kong—and the Middle East as well, including Turkey, Israel and Dubai.
“We have picked up substantial Asian businesses from companies that want to make ‘Made in USA’ and ‘USDA Certified Organic’ claims for Asian markets. As a testament to our organic program here in the United States, USDA Certified Organic has tremendous cachet in Asia, and yet it still represents less than one percent of the market share. This has resulted inwhat we estimate to be a 200 percent increase our sales in 2008. We project similar growth for 2009.”
Other Factors Positioning Organic Private Label for Growth
Besides the value and values concept, private label has a few other market strengths that could lead to growth.
A name consumers know and trust. Although organic national brands are developing increasing awareness and have strong brand loyalty with core consumers, the fact is that many of the mainstream shoppers in supermarkets are much more familiar with the name of the store brand than the name of most organic brands.
Organic private label categories will succeed where there is no national brand presence and retailers can impress with high-quality consistent, convenient, premium food solutions. If the retail chain can demonstrate outstanding private label quality and consistency across the entire range, it can build trust in its brand.
The best retailers are becoming “the consumer’s buying agent” because they are closer to the customer and can anticipate their needs better than the competition. National brand manufacturers, who participate in private label for these retailers can be on the forefront of these trends and bring a category solution to the retailer, offer more innovation and supply-chain efficiency, and develop more inclusive relationships with the retailer, adding to the solutions which they ultimately present to consumers.
The price gap advantage. No matter how high the quality, consumers still expect private label to be at a noticeably lower price point that the national brands. In the over all category of private label, the prices have risen quite a bit this summer, but according to research from OFI, most organic private label products that have common distribution among competing retailers have kept a steady price. OFI conducts a monthly price survey of 22 organic private brand food products among five leading retailers. Price points are gathered from varying spots around the country, and all prices are converted to a common package size for direct comparison. Data collected between April and August 2008 indicates that with the exception of a few items such as milk and eggs, four out of five retailers maintained many of their price points for most items surveyed. Competition is the key factor here and OFI feels that consumers will take notice of those price opportunities.
Selling Against Ourselves—National Brands Versus Store Brand
The idea of creating a product that could, in some cases, sit right next to yours on the shelf, competing for market share with your brand, may seem a bit absurd, almost cannibalistic—but there are many branded companies that are very happy doing both. The fact is that any time there is a dynamic force coming in to play (in this case, rapidly rising prices) there are going to be brands and products positioned to take advantage of the situation. Most private label is priced on a net basis without any promotions or marketing funds, whereas larger organic national brands may have these marketing monies built in. These monies can be trimmed in recessionary times, often delaying or avoiding price increases and helping brands compete for market share. Private label is seeing the same cost of ingredients and freight as the brands, but have lower margins for the manufacturer (no built-in brand tax), and the result is price increases that can, at times, close the gap with the brands.
But neither national brands nor private label can build their future on price alone. For one thing, historically, consumers tend to be very cautious about trying new products even during an economic downturn. The reason is that at a lower price, there is a perceived risk of lower quality and performance. An example would be buying a house brand of coffee at $4.99 versus the consumer’s usual brand at $6.49. Is the $1.50 savings worth the risk if the consumer does not like the house brand and has to go back to buy the brand usually purchased?
Private labels can help bring awareness to organic and encourage consumers to try new types of products as well. Before Whole Foods brought in their 365 label, their cereal sales were flat; no one really went into the aisle.
Other companies see this potential as well. “Our feeling is that private label will expand and further legitimize the category,” said Matt Kiene, the co-owner of Homemade Baby, the only fresh, refrigerated, puréed organic baby food on the market. Their organic certified manufacturing facility is also gluten-free and kosher, which has been a plus with retailers.
Retailers can also help drive innovation. Because of requests brought to them by their private label partners, Homemade Baby is now manufacturing private label gourmet, puréed side dishes as well as their line of baby foods. “That’s the fun of working with other sets of minds; people who have been in the business for 15 to 30 years who can help accelerate our R&D,” Kiene said.
