95-Price Leader Expansion Under Standard Leader Umbrella

If you offer quality products (Function) with a premium brand name (Reliability), you should expect to maintain a premium price and significant market share advantage against companies offering products of lower quality at a lower price. Function and Reliability trump low Price on the Customer Buying Hierarchy. Nevertheless, if these lower-priced companies enjoy industry pricing high enough to improve their products, you should expect that the market share and Price gaps should decline. Here is an example of how this happens.

Posted 4/9/09

Over the last year, private label sales of food and other grocery products in the U.S. have grown at over 10% per annum. These private label products are examples of Price Leaders, companies and products who offer performance less than that of the larger, industry-leading, Standard Leaders for a price substantially less than Standard Leaders.

Standard Leaders are the companies and the products that are most common in an industry. Standard Leader products make up the majority of the industry’s sales. A Camry and an Accord would be Standard Leader products. The Yaris and the Fit are Price Leader products.

Private label products rely in the brand name of the retailer to establish Reliability, while offering the consumer Function benefits that are roughly equivalent to the Standard Leader product. Sometimes industry Standard Leaders will produce private label products which are unrelated to their major branded products. More often, though, private label products are produced by private label company specialists, such as Ralcorp and Cott. The majority of these private label food producers are mid-sized private companies. Most are unknown by the average consumer. They include companies such as Schwann’s, Land O’Lakes, Specialty Foods, Sturm Foods and Pan-O-Gold.

In the food business, private label products can put significant pressure on the industry’s Standard Leaders. That is happening today. While private label products have grown 10% in the last year, many of the branded food companies are growing well below that or are shrinking in their sales. ConAgra Foods saw a sales increase due to price increases, but sales volume actually fell. Kraft Foods, General Mills and H.J. Heinz also saw declines in sales volumes.

The reason for the disparities in growth rates between private label products and branded foods is pricing. Last year the branded food companies had a unique opportunity to raise prices dramatically, on the order of 10%, due to the rising commodity prices at the time. However, these commodity prices have since come down and the branded food companies have continued to maintain, or even raise prices. With the fall-off in the economy, and these price umbrellas set by the branded food companies, private labels have jumped in popularity. This is a form of the Leader’s Trap. We just placed many examples of the Leader’s Trap on our StrategyStreet web site (see the perspective The Leader’s Trap and also the Symptom and Implication, “Leaders Stress Quality to Offset Competitors’ Lower Prices” on StrategyStreet.com).

The problem that private labels are creating for the branded food companies is one of improving Functions and Reliability. The increased volume that the branded food companies are allowing private label products enables these Price Leader companies to improve their products, reducing or erasing the Function and Reliability (quality) differences their products have compared to the branded products. The private label products then become permanently stronger.

This is a serious challenge. J.D. Power & Associates recently reported that consumer perceptions of private label grocery brands have shifted to the positive. Many consumers no longer consider them to be low quality with bland packaging. These consumers look at private label brands as unique and having quality that equals that of traditional brands. The traditional branded companies are setting up powerful competitors who will always maintain a price advantage over them.

These private label store brands are unlikely to lose all the market share they have gained over the past year, once the industry Standard Leaders reduce their prices, as they inevitably will.

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Update 2022:

HERE are several examples of a Leader’s Trap in other industries.  In some industries, especially those with high marketing costs, there is a danger for the industry leaders to fall into this pricing trap and then have to work their way out of it in a cyclical pattern.

In 2020, private label products were solidly established in the US market. They accounted for 23.4% of the units sold and 19.5% of the dollar value of retail sales of consumer package goods. This implies an average private label discount to the national brands of about 20%.

Backing up the strength of private label products is their reputation. A solid majority of US consumers view private label products has having quality equivalent to that of the national brands. An even larger majority believe private label variety is as good as that of national brands. By 2020, 80% of consumers continued to purchase some private label products.

Branded consumer package goods products have very high sales general and administrative expenses as a percentage of sales. Over time, branded consumer package goods producers have a tendency to use a rise in prices over that needed to cover increased costs to produce more profits. Eventually, Price Leader competitors exploit this price umbrella to gain market share. This is a cyclical pattern where eventually the branded product producers will have to reduce price significantly to stop share erosion to these low-end competitors. See HERE for questions a company seeking a price change in an industry may consider.

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Update 6/26

The private label food business continues to thrive. In 2009, we listed several significant private label manufacturers. One of those, Cott, sold its private label carbonated soda business in 2018. Schwan’s and Sturm Foods were acquired by other food companies and continue to operate in the private label market. The others continue as successful and expanding independent private label competitors. They operate in close coordination with their retailers and avoid the major costs of marketing their products.  Private‑label manufacturers run lean, high‑volume, low‑overhead operations. Pricing in the market has allowed private label food manufacturers to earn decent returns and grow.

There have been four cycles like we described above, where branded food manufacturers overshot their price increases in response to inflationary pressures and set an umbrella over private label manufacturers.  In each case, the branded manufacturers made themselves weaker and strengthened their private label competitors. We will review each of these cycles.

The first cycle occurred during the great recession. It started at the end of 2007 and lasted until the middle of 2010. Commodity costs spiked. In response, the branded manufacturers pushed through substantial list price increases and shrank pack sizes. Consumers then traded down from mid-tier brands to retailer brands in staples. Retailers used the private label products to anchor their low price points and protect margins. Private labels had roughly 16% of the dollar market in 2007 and finished with roughly 19% by 2010. Normally, you would not expect to see a Price Leader set of competitors owning more than 15% of the total market.  This was not normal.

The second cycle occurred after the recession, from roughly mid-2011 until the end of 2013. Again, branded producers faced another round of commodity inflation. The branded food manufacturers raised prices and argued that they had better ingredients and more healthy offerings to justify their high prices. Price sensitive consumers stayed with the private label products instead of re-trading up to the branded products. Retailers expanded their private label offerings into more categories, presenting more challenges to branded products.

The third cycle resulted from tariffs, input inflation and the branded industry’s emphasis on premium products. The branded producers raised prices above the rate of the CPI. Retailers responded with their own premium private label products. As the branded products moved up in price, they left a gap at the mid-price level that private labels filled with their products, now widely viewed as having acceptable quality. Premium private label products captured shoppers who wanted better ingredients but refused to pay the higher branded prices.

The fourth and final cycle occurred from 2021 to 2023 with the inflationary aftershock of Covid. The supply shocks, energy cost jumps and commodity spikes created the sharpest food inflation in decades. Branded food manufacturers took multiple rounds of price increases to defend margins. Retailers aggressively promoted private labels as inflation fighters. This cycle saw middle income households shifting to private labels in several product categories. Retailers found that repeat private label purchase rates were high in many categories. The consumer embrace of private labels broadened.  By the end of this cycle, private labels had over 21% of dollar volume.

So, over four cycles and 19 years, private label market share grew from 16% to 21%, much of that permanently attached to private labels. Of course, these numbers are rough. They also vary by category and in a few other dimensions. But directionally, they make a compelling case that branded manufacturers and their price umbrellas have sustained and grown the private label industry. Price increases beyond true cost increases have become an addictive drug in the food industry. This is an addiction that the branded companies must overcome.

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