The Next Challenger to Coke and Pepsi?

The recession has made private-label brands a hot growth industry, fueled by supermarkets exploiting consumers' search for value. With that in mind, where might investors snatch up a deal on private-label companies?

Private-label brands racked up sales of more than $83 billion in 2008, and they're forecast to grow some 17% this year. According to the market researchers at Information Resources, the private-label share of all consumer-product spending grew to 22.6% (by volume) in the fourth quarter of 2008. Not surprising, really. The Private Label Manufacturers Association says consumers can save roughly 30% on their weekly grocery bills by buying store brands, which is about what Target says consumers can save with its relaunched "up & up" line of household items.

Can't quench the thirst
Cheaper off-brand products are forcing consumer-goods giants such as Kraft, Procter & Gamble (NYSE: PG  ) , and General Mills to confront spiraling commodity costs more seriously now, rather than passing much of the bill on to consumers. Yet their efforts have been decidedly uneven.

The press has focused more on consumers' trade-downs among food items, but let's not forget the beverage category, either. Aside from milk, water, and some juice drinks, where there's a perceived lack of differentiation, private-label beverages have been unable to break Coca-Cola (NYSE: KO  ) and PepsiCo's (NYSE: PEP  ) death grip on the drink market.

And then there's Cott (NYSE: COT  ) . The world's largest private-label drink maker saw revenue peak in 2007, then steadily give way as the recession began in earnest -- just when you would expect it to rise. And the decline didn't owe solely to Wal-Mart Stores (NYSE: WMT  ) cutting its exclusive beverage-supply agreement with Cott. That happened only this year, while Leading Brands, another private-label juice and drink maker, also saw a similar drop-off in sales. At 11 times forward earnings, Cott isn't exactly the market's cheapest stock, either, especially in light of its lower sales potential now that Wal-Mart has cut it loose.

Cott is now in a bit of a sticky spot in its turnaround efforts. Yesterday, the company released quarterly earnings that beat expectations. But it also warned about second-half challenges, including rising commodity costs and stiff competition. Revenue fell 5.9%, although gross margins firmed.

A heady brew
Private-label beverages might also make inroads in alcoholic drinks. House wines have long been a top seller, but unless you shopped at Trader Joe's, you might not find a house beer. Last year, however, Costco (Nasdaq: COST  ) began selling Kirkland-branded beer.

I'm not sure that Budweiser fears shoppers bringing home a pallet of suds along with their 50 rolls of toilet paper. Still, a Kirkland brew could actually make inroads into the beer market, which already offers a 4% share (by volume) to craft breweries. More interestingly, craft brews commanded a disproportionate 6.3% share of revenue dollars in 2008, meaning that craft beer offers the potential for more profit.

Check out this growth
While Kroger's been in the express line of private-label sales -- 35% of the items Kroger sold last quarter were generic -- the private-label beverage market might not offer the same opportunities, given Cott's poor performance and considerable challenges.

As a result, investors might want to focus on consumer-goods makers such as Ralcorp (NYSE: RAH  ) . It actually has a strong brand in cereal maker Post Foods, but it'll also be growing with private-label goods for Wal-Mart, which delivers 17% of Ralcorp's revenue. Private-label beverages, on the other hand, offer a merely generic opportunity unless you choose carefully. I'd avoid filling my cup with any of the leading players here.

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

Fool contributor Rich Duprey owns shares of Wal-Mart, Kroger, and Procter & Gamble, but holds no financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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