But what about protecting your own brand in all of this? Spalding of Barbara’s Bakery, says that this is not really and issue for their brand. “We try to stay away from products that are too similar to our branded products. If we have a proprietary process or ingredient, that is not generally something we share,” he said. “But innovation can mean a lot of things, and if your brand has a specific voice, then there are a lot of innovations that will not fit the
brand, but may fit your retail partner’s private label brand perfectly.
Lastly, having a partnership with a strong retailer can offer a more secure route of distribution when other branded companies are fighting for market share. Manzana Products, an apple processor, started off with branded products, but since all of their competitors had their own brands, Manzana decided to focus on private label as a competitive advantage. Since then, they have steered through hard times that have seen all eight competitors go out of business.
“Our competitors were focusing on their building their brands, doing the necessary advertising, attempting to get shelf space, etc. This placed them in competition with the store brands,” said Suzi Kaido, co-owner of Manzana. “Today, many consumers choose the store brand. When they find the store brand quality is excellent, why pay more? Sometimes the margins aren’t much with private label, but the volume can make up for that.”
Private Label 101
So what does it take to be a successful private label manufacturer? Here’s some advice.
Do your homework. Organic manufacturers who are thinking about getting into private label first need to understand the commitment of partnering with retailers and study the bottom line impact of that volumetric growth. Golfer Chi Chi Rodriquez once quipped, “It ain’t what you make, it’s what you take home that counts.” In business terms, this means take a hard look at your net numbers.
Brands have higher initial profit margins, without a doubt, but what does the net look like after deducting marketing, advertising and other promotional costs like slotting fees? After doing some calculations, some brands may find that their take home pay may not be much higher for their branded products than what they would pocket doing private label, which is primarily sold on a net/net basis. When the processor takes into account the incremental volume from private label, it is often a star performer.
Another key step in the research phase is to have conversations with your sales force and brokers to ensure that increasing SKU complexity can be managed by the operation. You will also want to attend some trade shows and events such as the Private Label Manufacturer’s Association (PLMA) show, Natural Products Expo and All Things Organic.
When courting partners, make sure to look for retailers that have strong merchandising strategies and are committed to their private label programs. Generally, these retailers will have good loyalty card research and promotion programs, launch plans and in-store execution programs to support a private label launch. Also, make sure that managers and buyers embrace the organic brand values and don’t dilute the brand message or focus too much on just short term goals.
Understand your needs. It is often important to do some planning ahead to figure out raw material availability, production bottlenecks and storage needs. Also, when approaching retailers, know the net margin that you are willing to accept for your work and what the competitive retail would be for the private label item. For food, the price point is usually 5 to 10 percent lower. For non-food, it can be 15 to 20 percent lower. Retail margins vary widely across different channels. Generally, club stores work on a 13 to 17 percent net margin, whereas supermarkets should operate around 22 to 25 percent or higher (natural channels operate on 33 percent or greater) and require calendar promotions to encourage trial and drive sales.
Know what is expected of you (and get help if you need it). The details about what retailers expect vary. Most supermarket retailers have upfront costs for formulation testing and packaging development for their private labels. Some may prefer to provide their own packaging, but generally they are interested in a complete product quote. Retailers may expect to get a better price if they assume responsibility for the labels. Some retailers also ask to have the store name as well as the private label brand on the product, which can add complexity, requiring you to deal with several separate labels.
In addition, retailers have lacked forecasting skills and need assistance to find the right product and promotional mix to drive sales. To solve this issue, some of the larger manufacturers will have a separate sales team manage their private label accounts. Other manufacturers use a broker to work with the retailer and help work out bumps if their product is not selling and ensure that the retailer is representing their product well and promoting it in advertising. Broker fees are usually about 3 percent.
Once Again Nut Butter works with Daymon Worldwide as their broker. Daymon, like other major brokers, will actually station one of their own employees in the retailers’ corporate offices to work as a liaison between the retailers and the manufacturers they represent. Because of this relationship, Blatz of Once Again Nut Butter said she is able to focus 75 percent of her time on branded sales, even though about 50 percent of the overall sales come from private label.
