The nitty-gritty on in-store brands: Sometimes they are cheaper and better

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When you go shopping in any grocery store or discount big box retailer these days, you're likely to find a growing array of products sold under the store brand or "private label." These goods aim to compete with the national brands you see advertised on TV. (See our taste test comparing generics with the brand name products they emulate).

If you're like most Americans, you're increasingly tempted to snap up these blander, cheaper boxes. But where do they all come from?

The answer is a dizzying array of manufacturing plants around the country and around the world that are ready to make virtually any product for any company -- for the right price. The Private Label Buyer, a kind of catalog of product makers, lists 756 companies in an ever-expanding array of categories that used to be the domain of specialty brands: 96 sell organic foods; 10 make alcoholic beverages; 31 make Asian foods. The stores pick and choose among these companies by requesting bids and testing quality.

As a result, each product sold under the same store brand may come from a different plant. And some may come from several different regional makers. Each year the Private Label Manufacturing Association holds a giant convention for companies whose names you've never heard of to meet up with local stores and potentially sell their goods there under a store brand name you might vaguely be familiar with.

Consumers always wonder if name brand companies are just selling their same products for less under a store brand label, says Dave Twinning, director of public relations for the Private Label Manufacturing Association.

"Generally speaking, it's fairly common for brand manufacturers to also make private labels," he says -- just not the household names.

"The ones that tend to be very high profile -- they will say that they never make private label and never intend to," Twinning says.

So, no, Coca-Cola is never going to spew out your grocery store's cola on the side just to get a little extra cash. But, Twinning says, a company may make products they don't compete against.

"If you're Heinz and you are the number one ketchup, you are not necessarily going to make ketchup to compete on the shelf," Twinning says. "But you might make soup."

Factories are capable of churning out a wide variety of similar products. Also, generics and brands might buy components from the same factory. Or, they might both hire the same factory to produce their wares, albeit with different recipes.

For a large store, choosing all the right makers can be hard. The recent scares of dog food tainted with melamine, toys with lead and toothpaste with anti-freeze show the dangers of just picking the cheapest factory in China. Big name retailers also have to worry about buying from companies that could give them a bad name for worker or environmental abuses.

In February Wal-Mart announced it would require private label food producers to submit to the Global Food Safety Initiative standards.

Why would stores put up with all the hassles of managing a brand if they could just buy the goods instead? Stores sell their own brands to have greater control over pricing (they hate coupons) and potentially higher margins. Also, they hope it will inspire loyalty. Not that they expect anyone is really saying, "Oh, I just loooove those generic corn flakes!" But customers may consciously choose to go to a big grocery store because they know it will have lots of low cost store brands in categories where they'd rather save money than pay for a name brand product.

American shoppers are still somewhat wary of store brands, haunted perhaps by memories of 70s-era generics with green and black stripes. We have an emotional attachment to some brands beyond all reason.

But stores want to change that and turn Americans into unsentimental, savvy consumers. For every dollar you, the typical American shopper, spend at the grocery or chain store, about 15 cents goes to buy a private label product, according to a study by McKinsey and Co. last year. That number has held pretty steady for a long time, but may be about to go up because stores are increasingly interested in pushing their own products. McKinsey predicts store brands could end up accounting for 24 cents of every dollar by 2016.

Those sophisticated European shoppers have caught on to how much money they can save with store brands that skip ad costs. Germans spend 32% of their Euros on private labels and British shoppers at Tesco, a chain that has embraced private label products with a bear hug, give up 34 pence of every pound for store brands.

Not all retail chains have the same appetite and expertise in private labels. According to the McKinsey study, stores like Kroger and Safeway are quite aggressive and already sell 21% of their goods under a private label. A&P, once a pioneer of store brands, now only sells about 11% private label brands.

Outside the grocery store, Wal-mart is starting to lean more heavily on store brands, following the growth strategy of Costco and Target, the McKinsey report says.

Costco has built the Kirkland line, which is produced by a myriad of manufacturers around the globe, into its own recognizable brand. When they want to sell an Italian suit, they tour Italy looking for the right manufacturer, says Costco spokesman Craig Jelinek.

"What we try to do is build the best possible item and then worry about pricing," Jelinek says. "Some people use private brands as just a low cost item."

Even without the push from retailers, consumers are naturally turning to store brands as economic outlooks turns more gray. According to a survey by Nielsen, 23% of consumers say they're going to buy cheaper grocery store brands because of high gas prices.
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