Private Labels: The Death Star for Branded Goods

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I checked my calendar to confirm that it's not April 1, so perhaps the news that Kellogg (NYSE: K) has developed a way to laser-etch its corn flakes isn't some elaborate publicity stunt. Instead, it's just an elaborate marketing stunt.

Zapping mind share
The cereal maker says it's trying to protect its brand from an influx of "fake flakes." We knew purse makers Coach (NYSE: COH) and Louis Vuitton needed to protect their products from counterfeiters, and eBay takes a tough stand on sellers who try to foist faked goods on unsuspecting buyers. But who even knew there was a fertile, underground black market for corn flakes?

In reality, this news/development/marketing stunt highlights the inroads that private-label products are making on branded goods. When something as mundane as a corn flake needs an identifying label on it, you know store-brands have gotten the competition all soggy.

Supermarket chain Kroger (NYSE: KR) has made private-label goods the centerpiece of its growth strategy, boosting volume of its own brands by 15% this year. Wal-Mart Stores (NYSE: WMT) has been another leader in creating shelf space for store brands, further aligning its image with rock-bottom pricing.

The real thing
Kellogg says it wants to reinforce the notion that its corn flakes are unique, and that the company does not make fake flakes for anyone else. There's a certain logic to Kellogg's extreme lengths; after all, "brand" allows it or Coca Cola (NYSE: KO) or Perrier to charge a little more (or sometimes a lot more) than the competition. Yet particularly in tough times, consumers willingly trade down on many products, figuring they're getting essentially the same product -- sans the markup.

And that markup has been steep. When commodity prices soared last year, consumer-goods companies were all too willing to pass along much of the price increases to customers, perhaps under some mistaken belief in the power of their own brand names. Many were undoubtedly caught by surprise when supermarkets began pushing back, and started devoting more space to cheaper, private-label goods. The big names ended up resorting to discounting and coupons to entice shoppers to buy their products. Even giant Procter & Gamble (NYSE: PG) has had to cave in.

Kellogg says it hasn't been hurt too much by the trading-down effect; sales of its Corn Flakes rose this year. But as more consumers reach for the box of Great Value flakes at Wal-Mart, or the Kirkland Signature brand cereals at Costco (Nasdaq: COST), we may see other consumer-products companies latching onto such gimmicks.

The Force is against them
Whether this is a real technological advance -- Star Wars meets the grocery aisle -- or a cleverly devised publicity coup to gain attention for Kellogg, the implication is clear: The big brands have fancy laser tech, but private-label products have become the true Death Star in this market. And that's no joke.

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