Nielsen: Higher Unit Prices, Not Volume, Behind Rapid Growth of U.S. Private Label Sales

Research Unveiled at Nielsen’s Consumer 360 Conference Shows Dramatic Growth Due to Rising Commodity Prices, Volume Sales Flat
Phoenix, June 2008- While private label products, traditionally considered an affordable alternative to national brands, are showing rapid growth, a new analysis from The Nielsen Company shows that the growth is driven by rising commodity and food prices, not a result of consumers abandoning national brands. The analysis was presented today at Nielsen’s Consumer 360 Conference, the consumer packaged goods (CPG) industry’s premier educational and networking event, attended by more than 1,000 industry professionals.

Over the last year, private label sales of CPG products have grown nearly nine percent to $50 billion in supermarket sales, or a 17.5 percent share of supermarket dollar sales. In supermarket, mass merchandise and drug stores combined, private label sales are up 9.1 percent to $77 billion in sales, or a 15.9 percent share of stores’ dollar sales. Nielsen’s research finds, however, that while dollar sales of private label products are up, unit sales are down slightly, indicating that higher unit pricing is the main driver of growth. (Please see table on Dollar and Unit change in Full PDF Download version of PDF).

“When private label dollar share started to spike, it appeared that shoppers were shifting to store brands in order to save money,” said Tom Pirovano, director of Industry Insights,The Nielsen Company. “That’s always been the conventional wisdom during economic downturns. Digging beyond the numbers, however, it’s clear that private label unit share is essentially flat. Higher prices in commodity categories like eggs, milk and cheese are driving private label dollars, not consumers deserting traditional brands.”

There a number of reasons behind higher prices at the store. The high price of gas makes it more expensive to ship products from the manufacturer to the retailer. Interest in developing ethanol as an alternative fuel for cars increases the demand and price for corn. Higher corn prices mean livestock feed is on the increase, and food items made with corn and corn by-products, such as corn syrup, cost more at the register.

Top-Sellers
The top-selling private label items tend to be products with limited profit margins that are most impacted by an increase in shipping or raw materials. In the food categories, the top private label items are eggs, milk and cheese products, while the best-selling non-food private label items are aluminum foil, paper towels, paper plates and toilet paper.

Regional Loyalties Drive Private Label Sales
The popularity of private label products varies throughout the country. The San Antonio market has the highest private label share of store, at 25.6 percent. New York City consumers are the least likely to purchase private label products at the grocery store, with private label commanding just over a ten percent share-of-store in that market. (Please see tables “Top 10 - Private Label Share Across Grocery Markets” and “Bottom 10 - Private Label Share Across Grocery Markets” in Full PDF Download version of release.)

“Market consolidation appears to be an important indicator for private label share,” said Pirovano. “For example, San Antonio and other top markets for private label are dominated by just a few major retailers. New York and other markets with lower private label share, however, have several smaller grocery chains with less opportunity to establish shopper loyalty for retailers or their brands.”

Opportunities for Growth
While rising prices are responsible, in large part, for private label’s recent growth, the fact remains that in the long run, private label products are gaining share of wallet and share of mind with consumers - - presenting an opportunity for CPG manufacturers and retailers.

Opportunities for growth exist in the organic and natural food categories as sales of organic products remain strong despite a struggling economy. Private label organic products kept pace, generating 17.4 percent of organic sales. Consumers also continue to make health and wellness a priority and sales show that “Low fat,” “natural,” “gluten-free,” “pro-biotic” products resonate with today’s health-conscious consumers, another avenue for private label products.

Private label or store brands were originally offered as a less expensive option to national brands. Over the years, however, there has been a shift in the perception or role of private label. A number of retailers are developing their private label products as an exclusive offering that elevates the status of the store -- and its products -- with consumers.

“Private label products are in the pantry of virtually every U.S. home and not limited to low and middle income households anymore,” said Pirovano. “As prices continue to rise, private label products can be leveraged by retailers to entice consumers into the store and increase sales. Knowing what your consumers want is essential for developing your private label strategy. Do your customers want to save money with in-store brands? Are your customers willing to buy higher-end and more expensive private label products? In a challenging economy, private label products can serve as ‘destination’ products that truly differentiate your store from competitors.”

Pirovano adds that manufacturers need to understand that private label is competing on factors other than simply offering a lower price alternative. “In today’s marketplace, it’s more important than ever to differentiate national brands.”