“They have really been the teacher,” she said. “I didn’t know anything when I started and they took us through everything step by step.”
Adapt to their system. Retailers will control the brand and product development process, but are juggling a lot of priorities and competitive issues, which can result in project delays. Generally new products take around 27 weeks to bring to market, with line extensions in existing retail brands taking 9 to 12 weeks.
One area that a new packer might need to invest in up front is an employee or consultant who can evaluate and understand legal requirements for labeling. Most branded folks have this anyway, but the volume of work might be heavier than anticipated. Private label retailers are notorious for piles of paperwork, so be prepared.
Make a commitment to quality and innovation. Avoid the temptation of thinking of private label as just way to fill down time. A commitment to the retailer to provide service and quality is absolutely necessary to be successful in organic private label. These days, private label vendors are held to a much higher standard than in the past, and the product must pass many cuttings, even consumer panels, before the account launches the product. Also, today most major retailers have extensive quality control resources in place for their private label contracts. This means that they often conduct plant audits, pull random products from shipments or from shelves for testing and demand more explanation from the packer on the source of ingredients, certification of suppliers, etc.
Monitor sales. While it is not your job to market the private label product, it is important to make sure to watch sales and be proactive with the retailer to ensure that your product gets into store ads and doesn’t get pushed to the bottom shelf. Product sales in main line aisles should be at least one case per store per week; any less, they are vulnerable to deletion with resulting label liabilities and business loss.
Future Opportunities for Organic Private Label
There are several opportunities for continued growth of organic private label. For one thing, Europe has proven that it is possible to gain a much higher market share. Tesco and Sainsbury in the UK, Albert Heijn and Delhaize in Benelux, and Carrefour and Auchan in France, all regularly report penetration rates for private label at 55 to 60 percent.
Also, U.S. retailers are continually evolving. In the United States, most supermarkets have opted to develop sub-brands. For example, Safeway’s O Organics and Ahold’s Nature’s Promise have become multimillion-dollar brands in their own right and helped to re-position the store banner competitively in their markets. And what of the recent success of organic private label in the mass and club channels? Club-channel organics is still dominated by national brands, but will this change in the future as programs like Costco’s Kirkland co-brands and Earth’s Pride at BJ’s begin to develop the same treasure hunt with organic and gourmet private label products? If the goal is to sell organic at the club store at the retail price of conventional national brands at the supermarket, club stores could gain a sizeable share of the wallet from both natural and supermarket chains.
Overall, no matter what retail venue you are talking about, as long as “value” and “values” remain important to consumers, the future looks very bright for organic private label.
Ron Rash is a partner at Organic Food International (OFI), a consulting firm that offers retailer and vendor services ranging from complete program development to brand positioning, and product development to sales and marketing services. He has helped pioneer private brand organic products in the conventional grocery channel and brings a wealth of manufacturing experience. Ron has held executive and senior positions in his career at Maxwell House/General Foods, Bake-Line/Keebler, Hain-Celestial, International Nutrition, Allied Old English and Wizard’s Cauldron. You can reach Ron at firstname.lastname@example.org.
Bob Johnson is the founder of OFI and was integral in transforming Trader Joe’s into today’s powerhouse retailer. He was also the co-founder of the Whole Foods Brand 365 label, and has consulted with some of the most successful natural and organic private label brands in the United States. You can reach Bob at email@example.com.
Graham Mitchell, the founder of Sustainable Innovations consulting (www.sustainableinnovations.com) works with retailers and national brands to expand sustainable and organic sourcing and manufacturing programs, and develop new brands and distribution. He led Stop & Shop’s and Giant’s development team for private label food and beverage programs as well as the Ahold’s Global Innovation Team. He was also responsible for the launch of “Simply Enjoy” gourmet and “Nature’s Promise” organic and natural private label products. You can reach Graham at firstname.lastname@example.org.