The Next Victims of Commoditization

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Countless numbers of consumers re-evaluated their spending patterns after the recent economic downturn. One way people have decided to trim the fat in their budgets is by ditching their once-beloved, big-branded foods and beverages. Where does this leave name-brand manufacturers?

Commoditizing categories
Deloitte's annual American Pantry Study
shows brand loyalty has dropped for yet another year, indicating a shrinking number of consumers who are remaining faithful to their favorite big-branded goods. In fact, 90% of consumers are reaching for private labels instead of big brands. 

The study identified four distinct brand loyalty archetypes, the most concerning being "category brands with declining loyalty." The categories that ranked the worst off in this archetype were salad dressings and cookies. Does this mean big-branded dressing and cookie manufacturers are approaching their own expiration dates?

That's a huge issue for Kraft Foods Group (UNKNOWN: KRFT.DL  ) and Mondelez International (NASDAQ: MDLZ  ) . After its October 2012 split from Mondelez, Kraft retained the vast smorgasbord of salad dressing brands. But even aside from dressings, many categories in which Kraft competes already face commoditization and serious private-label threats. Another drawback for Kraft is that it's confined to mature North American markets, a factor limiting its long-term growth potential.

On the other hand, Mondelez, with its top-selling Chips Ahoy, Oreo, and Newtons brands, boasts the advantage of global exposure, with particular emphasis on mouthwatering emerging markets. And, lucky for Mondelez, one food category that the Deloitte study found most insulated from private-label threats was candy, a category this snack-food maker dominates.

Private-label pressures
Regardless, private labels are becoming a bigger problem for companies such as Kraft and, to a lesser extent, Mondelez. According to an industry profile compiled by First Research, these brands typically cost 20% to 40% less than name-brand products. Couple that with the fact that more consumers are ditching big brands, and we can easily see why ConAgra (NYSE: CAG  ) , Cott (NYSE: COT  ) , and others are continually strengthening their private-label positions.

ConAgra acquired Ralcorp late last year, making it North America's largest manufacturer of private-label foods. The Ralcorp acquisition should boost ConAgra's sales and earnings growth over the long term and give the combined company a larger footprint in the overall packaged-food industry. Meanwhile, Cott recently partnered with cola-industry disruptor SodaStream (NASDAQ: SODA  ) . The private-label beverage company will provide new flavors and extra capacity to meet SodaStream's increasing U.S. demand.

Foolish final takeaway
If consumers don't see a marked distinction in big-brand goods over private-label ones, then commoditization is inevitable. As more consumers ditch their once-favorite brands, private-label companies are becoming more viable businesses and investment opportunities. Sure, they're not as sexy as big-branded companies, but private-label manufacturers might deserve a spot in your portfolio.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only the most forward-looking and capable companies will survive, and they'll handsomely reward investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

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9/29/2016 9:33 AM
CAG $45.14 Up +2.01 +4.65%
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MDLZ $43.22 Down -0.18 -0.41%
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