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RETAIL VIEW: Is private label a good fit for produce?

According to the most recent statistics, the use of private labels has made significant inroads into produce packaging. In fact, the trend in produce is growing at a pace faster or at least equal to its rise in other grocery department sectors, including both food and non-food categories.

The New York City-based Private Label Manufacturing Association has Nielsen data for calendar year 2010 that show that private labels had a 21.3 percent share of branded produce sales that year compared to 19.1 percent the year before. That is 10 percent growth year over year and compares favorably to most other food categories, which were in the 19 percent range for 2010, and non-food categories that see private label sales below 15 percent for most sub categories. Of course, the caveat is that packaged produce sales typically represent about 40 percent of produce sales, so overall private-brand sales in the produce department account for less than 10 percent of the total sales in most supermarket produce departments.

Still, the amount of private-label merchandise being sold in the produce department has risen significantly over the past few years.

Longtime retailer and industry consultant Dick Spezzano of Spezzano Consulting Service in Monrovia, CA, believes some supermarkets will continue to expand their use of private labels. But he said that the 20 percent penetration level represents most of the “easy items,” and increased usage comes with greater challenges. “Most supermarkets start with bagged carrots, Romaine hearts and maybe some of the tomato items and then mushrooms. After that, they might move to bagged apples, bagged citrus, bagged potatoes and bagged onions. After that, it gets much more difficult,” he said. “What’s next? Maybe private-label croutons. Some companies have experimented with private-label salad dressings, but that’s usually an added item, and many seem to drop it after a year or two.”

Mr. Spezzano said that while some supermarkets have used their house brand by stickering bulk items such as bananas, that is rare. Most supermarkets stick to high-volume packaged produce.

Mr. Spezzano said that the allure of private labels for the produce department is identifiable. In the first place, it mirrors and complements what supermarkets are doing in the rest of the store. Almost across the board, the major chains have added private labels as both value propositions and premium packs. By continuing the penetration in the produce department, he said that they are reinforcing the concept and creating more loyalty from the consumer. “If the consumer likes the carrots they are getting in the private label, they assume they can only get those carrots at that chain,” he said.

Dane Twining, director of public relations, said that this creation of brand loyalty is the main driver behind the proliferation of private labels. The supermarket is expecting the consumer to have a good experience with the house brand in one product and for that expected experience to carry over to other products with the same brand. “We call it the ‘halo effect,’” he said. “Of course, it can be both negative and positive. But the expectation is that it is positive.”

He said that consumers identify the store brand with the store and believe that it contains a high-quality product. After all, the consumer trusts the stores if that is where they are shopping, so it seems only natural that they will trust the store’s brand.

Mr. Spezzano agreed but said that the reverse can also happen. “You can pack great product, but we all know that major problems can arise in that last 100 feet from the loading dock at the store to the shelf in the produce department. Because of bad ordering or bad rotation practices, the consumer can get a bag of salad with tip burn or wilted leaves. If it has a national brand on it, they are going to blame the brand. If it has the store brand on it, they are going to blame the store.”

On the positive side, however, he said that a store brand allows a retailer to change suppliers without its customers knowing. Mr. Spezzano said that typically, if a retailer is carrying one brand of a product -- a packaged salad, for example -- and it switches to another brand, that retailer will to take a hit in sales until its customers get comfortable with the new brand. If that retailer uses a house brand and switches suppliers because of a better price, that problem is avoided.

Lisa Cork, owner of Fresh Produce Marketing in Auckland, New Zealand, who helps fresh produce companies grow sales and impact through packaging, believes that the produce industry should avoid private labels if at all possible simply because they do not help increase the sales of fruits and vegetables. “Private labeling takes away everything that makes produce special,” she said.

Ms. Cork, who spoke during a packaging session at the fall Produce Marketing Association Fresh Summit convention, believes most produce packaging, house brands or otherwise, does very little to improve sales. She said that most produce companies tend to promote their own brand, which does not resonate with consumers, rather than point out a positive attribute of the produce itself. She believes that produce packaging should be used to enhance the product and convince shoppers to buy it.

By nature, Ms. Cork said most private-label packaging is designed to be consistent with that same label used on a cross section of products within a grocery store. The private label draws attention to the supermarket itself rather than to the product. Again, she said, “That takes away everything that makes produce not grocery.” In fact, the private label almost makes produce indistinguishable from the grocery products in the same packaging, she said.

Mr. Spezzano basically agrees with that assessment. “The produce sells itself, not the packaging,” he said, agreeing that hiding fresh product behind packaging is hardly an effective sales tool.

But Mr. Twining said that the private label should not be blamed. He said that many innovative supermarkets are establishing premium private labels and even food-specific private labels -- such as “Safeway Farms.” He said that many supermarkets also have specific private labels for organic products or other sub categories, which give consumers looking for that type of product an easy way to identify it.

Mr. Spezzano said that the produce department is also different when it comes to private labels because the same value proposition evident with private labels in the rest of the store is not in play in produce. In Mr. Spezzano’s experience, private labels in the center store are usually used to offer customers a discount. “Typically, the private label is sold for 20 percent less than the national brand. That’s not true in the produce department. The supplier usually won’t give you any discount at all.”

He said that it actually costs most produce suppliers more to do a private label run because the runs are shorter and they do not get the same economy of scale.

Ms. Cork noted the same thing, stating that a private label works best when a retailer gives consumers either a premium product or a value product. In the case of produce, she said it is simply a different product with no discernable advantage. Discussing several innovative produce packaging concepts she has seen, such as themed carrot packaging by Bakersfield, CA-based Bolthouse Farms, Ms. Cork said, “No retailer is going to do that [with their private label]. They don’t have enough skin in the game.”

She said that if private labels dominate the produce department, “you start to take away everything that gives the grower pride,” adding that innovation cannot thrive in that type of environment.

The California native, who got her produce packaging start with the “Eat Smart” Apio brand and then relocated to New Zealand in the 1990s, said that private labels also do not resonate with the new generation of shoppers. Ms. Cork said that all marketers need to come up with innovative concepts and interesting strategies to reach the Gen Xers, the Gen Y group and the Millennials. She does not believe private labels hit the mark.

Despite some of the potential drawbacks, Mr. Spezzano will not be surprised if private labels continue to be popular with supermarketers. While it is not necessarily true in the produce department, he said that increased private label penetration within a supermarket tends to mean higher margins, and that looks good to Wall Street investors, which is an important factor in any supermarket decision today.