A scourge or a necessity?
Overview by NODPA Staff
Added September 12, 2011.
"The growth of private label brands was probably simultaneous with the growth of Trader Joe's and Whole Foods," says David Wright, a senior associate at the Bellevue, Wash.-based Hartman Group, a research and consulting firm that has been tracking organic shopping trends for the past 15 years. "They really pushed the notions of specialized store brands into the spotlight."
"Private label was part of scaling our business," says Eric Newman, Vice President of Sales, Organic Valley/CROPP Cooperative. Early on, the company decided to embrace the private label market, rather than resist it, knowing if it didn't do so, another supplier would. Now, about one fifth of the co-operative's sales – or about $100 million – comes from supplying products to private labels,……. (The Organic Challenge, Sustainable Industries)
"Additionally, in order to fulfill a broader consumer need, there is a need for Private Label (or "store") brands of organic milk. The Private Label brands often appeal to consumers who are loyal to their local food retailer and buy products featuring their store's brand." (Aurora Organic)
"While some laud private labels for making organics more accessible and increasing the overall appetite for natural foods, others criticize the grocery giants for profiting from the demand created by trailblazing organic brands. Either way, one thing is certain – if small organic producers are to flourish in this market, they have a fight ahead of them."(Sara Stroud, The Organic Challenge, Sustainable Industries).
"Unfortunately, there is an inherent limitation in private-label organic products: organic consumers tend to want to know where their food is coming from and how it is produced, and private-label products are anonymous by their nature." (Cornucopia Institute)
"The truth is, the industry has gotten bigger and is maturing in some ways," says John Foraker, chief executive of Annie's Homegrown. "The competitive landscape is getting tough for smaller brands. Private label is really bad news if you're not the number one or number two brand."
Industry professionals have many different views on the role of private label products within the organic and natural foods industry. Organic dairy producers have many questions on who profits from private label milk and its role in their industry. They question whether the highly competitive prices and short contracts give them long term market security or undermine their ability to capture a greater share of the retail dollar or benefit from the consumers' willingness to pay extra for organic products because of the environmental and health benefits of the organic production systems. With retail mark-up on organic dairy branded fluid product ranging from 30-40%, the private label market has a competitive advantage in the dairy case and encourages brands to have in-store promotions to match store brand retail pricing, which bears none of the burden of marketing, policy work protecting the integrity of organic, or brand development.
The upcoming NODPA Field Days features a panel discussion including Peter Miller (CROPP Cooperative/Organic Valley, Northeast Regional Pool Manager), and Kelly Shea (Vice President--Industry Relations & Organic Stewardship, WhiteWave Foods) plus representatives from Aurora Dairy (invited) and Upstate Niagara (invited) that will examine the practical realities of private label milk and why the two companies have different approaches to the role it plays in their business model.
At right, Organic Valley's Eric Newman gives CROPP/Organic Valley's perspective.
Private Label's Role
By Eric Newman, Vice President of Sales
Organic Valley/CROPP Cooperative
Private Label is a growing business not without its controversies, challenges and benefits. As a partnership strategy, it has evolved greatly since its first appearance as "retailer controlled" brands. With Organic in particular, private label allows companies to partner with strategic retail customers, reach additional markets in times of over supply and make organics more accessible.
In our case at CROPP Cooperative, equally as important, it also allows us to better support our more than 1,600 farmer owners across the country with additional markets to help balance our supply and provide stability for them, their families and communities, in each of their regions. CROPP Cooperative in its second year began selling private labels including the now defunct "North Farm" brand and "Tree of Life" cheeses.
Today, private label milk sales represent 75 percent of the conventional fluid milk market. Only in the past 15 years have national fluid milk companies such as CROPP Cooperative with the Organic Valley brand established themselves in that channel with any significant market share. Borden Dairy Company failed at its attempt. However, Land O'Lakes, Horizon, Organic Valley and Lactaid have all been successful in this arena. National fluid milk brand development accelerated when Organic Valley launched ultra pasteurized organic milk in 1998. During the early days of organic milk marketing, there were short code dates and lots of spoilage. Ultra pasteurized milk delivered high-quality product to consumers with the best codes in the market place, bringing organic milk to the National table.
While the brands grew and competed for market share, which is the most expensive part of selling branded products, retailers began to focus on their own private label dairy offerings. They began to recognize there was a future for processing organic milk in their plants and sold under their own brands. Retailers with captive dairies include Kroger, Safeway, H-E-B, Publix, ShopRite, Harris Teeter, Lowes, Raley's, Save Mart and others. Most of these retailers are bottling organic milk today.
So back at Organic Valley, private label sales also allow us more room to balance our milk supply and secure a stable market for our farmer owners—the farm families who produce our milk in each region. In 2010, private label sales totaled $100 million or about one-fifth of our total sales. Additionally, our ingredient and bulk sales help round out a balanced approach to utilize and inventory our fluid milk.
Our approach to private label milk sales calls to mind the story of the three-legged stool. Branded sales, bulk tanker and private label/ingredient sales are the foundation of our marketing and sales strategy. Net profit targets are the same for our private label and branded products. Our private label business has consistently achieved the same or higher net income than the same Organic Valley branded products. Private label costs less to market because retailers handle marketing for their private label products. For branded sales, sales and marketing expenses can run from 10 to 17 percent of the wholesale price, depending on the product category and strategy.
Specifically, our private label strategy has enabled us to achieve the following goals over the past 15 years, to great success:
Our private label business has achieved and exceeded our net profit goals every single year for the past 15 years.
Private label should be looked at as an opportunity and a way to develop more business, security and profit for our farmers. Selling branded products is part of an excellent strategy for the cooperative, but it's expensive, especially when competing with public companies that seem to have endless financial resources at their disposal. Diversity is a key strategy for CROPP and private label plays an important role.
Posted: to Industry News on Mon, Sep 12, 2011
Updated: Mon, Sep 12, 2011
