Big growth in its own packages

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Wegmans Food Markets Inc. generates an estimated 35.5 percent of sales from its store brands, roughly double the average of all grocers’ sales nationwide, experts say. Those house brands-currently generating more than $1 billion in sales a year-could be key to the firm’s rise within the next decade to be the largest corporation in New York.
“Wegmans is regarded in the United States as the No. 1 retailer of store brands or exclusive brands,” said Burt Flickinger, a principal in Strategic Resources Group in New York City and a nationally recognized retailing expert. “Wegmans does in the U.S. what Tesco PLC does worldwide and what Loblaws does in Canada.”
Wegmans, with 68 stores in New York, Pennsylvania and along the Eastern Seaboard, reported 2005 annual sales of $3.8 billion, up from $3.6 billion in 2004, $3.3 billion in 2003 and $3 billion in 2002.
A 2005 A.C. Nielsen study found store brands account for 16 percent of grocers’ sales nationwide. The sector’s sales are growing 7 percent annually-more than double the rate of name brand sales.
Wegmans traditionally keeps the specifics of its financial results confidential. The firm’s officials do say 7,500 to 8,000 stock-keeping units, or SKUs, are store brands, out of some 60,000 SKUs the firm stocks in each store.
Flickinger said 13 percent of the stock is estimated to account for 35.5 percent of revenues. Wegmans declined to confirm the revenue figure.
Private-label products are cheaper, for the store and the shopper. Wegmans does not disclose its pricing structure, but nationally store brands sell at 10 percent to 50 percent less than name brand counterparts.
Private-label brands are products made by an outside company and labeled with the retailer’s choice of name or logo. In many cases, the brands are made by the same firms that make national brands. The vendor contract usually stipulates confidentiality, meaning stores are not likely to divulge the name of the manufacturer.
In the Rochester area, Birds Eye Foods Inc., Seneca Foods Corp., LiDestri Foods Inc. and High Falls Brewing Co. LLC manufacture products under other companies’ labels.
“By and large, we don’t have a lot of the corporate overhead that the big national brands would have in terms of marketing and advertising, maintaining multiple geographic locations, things of that nature,” said Michael DeCory, manager of Wegmans store brands. “For us, it’s smaller, a little more regional. And there is a margin opportunity in private label, again because we don’t have all that built-in overhead that the national brands do.
“It’s also a better value for the customer.”

Decades of evolution

Wegmans began merchandising private-label products in the 1980s. At that time, consumers were turning away from the trend toward generic or no-name products, whose quality was sometimes shaky.
At first, Wegmans leaned toward producing the types of items shoppers would be most apt to pay a little less for-aspirin, paper towels and napkins, for example-products where a national logo might not be deemed important.
But as the company grew into its reputation for quality in-store goods, with delis, bakeries and so on, the opportunities to develop more products that could compete with national brands grew as well.
Wegmans now has a variety of store brand families, including Food You Feel Good About with its yellow-ribbon logo, Wegmans Organics and the Traditional label.
Wegmans has its own frozen chicken pot pie, plastic sandwich bags, apple juice and rice. The firm’s stores have entire shelves devoted to its own brand of Italian products-Italian Classics-that compete with highly advertised national and international brands such as Progresso, DeCecco and Ragu.
The company’s European-style breads can be used with an Italian meal made with frozen Italian Classics entrees. The fruits and vegetables section has cleaned and chopped store brand fresh vegetables and fruits to round out the meal with little preparation by the cook.
“We look at trends, whether it’s things on television that we see, things in restaurants that we see, health trends, anything that might pique a customer’s interest,” DeCory said. “We want products that can catch a customer’s eye and make him say, ‘Hey, I saw that some-where; that is hot, that is good for me.’ We want to develop items that meet customers where they are at.”
Customers trust the quality of store brands in increasing numbers. A.C. Nielsen data indicates 68 percent of polled shoppers agree with the statement: “Private-label brands are a good alternative to other brands.”
Trust in a retailer’s name and reputation produce strong store brand sales, said Milton Sender, an industry expert with Daymon Worldwide Inc., a Stamford, Conn., firm that develops and markets store brand programs for retailers.
“An established chain known for innovation, such as Wegmans or Whole Foods, can put its own brand on the shelf in any area of the store not known for private label and the impact that store makes visually and ethereally on the consumer will virtually pre-sell the brand,” Sender said.
Wegmans brands have sold so successfully that they make the grocery stores a must-shop destination for consumers, Flickinger said.
He serves on a board at Cornell University in Ithaca. It is common, Flickinger said, to see parents visit students, then stop at Wegmans to buy hundreds of dollars of products. They put the food in suitcases, fill their cars or mail it back home where there is no Wegmans superstore.
“I have never heard of people bootlegging another store’s products to sell 500 miles away. But they do at Wegmans. Their store brands have made them a primary shopping destination,” he said.

Growth driver

Private brands are driving Wegmans’ corporate growth, Flickinger said.
“Within the decade, Wegmans will be the largest corporation in the Greater Rochester area, with sales exceeding Kodak, Xerox and Bausch & Lomb, because of the private label,” he predicted. “Within the next decade, it could well be the largest corporation in New York State and easily one of the largest in the Northeast.”
However, it is unlikely Wegmans will go the way of California-based Trader Joe’s Co. Inc., Flickinger said. Some 80 percent of Trader Joe’s national sales come from its store brands. Wegmans prefers to keep a broad and deep selection of products for its shoppers, he said.
“The W brand of soda is one of the most well-developed in the country,” Flickinger said. “But Wegmans still does a good job selling Pepsico products. In fact, Wegmans moves more Tropicana orange juice per store door than almost any other retailer. And it still does well with its own orange juice.
“But even better, Wegmans has fresh-squeezed juice that is even better than Tropicana. That’s why Wegmans tends to be the market share leader.”

Focus on quality

The most important issue for Wegmans is its store brands must be high quality, DeCory said. Wegmans’ most valuable asset is its goodwill: Poorly made store products will dent the firm’s reputation.
So the process for contracting with a supplier for a store brand product is rigorous, he said. Initially the company identifies manufacturers capable of creating the product Wegmans wants to sell.
“We have a very strict supplier quality assurance program,” DeCory said. “Just because someone can produce an item doesn’t necessarily mean they will produce it for us.”
An auditor visits potential vendors for Wegmans and investigates its manufacturing practices. Along with cleanliness and use of quality resources, Wegmans looks for vendors who have a system in place to document what happens to a product along each stage of its manufacture.
“We want traceability,” DeCory said. “If there is something wrong with a product, we can trace it back through the chain and then see where something might have gone wrong.”
If a manufacturer does not pass the audit, Wegmans will explain where it failed.
“If they don’t pass, we will tell them where they fell short of our quality standards. Then, if they want to improve in those areas, we will go back and re-inspect,” he said.
Wegmans prefers to develop ongoing relationships with vendors the company trusts.
“We try to leverage existing relationships wherever possible, because obviously we are comfortable with those companies,” DeCory said.
The best-selling Wegmans private-label products are items customers tend to use every day, DeCory said.
“From a unit and dollar sales perspective, common items are better sellers. Bottled water is a great example. Our cereal category. Pasta sauces,” he said.
Some other product sectors are beginning to rival the standard best sellers though, he added. Convenience fresh fruits and vegetables, for example, “are creeping up there (in sales),” he said.
Wegmans continually searches for new products to slap its label on, DeCory said.
“Right now, all natural and organic products are something we are focusing on. If we can help customers lead healthier and better lives and if we can develop some Wegmans products to help support that, great.”
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02/24/06 (C) Rochester Business Journal