Seeking profits in private labels
You may not think much about store brands as you shop for groceries, but it’s a business worth nearly $60 billion per year. ConAgra, a company based in Omaha, Neb., made a splash recently in what the industry calls private label food when it paid $6.8 billion to buy Ralcorp, based in St. Louis, Mo. The merger created the biggest private label food company in the country.
Every major grocer has its own private label brand. Walmart has Great Value. Kroger stores sell Private Selection. Costco has Kirkland. Almost everything at Trader Joe’s seems to carry the store's name.
Behind those labels are companies you’ve probably never heard of, like Ralcorp or Treehouse Foods. John Stanton, a food marketing professor at St. Joseph’s University in Philadelphia, Penn., recently visited the Private Label Manufacturer’s Association conference. He said private label is sort of an anonymous industry.
“There were 150 companies there," Stanton said. "I doubt you’ve heard the name of one of them."
Now ConAgra, a company known for national brands like Hunt’s and Healthy Choice, is the nation’s largest private label food company. Stanton said there is a reason a company with national brands would want to make a big push into private label.
“Private label sales, for at least the last five years, have been increasing," Stanton said. “And it’s been accelerated by the recession.”
Supermarkets sold $59 billion worth of private label food last year. That’s 19 percent of food sales and an increase of about 20 percent since 2007.
Michael Liss, a portfolio manager with American Century Investments in Kansas City, Mo., said that growth happened while ConAgra’s brands like Orville Redenbacher popcorn and Snack Pack pudding were stuck in neutral.
“They give (ConAgra) high returns and they have really good market shares in a whole bunch of categories, but they’re just not growing,” Liss said.
So the Ralcorp merger puts ConAgra at the front of a growing industry and among the biggest food companies in the country, rubbing elbows with the likes of General Mills and Dean Foods.
But Mary Hendrickson, who studies food industry consolidation at the University of Missouri, said Walmart may also be on ConAgra’s mind.
“You’ve seen Walmart move up from selling no groceries in the 1980s to somewhere between 28 and 32 percent of the grocery market today,” Hendrickson said. “That’s very significant.”
According to the trade magazine Progressive Grocer, Walmart sold $118.7 billion in groceries in 2011. Kroger, Walmart’s closest competitor, sold just over half that with $61.1 billion.
Following Walmart’s emergence, other chains began buying up competitors. Concentration has occurred faster in the grocery industry than any other part of the food system. Hendrickson said the top four grocery chains (Walmart, Kroger, Safeway, and Supervalu) control close to 50 percent of the market.
As they have grown, they have flipped the way food processors and food retailers compete.
In the past, Hendrickson said companies like ConAgra used the strength of their national brands as leverage with grocery stores.
“They’ve spent a lot of money making sure people want those brands,” Hendrickson said. “You go into a grocery store that doesn’t have those particular brands and you might say, ‘I don’t want to shop here anymore.’”
But as grocery chains control more shelf space and grow their private label brands, they gain more clout.
“People come in and say I’d like to sell you my cereal and the retailer says well let me tell you how much we’re going to pay for it,” said food marketing expert John Stanton. “They say that’s too little. And they say, go sell it to someone else then.”
Of course, that’s what a company like Walmart is good at. Keeping costs down is what keeps prices low for consumers. But the savings have to come from somewhere and the ripple effects can reach all the way back to the farm.
“The private labels are going to try and squeeze farmers because they need to come into a lower price and the branded people are going to squeeze farmers because private labels are coming in at a lower price,” Stanton said.
It’s an example of how competition has evolved in the food industry.
“It could have been Kroger that did this rather than Walmart,” said Mary Hendrickson of the University of Missouri. “It just happens to be Walmart. Their business model was really focused on squeezing out a lot of costs in the supply chain.”
For companies like ConAgra it means looking for new ways to keep up, like private label foods. As investment manager Michael Liss said, “They’re running hard to stay in place.”