Private Label Rivalries Could Inflame Competition Between Wal-Mart, Kroger, Aldi

Is a private label price war in the making?

Perhaps, if Kroger lives up to suggestions that it will drop prices on private label groceries as commodity costs slide.

Not that everyone is predicting immediate intensification of private label price rivalries. Speaking at Reuters Food and Agriculture Summit this week, Andrea Thomas, Wal-Mart's senior vice president of private brands, discussed Wal-Mart's refurbished Great Value label. After months of work, Wal-Mart is reintroducing the label with a new look and 80 additional products in the line up. In an ensuing interview with Reuters, Thomas talked about the brand's fresh white labels, its enhanced graphics and the new nutritional information on its box. However, she wouldn't commit to lowering product prices in line with declining commodity costs. When asked about the possibility, she repeated the company line about looking to create savings throughout the distribution process and passing them on to the consumer then wended her way to the next topic. She certainly didn't tout price cuts as an accompaniment to the reintroduction.

In contrast, Kroger CEO David Dillon told analysts during the company's fourth quarter conference call last week that he foresees a widening gap between national brand and Kroger private label products as commodity costs decline. Dillon noted that national brand producers are generally holding the line on prices. As a result, Kroger has an opportunity to increase its private label price advantage. Cutting prices would be a pretty sure way to keep its private label, which has grown to about 27% of grocery sales, rolling along.

In pressing its advantage over national brand grocery producers, Kroger would naturally press into the price advantage Wal-Mart enjoys. Kroger generally pegs its prices to Wal-Mart, staying within a fixed percentage that its customers find an acceptable added cost for the additional services the supermarket provides. But Wal-Mart, as a rule, likes to match or better competitor prices. Kroger price encroachment could create some tension.

Consider further that Aldi -- which operates about 1,000 discount-oriented grocery stores under its own brand name across the U.S. -- is revisiting private label, looking to consolidate and bring the company's operation into line with successful own-brand programs in the United States. Aldi, too, has a price reputation to defend and, to get the most of its investment in private label refurbishment, would need to respond to cost cutting among major rivals such as Kroger and potentially Wal-Mart.

As private labels become more important to their businesses, retailers will become increasingly jealous of them, and that could lead to grimmer competition. A private label price war might not break out immediately, but the scenario bears watching as retailers squeeze each other in pursuit of scarce consumer dollars and of market share in the recession.