By Nicole Maestri - Analysis
CHICAGO (Reuters) - If imitation is the best form of flattery, foodmakers are finding themselves dealing with an inordinate number of compliments these days.
As the recession crimps household budgets, retailers like Wal-Mart Stores Inc (WMT.N) and Target Corp (TGT.N) are increasingly looking to woo shoppers with their own private label, or store brand, food items that often look very similar to name brand products but are sold at lower prices.
Foodmakers are defending their turf, telling the Reuters Food and Agriculture Summit in Chicago this week that they are the ones who develop innovative new products and spend marketing dollars to draw shoppers into retailers’ stores.
They acknowledged that retailers are giving them a run for their money, introducing better products at a faster pace and squeezing out tertiary brands in the process. The question now looms as to whether retailers will make the leap from simply imitating name brand foods to innovating on their own.
“Brands typically talk to consumers about that innovation and spend a lot of marketing money on that innovation,” said B&G Foods Inc (BGS.N) CEO David Wenner. “And that is not something that the retailers have typically done in the past.”
But Wenner, whose company’s brands include Cream of Wheat, said it would not be out of the question for increasingly savvy retailers to cross the line from food imitators to food innovators. Asked if that worries him, he said: “When I see them do it, it will.”
Seeking to woo frugal shoppers, retailers are giving more shelf space to their own brands and stepping up promotions.
“In this recessionary environment, it seems to me that the entire retail trade has become energized very quickly to bring out products that compete with branded package food,” said Wesley Moultrie, a Fitch Ratings senior analyst.
Wal-Mart is relaunching its Great Value private brand, adding more than 80 new products, like double-stuffed sandwich cookies and organic cage-free eggs.
Andrea Thomas, senior vice president of private brands for Wal-Mart, told Reuters the new Great Value packaging has “better pictures on a white background so it really pops off of the shelf, and that makes it easier to find.”
Rival Target devoted the cover space of a recent circular to its Archer Farms brand, touting a $4 spinach and goat cheese frozen pizza and a $2 bag of blue corn tortilla chips. It also offered Archer Farms food and drinks for 15 percent off.
Moultrie said consumers really take notice of private label products when the price gap between a name brand item and a store brand one reaches more than 30 percent.
But foodmakers told Reuters that it is not their intention to necessarily offer the cheapest product on a shelf.
“Our feeling is that we don’t want long-term to be competing exclusively on price,” said Quaker Oats President Mark Schiller. “That’s potentially a good short-term tactic, but long-term you really want to build your brand and what it stands for in consumers’ minds.”
So Quaker Oats, owned by PepsiCo Inc (PEP.N), is emphasizing the health benefits of its main ingredient, whole grain oats, in a major new advertising campaign.
Fitch’s Moultrie said it is in foodmakers’ best interest to lead the way with innovation.
“If you introduce a new product, no one really knows what the price of that product should be,” he said. That allows foodmakers to set an initial price and build in a hefty margin before imitators come into the space, he said.
It can also help sell higher-priced items amid a recession.
Michael Polk, the head of Unilever’s Americas region, pointed to its Bertolli frozen dinners, which are marketed as “restaurant quality.” While they may be more expensive than other frozen dinners, he said they are priced “at about a 40 percent value to take-out food or restaurant food.”
Shoppers feel like they are getting a deal when they buy Bertolli because they spent less than they would have in a restaurant, even though the meals are more expensive than other items in the frozen food aisle.
With retailers increasingly eyeing private label, Campbell Soup Co (CPB.N) CEO Douglas Conant said it has become crucial for foodmakers to make sure they have the No. 1 or No. 2 brand in their categories. Brands that cannot distinguish themselves face losing shelf space.
“I wouldn’t want to be a number three, four or five brand that wasn’t differentiated,” said Conant. “That’s where there’s ... going to be a lot of chaos.”
While the recession may create chaos as retailers and foodmakers compete for thrifty shoppers, it remains to be seen if private label can keep its allure once the tough times recede.
“As we get out of this recession, will consumers then look back to their favorite brand or not?” Moultrie said. “I think that’s the million-dollar question.”
Reporting by Nicole Maestri, editing by Matthew Lewis