Q&A: IRI

STORE BRANDS GO PREMIUM TO BATTLE INFLATION

EXCLUSIVE TALK WITH IRI ON THE CURRENT STATE OF STORE BRANDS IN THE FACE OF RISING PRICES

More than a decade ago, the retail market faced rising prices and infl ation. But amid the COVID-19 pandemic, the infl ation period underway is revealing a diff erent strategy for store brands. Previously, the strategy was to promote value brands and the lowest price possible. The current situation is revealing an opportunity to promote premium private brand products, according to Krishnakumar Davey, president, strategic analytics, IRI, who sat down with Store Brands.

Here’s an edited version of the conversation:

STORE BRANDS: DESCRIBE THE SITUATION RIGHT NOW AS YOU SEE IT.

KRISHNAKUMAR DAVEY: The price index continues to increase. This year it is running roughly at about a 4% increase vs. a year ago, and up about 8.5% to 9% vs. two years ago. That’s significant inflation because typically we run about two to two and a half points of inflation a year by price mix. Many large manufacturers have announced price increases, like Tyson and others, who are expected to increase prices throughout 2022 because there’s significant cost inflation. At the retail level the price increases have been 1% to 2.5% in terms of just the everyday price.

SB: You mentioned Tyson, which has a branded business and a private brand business. How does that play out?

KD: I think they have already added significant pricing in foodservice. In retail, they have said they have implemented it, but it's going to take a month for it to escalate down to the consumer, so I would assume their private label will also go up. So far this year, private label pricing has been more in the fresh, meat and deli department, but not as much in packaged goods, but that's also picking up because at the end of the day a bottle is a bottle, whether private label or branded.

Right now, store brands are taking prices up about one to one and a half points below national manufacturers. Earlier, there was a lot more in fresh, but I think that's moderating. The packaged goods, the center store, is what is growing right now in terms of pricing for national brands significantly and store brands also quite a bit.

SB: How does today’s situation compare to years past?

KD: We looked at the last recession when pricing really shot up quite a bit, 2008, 2009. In that period, private label, believe it or not, added about $8 billion in increase in sales, over a two-year time period, 2008 to 2010. The share grew 0.8 points and also the category grew whatever their normal growth, so they grew both from category growth but also from share growth, both in edible and non-edible. It was $3.4 billion in non-edible and the rest in edible.

What happened at that time was a lot of the mass and club retailers started building private label brands so they were growing through distribution, introducing store brands in categories that they didn't have and so on, which all helped them. This time is different in the sense that there's a lot of stimulus money still in the system and the other

“So far this year, private label pricing has been more in the fresh, meat and deli department, but not as much in packaged goods, but that's also picking up because at the end of the day a bottle is a bottle, whether private label or branded.”

factor, until recently, consumers didn’t have a lot of other avenues to spend money. They couldn’t go out to eat as much as they did before, they couldn’t entertain themselves, etc. Everybody traded up, particularly in terms of food at home and better quality of pasta sauce and better quality of beverages.

The further complication, more recently, as we all know, is this whole Delta variant, so there’s going to be continued increased consumption at home so there is uncertainty of demand. The supply situation more or less has stabilized in many categories but still not completely. You see that in foodservice still.

SB: Which categories do you see having the best opportunities for store brands?

KD: One of the things that we have studied in store brand growth over the years, the categories that already have a strong store brand development, are the ones who gain the most during the switch from national brands to store brands. That may be because of ubiquity, presence, established brand name, people may have tried it and come back to it. Even though retailers are systematically trying to introduce more store brands in more categories, they are introducing more variety and more flavors. For example, from a variety perspective, there's a lot of interest in ethnic cooking. We are seeing more premium, more variety in already established categories, and then retailers are dipping their toes in where there's no big supply constraint right now.

SB: How do retailers prepare for what's next?

KD: Our read of the situation suggests we may see price mix growth of even close to 7% to 10% by the end of the year for many categories, and that's pretty significant compared to anything that they have seen for the last 10 years. But on the other hand, foodservice, out-of-home food inflation is even higher because not

“Our read of the situation suggests we may see price mix growth of even close to 7% to 10%

by the end of the year for many categories, and that's pretty significant compared to anything that they have seen for the last 10 years.”

only are they paying more for these things, but they're also paying more for the labor and the shortage of labor.

The labor costs are going up in addition to the raw material ingredients, so out-of-home food is already running much higher than in-home food and will continue to run. Consumers will be forced to trade down, at least a certain segment, and look for value channels, value-seeking behavior, value brands, or premium brands, which offer value. Value doesn't really mean right away lowest price point, but instead of buying two Kit Kats can I buy a bulk bag of Kit Kats?

SB: And the foodservice issue there feeds that premium store brand strategy because that's still a better value vs. going out to eat.

