ATLANTA — As consumers are reeling from the increased costs of food, supermarkets are responding with a greater variety of private-label goods.
Also known as generics, grocers have started to put more emphasis on the products' quality and branding.
Publix, for example, has started advertising its store-brand products. And Kroger has boosted the number of products it makes under its own label, from premium ice cream to marinara sauce.
The move toward value is paying off. Kroger's first quarter revenue rose 11.6 percent to $23.1 billion over the same quarter last year, and earnings rose 14.5 percent to $386 million. At employee-owned Publix, sales the second quarter were $5.9 billion, a 3.5 percent increase from $5.7 billion during the same quarter last year.
The upscale Whole Foods, on the other hand, saw its earnings decline by 30 percent to $33.9 million, even though sales increased to $6.16 billion in the second quarter.
The story, of course, starts in everyone's wallet. Ernst & Young found that food prices grew faster than the consumer price index for the three months ending May 2008. Food prices grew at 5.9 percent during that period, while the CPI grew 4.9 percent overall.
Chicago-based Patricia Novosel, global food leader for Ernst & Young, said one reason private labeling is helping both consumers and grocers is the quality is better than ever.
"We see good, better, best [in quality] driving an increased trend towards consumer acceptability," said Novosel. "And generally, there's more advertising around private label than we've seen before."
Grocers also have higher profit margins on goods they produce, said Novosel.
In a recent survey, two Morgan Stanley analysts tested pricing at grocery stores in six cities. They found that Kroger consistently had the lowest "everyday" prices compared with competitors, including Safeway, Costco, Sam's Club, Wal-Mart and BJ's. They conducted the survey in Baltimore, Chicago, Dallas, Denver, Fairfield, Conn., and Los Angeles (areas where Publix doesn't have a presence).
In the report to the investment bank's clients, the analysts say they are seeing a "consumer trade-down" trend.
"As consumers are being pressured by both food inflation and higher gasoline and energy prices," wrote Mark Wiltamuth and Joseph Parkhill, "we believe low prices are key to winning in this trade-down economy."
They found Kroger's everyday prices to be 10-12 percent below its peers in two of the three markets surveyed, and five to seven percent below peers after including promotional prices.
Kroger's private label discount was 38-48 percent below national brand prices. Other grocers' private labels were 16-35 percent lower.
One way that Kroger controls the price of its private labels is by operating its own manufacturing facilities. The company owns 43 percent of the private labels it sells, versus 22 percent for Safeway, the analysts said.
"We have over 40 manufacturing or processing centers," said Kroger spokesman Glynn Jenkins. "We manufacture dairy, cheese and bakery items." In metro Atlanta, Kroger owns a dairy facility off of Cheshire Bridge Road and an ice cream plant in Marietta.
Kroger has several brands, including Private Selection, which makes food for more upscale tastes, like "two-bite brownies" and caramel swirl ice cream.
"Both are very competitively priced in the industry," said Jenkins.
It's not like private label is new, but consumer acceptance is growing, said Bob Goldin, an executive vice president of Chicago-based food industry research firm, Technomnics.
"Private label's been around forever. There's nothing new," he said.
What is new, he said, is the quality is better.With consumers so "pinched," he said, they are turning to these cheaper but comparable products.
"One retailer that stands out most notably is Trader Joe's," said Goldin. "Eighty percent of what they sell is their brand. And people are pretty excited about it. Whole Foods and their 365 brand is really good."
On a recent Saturday at the Sandy Springs Whole Foods, the store's marketing manager gave about six customers a "value tour." The 365 brand by Whole Foods was featured throughout the tour.
Said Alice Cheung, the store's marketing specialist who gives the tours: "Our 365 line has no partially hydrogenated oils, artificial sweeteners, artificial preservatives."
Jerome Cardiff of Sandy Springs,who was on the tour with his wife, said "you can't go wrong" buying generic sugar and other "commodities." But he wasn't convinced by the 365 brand cookies the group sampled.
"I have a brand loyalty to certain things," he said.
Said Goldin: "Consumer loyalty has tended to be towards the national brands and lots of categories have had no success, like soft drinks and breakfast cereal." He said that 15 to 18 percent of what supermarkets sell is from private labels.
At Publix, said spokeswoman Brenda Reid, "Not only are we seeing a higher volume," of private label sales, "we are also promoting it."
She said Publix has started comparing the national to the store brands in its advertising. And each week, a "mystery" coupon also can net shoppers a deeply discounted Publix brand product.
She said Publix, like Kroger, also owns its own dairy, ice cream, ice tea and deli manufacturing facilities.
Rachel Tobin Ramos writes for The Atlanta Journal-Constitution. E-mail: rtramos AT ajc.com