The Revenge of the Generic

Copying Target's model, chains such as Office Max and Costco are developing more upscale, store-brand products—and customers are buying them

by Reena Jana

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It used to be that few people would admit to buying generic. You remember, those almost comically minimalist packages of food, starkly decorated with text indicating the contents—"Spaghetti" or "Frozen Peas"—produced and sold by grocery-store chains, such as Star Markets (one of the first to offer such products in the U.S.) or the Canadian chain Loblaws, in the 1980s?

With no need to pay for product marketing or ad campaigns, the stores could price their offerings low to compete with name-brand products on price. But the no-frills packaging became associated with the perceived blandness and low quality of non-brand-name goods. In the last 15 or so years, however, there's been a dramatic shift: more and more consumers are buying store brands.

Surveys conducted by industry group Private Label Manufacturers Assn. and reported in a study released in November, 2006, show that—for a number of reasons—such in-house brands have dramatically gained respect in the marketplace. And big-box stores from Costco (COST) to Office Max (OMX) are realizing that launching higher-end, private-label goods can boost a store's revenues—and image.

The Target Effect

In 1991, just 12% of U.S. consumers would admit to being "frequent" buyers of any such store brand, according to the PMLA. By 2001, though, that percentage had jumped to 36%. Fast-forward to 2006 and 41% of consumers admit to frequently purchasing store brands.

One catalyst of the private label trend: the so-called Target (TGT) effect. In the mid to late 1990s, the discount department store started to develop exclusive, well-designed, in-house products that sold at competitive prices alongside nationally known, established brands. The company famously recruited design-world luminaries such as architect Michael Graves and fashion designer Isaac Mizrahi to create inexpensive product lines, and aggressively promoted the collaborations. As a result, Target's brand recognition rose, along with overall sales, as new buyers discovered the discount emporium.

But there are other reasons stores spend time and money to develop private-label products. Such in-house offerings give a retailer "leverage against vendors, driving its [wholesale] prices down," explains Bob Nelson, vice-president of finance and investor relations at Costco. "Plus, private labels threaten to take the shelf away from [vendors' products]." A survey of 1,048 consumers conducted by Bellevue (Wash.) market researcher Hartman Group, published in August, 2006, indicates that 82% of consumers polled believe store brands generally match the quality of national brands. The data indicate that most shoppers now see private-label goods as on par with any other product.

From Tires to Package Tours

Costco, which saw $60 billion in 2006 sales (up 13.6% from the previous year) and is currently the nation's largest wholesale club, has promoted its private label, Kirkland Signature, for 15 years. The brand encompasses a staggering—and curiously broad—array of offerings. "It started out with only a few labels, then gained steam and momentum to range from soda to food to tires to camera film," Nelson says, adding that the line's name refers to the city in Washington where Costco's headquarters once were based. Costco executives decide what private-label categories to pursue on a case-by-case basis.

"It really depends on the quality of the product, and how competitive we can be in terms of offering a lower price and driving volume," he says. Today, Costco customers can buy anything from Kirkland Signature roasted chickens to a $100 Kirkland Signature ballistic-nylon rolling briefcase to a $6,330-per-person, 10-day package vacation to South Africa promising "luxury" accommodations.