A new brand of profit comes late to America: Own-label goods may be old hat in the UK, but Larry Black finds they are the boom market in the US

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The Independent Online
AMERICA is the land of the shopping mall and 24-hour convenience store - its supermarkets the pioneers of 'serving suggestions' and product-code scanning.

But when it comes to making a buck selling a tin of baked beans - or, more to the point, a can of own-label cola - the Wal-Marts, Shop-Rites and Supervalus of the US are only just beginning to catch up with their Sainsburys, Tescos and Marks & Spencers UK counterparts.

Sainsbury's Classic Cola, the own-label soft drink that has sparked 'cola wars' with Pepsi and Coke in the UK, may indeed be available at Wal-Mart stores in the US as Sam's Choice cola - both are produced by Cott, the Canadian private-label manufacturer.

But Cott's colas are the exception in America's supermarkets. Only in the past three or four years have the stores started to reclaim control of their shelves.

Wal-Mart, the world's largest retail chain, carries only about 350 grocery items under its mid-priced Great Value label, for example, while K-Mart, its principal rival, has only a handful of own-label products.

But once started, the trend is inexorable. Own-label sales have taken off since the beginning of the 1990s, and will probably account for about 20 per cent of grocery revenues in the US this year, up from 15 per cent in 1989.

But why has 'private-labelling', as US store brands are known, taken so long to take hold among aggressive retailers and with shoppers so concerned with value?

American marketing analysts prefer to ask why private-label developed so early in the UK. In contrast with the US - which has a million retail venues, ranging from the shopping mall to pavement food carts and corner bodegas - the UK market is dominated by five companies which account for 60 per cent of sales.

While US supermarkets compete almost solely on price, the high cost of space in the UK has encouraged retailers to experiment, says Brian Sharoff, president of the Private Label Manufacturers Association.

Profit margins of 8 or 9 per cent, compared with 1 or 2 per cent in the US, have allowed them to develop their market, moving into higher margin products without fear of massive TV commercial interruption, he says.

Television advertising is the other main difference: the development of mass-market brands in the US went hand-in-hand with the growth of the three commercial TV networks in the 1950s.

Manufacturers like Procter & Gamble, Philip Morris and Coca- Cola established a relationship with shoppers that transcended US retailers. In the 1960s, 80 per cent of consumers went into stores knowing what brands they would buy.

Until recently, American brand managers could dispatch upstart rivals with a national ad campaign or well-targeted coupon promotion. A feeble attempt by retailers to introduce 'generic' products in the 1970s - poor quality commodity items in black-and-white packages - turned many consumers away from non-brand items.

But about five years ago a number of factors conspired to persuade US shoppers to try private labels again - the post-1980s recession being the most obvious. Shoppers had also suffered stiff price increases by manufacturers.

The late 1980s also marked the end of a cycle for branded goods, when too many brands were competing for shelf space.

At the same time, the proliferation of advertising made it too expensive to reach the audience necessary to sustain these new products. The three TV networks, which once commanded the attention of 95 per cent of Americans, now reach less than 60 per cent.

The result has been the rise of shopping clubs, discount mass- merchandisers, cable-TV merchandising and, most convincingly, own-label retailing by regional chains.

Counter-attacks by the big brands - such as 'Marlboro Friday', when Philip Morris slashed prices - have had limited success for individual products, but the growth of private-label has has outpaced the rise in overall grocery and personal-products sales by five to one.

'American shoppers are increasingly convinced that there is no difference between national brands and store brands,' says Judith Langer, a consumer-behaviour expert in New York.

The acquisition of many US retailers by UK and other European firms during the 1980s also hastened the move to private-label; European companies now own 25 per cent of US supermarkets.

A final factor has been Loblaw's, a Toronto food retailer that has imported its hugely successful 'President's Choice' concept to the US, providing chains like Wal-Mart with a ready-made house-brands programme. It was Loblaw's president, David Nichol, who first approached Cott about producing a quality own-label cola in 1988.

The transformation of US retailers from renting shelf space to manufacturers to selling their own wares is not simply an ego trip on the part of store owners, Mr Sharoff says.

Tom Stephens, the head of Loblaw International Merchants, the firm's consulting arm, says private-label has lifted the grocer's gross margins 3 percentage points - 'in an industry where you would sell your grandmother for a tenth of a point'.

The effect on Wal-Mart has already been dramatic, adding about dollars 900m in sales last year - a figure that will triple by 1995, according to George Strachan, retail analyst with Goldman Sachs in New York .

The growth of private-label in the US has slowed from the surge of the first few years, and it is still far less than 32 per cent penetration achieved by Loblaw in Canada, let alone the levels in the UK.

But sales should continue to grow by about 10 per cent a year - meaning one in every four purchases in US supermarkets will be own-label items by 2000.

The US now ranks third in the world after the UK and Canada in private-label penetration, and despite the efforts of the big-branded goods manufacturers, it seems unlikely the trend will be reversed.

(Photograph omitted)

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