Private Labels Are No Laughing Matter

In the cult classic flick Repo Man, all products were generic, with labels that read "BEER" or "FOOD." Funny, yeah, but when the movie came out in 1984, the ugly recession of the early '80s was fresh in people's minds, and stores really did carry cheap products with plain white labels and self-explanatory names. Since then, store-brand goods have increased in quality, removing much of their old stigma. Once viewed with derision, these low-priced, "private label" wares are now making a comeback on many grocers' shelves.

According to a Forbes article, Wal-Mart Stores (NYSE: WMT  ) has been expanding the items it offers under its "Great Value" brand. Kroger (NYSE: KR  ) has had great success with its private-label brand, with revenue for that segment accounting for 26% of total grocery department revenue in its most recently completed quarter. And anybody who's familiar with Costco (Nasdaq: COST  ) probably knows Kirkland Signature, the chain's own private label.

Whole Foods Market (Nasdaq: WFMI  ) may still have the "Whole Paycheck" stigma to contend with, but it's got its own lower-priced 365 Everyday Value brand, too. And if you're a Trader Joe's aficionado, you definitely know about lower-priced private-label brands. Nearly everything TJ's carries bears its own moniker -- but the privately held grocery chain still seems to please shoppers, judging by its recent success.

Wal-Mart's expansion of its private-label offerings may create problems for rivals, but it probably won't affect shareholders one way or the other. The Bentonville behemoth already has a reputation for rock-bottom deals; Wal-Mart investors probably didn't need any further proof of that.

Instead, investors may want to consider how this trend might hurt providers of brand-name goods, including General Mills (NYSE: GIS  ) , Kraft (NYSE: KFT  ) , and Procter & Gamble (NYSE: PG  ) . As more retailers pare back the selection of goods they carry, a greater push toward private-label merchandise can't be welcome news to these consumer giants. (Companies such as Ralcorp Holdings (NYSE: RAH  ) , which makes private-label foods, may have a more positive opinion.)

I'll bet that shoppers embracing the "new frugality" may grow increasingly reluctant to pay more money simply for the sake of a popular brand name. As in the faltering luxury goods market, I suspect that purveyors of high-end or name brands will have to think long and hard about how to cope with this shift in public opinion. Shareholders should keep a close eye on how these companies meet their challenges -- or risk resigning themselves to years of decidedly bland, generic returns.

More on the changing face of retail:

Costco and Whole Foods are Motley Fool Stock Advisor picks. Costco and Wal-Mart are Inside Value selections. Procter & Gamble is an Income Investor recommendation. The Fool owns shares of Procter & Gamble and Costco. Try any of our Foolish newsletter services, free for 30 days.

Alyce Lomax owns shares of Whole Foods Market and never got sushi without paying for it. The Fool's disclosure policy is thinking of a plate of shrimp.


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