Saturday, May 10, 2008

Safeway takes its private label public

Private label brands have become a staple at grocery stores, big-box retailers, discount warehouse clubs, office supply stores and pretty much everywhere else you can think. While private label items were once sold as the low-cost alternative to higher price, higher-quality items, today the items typically carry a small but still appreciable discount over their name-brand cousins, but at a price that is similar to and sometimes even exceeds that of the higher-priced goods.

Grocers in particular have jumped on the private label bandwagon, as goods stamped with their own name can often bring in 200-300% more gross margin than similar name-brand products which can be pretty significant when margins hover in the low- to mid-single digits.

Interestingly, some private label goods are doing so well, and have such a positive reputation in the marketplace, that they're starting to become full-fledged brands of themselves. That's precisely what has happened to Safeway's O Organic and Eating Right brands, as Supermarket News notes. Both brands have seen sales surges recently thanks to renewed interest in healthy eating and of course the gigantic sales monster that is organic. Just last week Safeway's CEO noted that O Organics recorded 2007 sales of $310M, and is expected to do $400 million "with ease" this year, with sales in the first quarter alone up 50%.

Wanting to capitalize on that trend, the company is going to be selling some of the products in this line to other grocers and retailers, who will basically treat it like any other name brand. To do this they're forming the Better Living Brands Alliance, which includes, "manufacturing, marketing and distribution companies as brand licensees; co-pack and distribution partners to provide a supply chain network; and support from EMAK Worldwide, a group of marketing agencies based in Los Angeles, for communications with consumers, and Crossmark, a professional services company for consumer goods based in Plano, Texas, for communications with retailers."

Safeway is taking a bit of a risk here by stepping outside of its typical role as a retailer and entering the murky world of product distribution and sales, however given the margins they're probably making on the O Organics and Eating Right goods, it may be a great hedge against store traffic slowdown or average ticket size decrease due to economic uncertainty and slowdown. If nothing else, it's a savvy play to try and take advantage of our current craze over organic and (perceived) higher-end foods.

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1 comment:

Chris Woods said...

This is actually a fairly common practice with substantial precedent. In some cases, the retailers license the brand and in others do the full service distribution. Some examples:

Loblaws' President's Choice
AWG's Always Save, Best Choice & Clearly Organic
Wild Oats brand distributed by Peapod and possibly others