KD: Yes, and they’re doing a good job because that innovation also helps differentiate one retailer from another. We had Albertsons on one of our interviews and they talked about how their cauliflower pizza is really sought after. Once you have a differentiated store brand, then that just offers a number of other benefits in terms of driving the basket, attracting shoppers, retaining the shopper and driving loyalty, and also driving their price position in the marketplace.

SB: Is there an opportunity for store brands to gain share during this period?

KD: As the price gap between the national brands and store brands widens, store brands start to gain share. In the last two, three months of data, we are seeing the widening of the price gap as national brands keep taking price and store brands are not following as aggressively and widening their price gap. Some retailers have spoken openly about the fact that, "Hey, if the national brands take too much price then we will double down on our store brands to make sure our consumers still get value."

The other thing I would say, mass merchant and club retailers are the ones who are doubling down on value and on store brands. Think of Target, think of Walmart, think of Costco, Sam’s Club, and BJ’s. They have been investing in store brands for the last five years before COVID, and we see them continuing to do so now as supply stabilizes to continue to grow in that.SB

PRIVATE BRAND DISRUPTORS

FOXTROT, A RISING CHAIN OUT TO MODERNIZE CONVENIENCE, LEADS A LOOK AT RETAILERS SHAKING UP STORE BRANDS

B Y D A N O C H W A T

Foxtrot, a regional chain of boutique markets that began six years ago, is widely considered a disruptor in retail. The company is aiming to “redefine convenience for a modern consumer,” and the retailer is certainly one to take notice.

This year, Foxtrot announced it would be adding 50 stores over the next two years, growing from a dozen locations in Chicago, Dallas and Washington, D.C., into New York, Austin, Boston, Miami, Los Angeles and Houston. The retailer also launched a national online gift box service with curated craft items, including its private brand products.

And consider the private brands — disrupting the fast food era of convenience chains with an eye on trendy cafe foods and premium packaged goods in fun, bright packaging. To achieve a store brand approach of this magnitude, Foxtrot hired Mitch Madoff in the spring of 2021. Madoff is the former vice president of exclusive brands at Whole Foods Market, and will lead Foxtrot’s private label and supply chain. He was added alongside the announcement of Tae Strain, a chef at acclaimed David Chang restaurant Momofuku, to be its culinary lead for exclusive prepared items and more.

Madoff discussed with Store Brands his strategy for Foxtrot’s private label program, as the company builds from its $42 million funding round in February, and begins to quadruple its store count.

“It’s been an exciting and busy first few months,” Madoff said about his early days on the job. “I’m happy to be part of a company that’s rapidly growing and expanding. We’re agile and nimble across all departments, and it’s been rewarding to oversee the private label division as both a developer and leader during this time of growth.”

So far, the store brand products stepping up during this time lean into desserts, a go-to among the convenience store set that Foxtrot is disrupting. Foxtrot’s namesake brand includes six original flavors of ice cream including Roasted Banana & Caramel, Extreme Cookie Dough Sprinkle, Chocolate Hazelnut Chunk, Big Riff Coffee, Mint Sprinkle Brownie, and Strawberry Cheesecake Crumble.

Additionally, the company teamed with Los Angeles-based CoolHaus for exclusive dual-branded Foxtrot and CoolHaus ice cream sandwiches and novelty bars. The retailer even has bundles to buy its own brand ice cream treats alongside a bottle of wine (the chain proudly touts a selection of more than 200 bottles) and carries a private brand wine under the Kid Sister label.

Madoff said the ice cream flavors have been very successful, and they’re continuing to look to collaborate with local chefs and small producers and suppliers to bring new offerings into its private brand mix. The company, for example, also partnered with Dolcezza Gelato in Washington, D.C., and Pretty Cool Ice Cream in Chicago. In coffee, Foxtrot partnered with Metric in Chicago for its own whole bean blend.

“Expanding into ice cream has given us credibility to explore other novelties and frozen treats,” said Madoff. “Above all, we love food and we always approach private label with the goal of uncovering and creating delicious, high-quality items we know our customers will enjoy.” Foxtrot’s The retailer even has bundles to buy its

Madoff said the ice cream flavors have been very laborate with local chefs and small producers and suppliers to bring new offerings into its private The company, for example, also partnered with Dolcezza Gelato in Washington, D.C., and Pretty Cool Ice Cream in Chicago. In coffee, Foxtrot partnered with Metric in Chicago for its own whole bean blend.

“Expanding into ice cream has given us credibility to explore other novelties and frozen “Above all, we love food and we always approach private label with the goal of uncovering and creating delicious, high-quality items we know our customers will enjoy.”

Other Foxtrot brand indulgent treats include scratchmade brownies, gummy candies in hip packages, chocolate mixes, cookies and cream pies.

The breadth of private brand products extends into snacks too, with extremely modern and slick-looking packaged chips in flavors like Spicy Dill Pickle, Back Porch BBQ and Sea Salt. The company has a line of granola as well. Madoff describes the assortment as taking customers along a food journey that’s nostalgic and aimed to help them uncover new trends. The packaging has fun animated characters and perhaps a kid-like, nostalgic feel.

