91-Price Leader Expansion Under Standard Leader Umbrella
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, Sterm 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.
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.
THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile. We put their facts into frameworks applicable to all industries and found patterns. Strategystreet.com describes the inductive results of these thousands of observations and their patterns.