The Disappearing Middle

I came across three articles this past week that I think come together to tell us an interesting story. Two of them will be no surprise – they tell us things we’re all well aware of – but the third gives us a graphic (literally) example of what the first two may mean in the long term.

First, we are told by Nielsen that private label sales volume is up:

Dollar sales grew by 7.4 percent to $85.9 billion within food, drug and mass-merchandisers (including Walmart), with shares recorded at 16.9 percent. This reflects an increase of 0.7 points from the previous year. Growth peaked in 2008 but then slowed slightly in 2009 with falling commodity prices and increased retail discounting.

Unit sales similarly experienced high growth during the same period. Sales increased by 5 percent to 39.5 billion units and unit shares rose by 1.3 points (a total of 21.5 percent).

All store brand food and non-food categories experienced better performance versus brands, but edible departments saw the greatest uptick in both dollar and unit sales.

No big surprises there. The second non-surprise is that Walmart (and others) are cutting SKUs (we discussed SKU rationalization here are few weeks ago). This article, from The Guardian in the UK, ends with a mention of how trade promo might play into Walmart’s shelf decisions:

"Wal-Mart has been brutally honest with suppliers about the number of products it wants," continues Roberts. "The implication for vendors is that those who choose not to contribute more to Wal-Mart's marketing efforts might find themselves off the shelf."

But what does this mean for suppliers if there are fewer products on the shelf, and more of those products are private label? Pretty obviously it means that the future for some brands is looking bleak. Again, not a surprise, but let’s look at a graph from the third article (found in The Economist) to see just how bleak it might be.

The figures are from Germany, where private label share is much higher than in the U.S., but I suspect the trendlines would be very similar here and in most developed countries. Premium brands were up ever-so-slightly through 2008 (and probably down a bit this year). The category leaders’ share held roughly steady. But “other brands” took a huge hit. These brands, numbers two, three and below, constituted more than half the market only ten years ago, if I’m reading the graph properly, but had dropped to barely a third last year.

It is these brands that are going to be cut? Of course. The leader will stay, the store brand will stay, and the premium brand will (likely) stay. How can they battle expulsion? Well, they can, of course “pay to stay," as The Guardian suggests, though one suspects the effect that would have on margins, on other forms of marketing, and on R&D would make it only a short-term survival tactic. Another tactic might be to make oneself important to the retailer in other ways – e.g., by providing information, analysis, and insights, which retailers say they want from their suppliers. That might allow a secondary brand to differentiate itself from the rest of the pack enough to be the designated survivor.