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Costco, Safeway Ensure Private Labels Won't Fade With Recession

Alberstons LLC announced this week that it was rolling out Safeway's O Organics line of natural foods, and the move demonstrates why private labels that have grown with the recession won't fade when it ends.

Retailer efforts to make store brands more attractive and integral to the way they approach the consumer ensure generous support for private label development will continue.

Still, as retailing has consolidated around large chains in recent years, mutual emulation of successful strategies has resulted in less variety of shopping environment and experience. Retailers recognize they need to stand out from their immediate competitors. Efforts to improve store brands preceded the recession as retailers such as Trader Joe's and Costco and Target made successful efforts to refine private labels they established as unique product choices in their stores. As they did so, they made private labels more attractive alternatives to the national brands that their competitors also carry.

In a recent conference call, Richard Galanti, Costco's CFO said that, when the company sees independent brand testing, its Kirkland Signature products consistently are competitive with any label when quality, value and price are weighed. Once, private labels were considered step-down merchandise that didn't really deserve the term brand, but that has changed. "I don't want to be so arrogant about it, but the Kirkland Signature has become a brand," he said.

According to The Nielsen Co. store brand dollar sales at food, drug and mass merchandise stores grew 10.2 percent last year compared to just 2.6 percent for national brands. Worse for national brand manufacturers, private label dollar sales gained 2.6 percent in units as their own unit sales fell by 2.2 percent. Those trends have continued into 2009, Todd Hale, Nielsen senior vice president for Shopper and Consumer Insight, noted. He added that private label versus national brand growth during 2008 was similar in pattern to what was observed during the 2001 recession, but, back then, retailers weren't making the kind of strides in packaging, quality, on-shelf presence and all-over brand building â€" a la Wal-Mart and its Great Value label â€" that we see today.

Retailers are becoming increasingly aggressive in building store brands. Safeway is among those companies that have been expanding private label initiatives to other retailers, but it isn't alone. For example, Wakefern, the cooperative that supplies ShopRite supermarkets in the New York Metropolitan area, has opened up its wholesaling services to non-competing retailers outside its own system in significant part to drive sales of its private label products.

Hale asserted that private labels will be better positioned for growth when the economy turns around than they were when previous recessions ended because of marketing efforts retailers are providing store brands. Another factor to consider is brand loyalty, Hale said, or, more precisely, its erosion. As fewer consumers express strong brand affinities, those who try private labels out of necessity or anxiety during the economic slump may add them permanently to their preferred set of brand choices.

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