Kroger muscles up store brands

Lisa Biank Fasig
Cincinnati Business Courier

In the retail industry, some of the biggest battles for shoppers are not occurring between supermarkets and mass merchandisers. They're taking place across the grocery aisle.

In few places is it as evident as at Kroger. Over the past several months, the 2,500-store chain has quietly been pulling its Kroger-branded fabric softeners, dishwashing liquids and other household products and replacing them with a more upscale, stylish-looking brand.

No, it isn't Mr. Clean or Lysol or Method. It is another in-house label, Everyday Living, and in a matter of months the line could approach as many as 2,000 of the more than 8,000 private-label goods Kroger produces.

The switch itself might be considered a minor undertaking, but the motivation is not. Every day, Kroger fights for consumers within its stores, on its own shelves. And increasingly, it is winning.

"Retailers are feeling a tremendous amount of power today because they are the ones in the driver's seat," said Brian Sharoff, president of the Private Label Manufacturers Association. "Twenty, 30 years ago, retailers were playing second fiddle to national brands promoted on TV. The balance is now changed and the pendulum has now swung to the retailers."

This is largely the result of the consolidation of the grocery industry, once populated by scores of regional chains but now dominated by a handful of national mega-merchants. Private-label brands, once known as no-frills, might have been introduced to distinguish retailers from their rivals, but now they're proving effective in competing against national brands. In turn, they've become more stylish, with selling points other than their low price.

These days, private labels make up about 15 percent of all product sales -- $51.6 billion in 2005, according to ACNielsen (that figure does not include Wal-Mart). That's up from $47.4 billion in 2001.

But at Kroger, private labels comprise roughly 24 percent of its $56.4 billion in grocery sales, and more than 31 percent of the items it sells. And while Kroger has yet to go full-force into the heavy-duty household items, such as laundry detergent, the advancement of Everyday Living could be an indication that Kroger will go head-to-head with mid-tier manufacturing brands, such as Joy.

"Kroger is making a superb strategic decision to move to the Everyday Living category because the brand has much more cachet," said Burt Flickinger III, managing director of Strategic Resource Group, a New York-based retail consultant. "The path to higher consumer satisfaction and profitability is through a bigger and better portfolio of private brands."

The curious factor in all this competition is that Kroger and its vendors happily use each other's resources. While 55 percent of Kroger's private-label goods are made at one of its 42 factories, many of its products, including its household cleaners, are made in plants owned by its vendors. Likewise, its suppliers have been known to enter into deals where Kroger will make specialty products for them and get exclusive distribution.

Kroger agreed that shelf space is at a premium. "We are always taking a hard look at our brand lineups and discontinuing those items that aren't moving," spokesman Gary Rhodes said in an e-mail. And he said Kroger's private brands are performing "very well" against manufacturers' brands, "as evidenced by the continued growth of our corporate brand shares."

Where does this leave companies such as Procter & Gamble? Company spokesman Terry Loftus said there is a place for both private labels and branded products. He said Procter competes by offering "price plus performance," as well as innovation, which is key in categories such as laundry soaps, experts said.

Image, they say, also is key. Goods hidden away in a pantry are more likely to be private label than those served to company.

"The more status-conscious a brand is in a category, the less likely private label works," said Charles Cerankosky, an analyst covering Kroger for KeyBanc Capital Markets. "They're much more likely to buy private-label aspirin than toothpaste. They're much more likely to buy private-label milk than serve private-label liquor."

But maybe not for long. Albertsons Inc., one of Kroger's biggest rivals, has won industry awards for its store-brand cognac, called Origine. Target's Archer Farms label easily looks like a small-farm alternative to Kellogg's or Stouffers.

And 13 of Kroger's Private Selection products, its top-shelf private-label, have earned the Good Housekeeping Seal of approval, a significant selling point.

"If the retailers are mega-retailers and they have power, then private label will be along for the ride," said Sharoff, with the Private Label Manufacturers Association. "The brands are a reflection of their power in the marketplace."