Kroger Eyes Private Label Manufacturer Acquisitions to Enhance Cost and Quality Controls

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October 5, 2010

Kroger Co. said it is interested in acquiring some private label manufacturing facilities -- and has already approached a few – but so far asking prices are too high.

"People who are selling still have some idea of a big multiple in their head," Kroger Chairman and Chief Executive David Dillon said at the company's investor conference. Kroger has made a few unsuccessful bids for some private label plants, but it did not name the targets.

Private label manufacturing acquisitions could help the grocer better control store brands quality and costs in the future as consumers show an increasing disposition to continue purchasing private label products.

In another move demonstrating Kroger’s confidence in the future of its stores brand to buoy sales and profits, executives announced they plan to pass along to consumers any CPG price increases on national brands, according to a report in the Wall Street Journal.

CPG companies such as ConAgra and Sara Lee have pointed to rising commodities costs deeply affecting their businesses, although neither has raised wholesale prices yet.

Dillon told the Wall Street Journal that CPG companies unable to weather the rising costs risk ceding more valuable market share to private label brands. "I don't see [rising manufacturers' prices] as a problem for us. It is a problem for them," Dillon said. "Each national vendor must make a choice."

Manufacturers "raised prices more than they should have in many cases," Kroger President Rodney McMullen said during the investor conference.

Through heavy promotions, couponing and cost cutting, CPG companies have worked to regain market share lost to private label, but many manufacturers are frustrated these tactics have not worked.

"The general trend in pricing is going to be up. We're already seeing that in the marketplace given the cost of wheat," C.J. Fraleigh, Sara Lee's head of North American retailing told the Wall Street Journal.

Kroger executives, however, said price increases now are wrongheaded given the country’s continued high unemployment rate and weak consumer confidence. The company’s focus is driving sales growth, more than profits right now, demonstrated by Kroger’s 0.5 percent national market share gain last year, which translated into a $1 billion rise in sales, according to the report.

"We are not opposed to having higher gross margins," Dillon said in jest. “But fattening profits could cost Kroger shoppers and dissipate brand equity."

SBD Views: This story caused a real double take as my understanding was that both Kroger and Safeway viewed their manufacturing facilities as legacy assets that they’d rather not own so they could invest the capital elsewhere. It will be interesting to see if Kroger actually moves on their expressed interest and the potential that retailers have to drive up the purchase price of store brand manufacturing capacity, which is currently being rolled up by a select group of larger suppliers (Ralcorp, Treehouse, etc). -- John Failla for Store Brands Decisions

Read These Related Articles:

• TreeHouse Foods' Ambitious Private Label Pursuits
• Kroger Expands Private Label Beauty and Personal Care Line
• TreeHouse Foods' Sales Rise With Consumers' Growing Desire for Value
• More than 600 New Private Label Products at Kroger This Year
• Ralcorp Acquires American Italian Pasta Company

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