ATLANTA — As consumers are reeling from the increased costs of food, supermarkets are responding with a greater variety of private-label goods.
Grocers have started to put more emphasis on the quality and branding of the products, which are also known as generics.
Publix, for example, has started advertising its store-brand products. And Kroger, which operates in Colorado as King Soopers and City Market, has boosted the number of products it makes under its own label.
The move toward value is paying off. Kroger’s first-quarter revenue rose 11.6 percent to $23.1 billion over the same quarter last year, and earnings rose 14.5 percent to $386 million.
The story, of course, starts in everyone’s wallet.
Ernst & Young found that food prices grew faster than the Consumer Price Index for the three months that ended in May. Food prices grew at 5.9 percent during that period, while the CPI grew 4.9 percent overall.
Chicago-based Patricia Novosel, global food leader for Ernst & Young, said one reason private labeling is helping consumers and grocers is that the quality is better than ever.
“We see good, better, best in quality driving an increased trend towards consumer acceptability,” said Novosel. “And generally, there’s more advertising around private label than we’ve seen before.”
Grocers also have higher profit margins on goods they produce, said Novosel.
Kroger had lowest prices
In a recent survey, two Morgan Stanley analysts tested pricing at grocery stores in six cities. They found that Kroger consistently had the lowest “everyday” prices compared with competitors, including Safeway, Costco, Sam’s Club, Wal-Mart and BJ’s. They conducted the survey in Baltimore, Chicago, Dallas, Denver, Los Angeles and Fairfield, Conn.
In the report to the investment bank’s clients, the analysts say they are seeing a “consumer trade-down” trend.
“As consumers are being pressured by both food inflation and higher gasoline and energy prices,” wrote Mark Wiltamuth and Joseph Parkhill, “we believe low prices are key to winning in this trade-down economy.”
They found Kroger’s everyday prices to be 10 percent to 12 percent below its peers in two of the three markets surveyed, and 5 percent to 7 percent below peers after including promotional prices.
Kroger’s private-label discount was 38 percent to 48 percent below national-brand prices. Other grocers’ private labels were 16 percent to 35 percent lower.
Its own facilities
One way Kroger controls the price of its private labels is by operating its own manufacturing facilities. The company owns 43 percent of the private labels it sells, versus 22 percent for Safeway, the analysts said.
“We have over 40 manufacturing or processing centers,” said Kroger spokesman Glynn Jenkins. “We manufacture dairy, cheese and bakery items.”
Kroger has several brands, including Private Selection, which makes food for more upscale tastes, such as “two-bite brownies” and caramel swirl ice cream.
It’s not like private label is new, but consumer acceptance is growing, said Bob Goldin, an executive vice president of Chicago-based food-industry research firm Technomnics.
What is new, he said, is that the quality is better.
With consumers so “pinched,” he said, they are turning to these cheaper but comparable products.
Said Goldin: “Consumer loyalty has tended to be towards the national brands, and lots of categories have had no success, like soft drinks and breakfast cereal.”
He said 15 percent to 18 percent of what supermarkets sell is from private labels.