“Our customers are curious and open to new trends and flavor profiles,” he said. “We develop products that are craveable and delicious. Our goal is to create an experience that they didn’t even realize they were missing before.”

In reference to the company’s swift growth and plans ahead, Madoff said scale is the key.

“Scale will make things easier. The larger we get, the faster we’ll be able to move and we’ll continue to streamline our supply chain,” he said. “Growth supports exactly what we’re trying to achieve, allowing our suppliers and the upand-coming brands we work with to grow with us as well. A lot of our partners have taken a leap of faith to work with us and they continue to grow and develop alongside us.”

FELLOW DISRUPTORS

HelloFresh. The New York-based meal-kit company announced late in the summer that it would be offering a mix of private label pantry items as part of its move into becoming a fullservice online grocer. The company told Store Brands that its HelloFresh Market service, an add-on to its mealkit delivery, will include fresh produce, snack foods, dessert items, packaged spice blends, grocery essentials and ready-to-heat meals. The new market offerings will include a mix of private label products from HelloFresh as well as partnerships with branded companies such as Intelligentsia Coffee, Annie’s, Vive Wellness Shots, Epicurean Butter and Pillsbury.

Imperfect Foods. The e-commerce company founded on the idea of delivering produce deemed imperfect by brick-and-mortar retailers added to its disruption by using imperfect produce to develop store brand products, including namesake cooking oils, quinoa, grains, and even bath and body products like facial oil, avocado honey body butter, and shampoo. The San Francisco-based company recently generated $95 million in a round of financing to build out its private brands.

Martha Hale, chief merchandising officer at the company, previously told Store Brands during a Q&A: “When it took off in 2019, our private label

Foxtrot’s building its private label program from its

$42 million

funding round in February, and is adding 50 stores over the next two years, including entering new markets such as New York, Austin, Boston, Miami, Los Angeles and Houston.

From its own brand suppliers, Foxtrot is looking to work with emerging producers, and ones that spark new ideas and take risks, he said. The suppliers should align with the Foxtrot mission: “People who enjoy creating delicious, high-quality food with an entrepreneurial spirit,” he said.

The latest from Foxtrot is its Foxtrot Anywhere nationwide shipping program. The program is framed as curated

program was focused on food rescue buys and as we began to expand, we evolved into what we offer today. To us, private label is where companies gain their distinction from other companies. We knew that our private label should be about storytelling but also that each item has to taste good and delight the customer as well. From our chocolate-covered pretzel pieces to our dried mango, the main ingredients have a story that helps drive our mission.”

Walmart. Strange to call a global leader like Walmart a disruptor, but the mass merchant does have a few tricks up its sleeve, including its entry into streaming devices that will challenge Roku and Amazon Fire Stick. Walmart also will launch its first-ever store brand insulin product, disrupting the pharmacy industry.

In electronics, Walmart introduced Onn in 2010 and eventually consolidated its store brand electronics under the brand in 2019. This year, it branched out with an Onn streaming device. Leigh Stidham, spokesperson for Walmart, told Store Brands that

FELLOW DISRUPTORS -

Continued

the brand and product is meant to be “an industry-disruptive entertainment brand to better serve customers and create a simplified shopping experience through thoughtful product design, elevated and compelling packaging design and simplified communications about product attributes, all at affordable prices.”

Also this year, Walmart rolled out ReliOn NovoLog, a private brand first in diabetes care. The store brand analog insulin vial and FlexPens is said to save consumers between 58% and 75% more money compared to branded packages.

Aldi, Trader Joe’s, Lidl. Perhaps the original disruptors, with stores that are 90%, 85% and 80% private label, respectively, the three grocers continue to elevate products, branding and assortment at a major value, arguably getting retailers to step up private brand programs over the years.

Loblaw. The Canadian retailer can also be looked at as a legendary disrupter with its No Name brand, which to this day stands out with its cheeky marketing and “lack of branding,” although it’s branding without branding (it’s all very meta). The brand relies on its black and yellow colors and that’s it. For example, go to the website for No Name and all it reads is, “website” in black lettering against bright yellow. The products carry the same mantra, only they stand for high quality, as the retailer introduced two years ago its Simple Check symbol on the No Name packages, signifying that the products are made without 10 ingredients including synthetic colors, artificial flavors and monosodium glutamate. gift boxes with a mix of its top-selling products and items that fit certain themes such as a Pasta Night box. The program gets the Foxtrot products out to consumers nationwide as it continues to grow into new markets. Additionally, Foxtrot has been evolving its culinary program that inspires its grab-and-go food items that are a core of the store, taking great care within its recipe department, Madoff said, and sourcing to revamp the prepared foods and cafe menu.

“We’ll continue to introduce new items and new collaborations across our current categories throughout the year, and you can expect some exciting new items and partnerships tied to the holiday season,” he said. “We’re also expanding our private label brands outside of food. We will have more to come on that soon.”