Safeway's private label goes public

Safeway (NYSE: SWY) is out to prove that the term "private label" is up for a revised, new and improved, economy edition. The chain yesterday announced that it had reached agreements to market its "O" organics and "Eating Right" store brand products at Albertson's, ShopRite and Exito supermarkets both domestically and internationally. In addition, it already sells the Eating Right brand in stores belonging to Big Y Supermarkets, Price Chopper and Hy-Vee Inc.

With private-label sales up 9.1% between 2007 and 2008, more and more regional and low-budget grocery stores are looking to get into the game. Of course, it's expensive to develop a private label (paradoxically); and many chains don't have the resources, or the time, to go it alone.

Enter the odd-but-sensible arrangement; sell your competitors' private label goods in your own market. Perhaps the theory is that consumers who aren't product loyal enough to spend extra for the premium brands won't associate the brands with the store that originally sold them. I'd believe that, if I didn't already associate the "O" organics brand with Safeway, despite having been a dedicated private label shopper, myself; you could say it's my savvy, but more likely, it's the extensive advertising the chain has done in its circulars.

Does offering your private label to competitors dilute, or extend, the private label brand? And what does it do to sales at your own stores? I shop according to availability of my preferred brands, first, and price, second; I have little to no store loyalty once I've left the grocery co-operative of which I'm a member. If I'm interested in the "O" organics line, and I have a choice between shopping at a Safeway or Albertsons, I'll pick the one with the best prices.

In this way, Safeway could be chipping away at its own market share and setting up unwelcome price competition. The international expansion of its private label is sensible and a great way to extend its sales without much infrastructure or investment; the domestic expansion seems a riskier bet that, were I a Safeway shareholder, I'd rather not make.

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