Kroger packs success into house brand

SPRINGDALE, Ohio — Ice cream swooshes out of metal nozzles and swirls into 38,000 "party pails" per day here, one of many ways Kroger Co. is using its massive manufacturing capability to feed growing demand for low-priced store brands.

Kroger is selling 15 percent more in-house products by volume this year, including these four-quart tubs of ice cream, which cost as little as $2.99 each at Kroger grocery chains like Dillons. National-brand ice creams go for at least four times as much.

Kroger makes almost half its roughly 14,400 in-house products, while most grocers contract with other companies to make such items. The company — the nation's largest grocery seller aside from Wal-Mart Stores — has the biggest self-owned manufacturing operation, with 40 factories, followed by Safeway, which has 32.

Making store-brand products themselves gives companies better control over costs and production decisions, a key advantage as consumers' recession-driven frugality eats into sales and grocers cut prices. Less than four weeks after Kroger executives approved producing ice cream in four-quart pails at the plant here, hundreds of thousands had reached stores.

"Speed to market is a benefit," said Krista Faron, a senior analyst for market research firm Mintel International. "To the extent that you can control your production and manufacturing and getting it on your shelf faster, that helps."

Industrywide, sales of store-brand grocery items jumped nearly 10 percent last year. At Kroger, 35 percent of the products sold in its nearly 2,500 stores were house brands, up from 31 percent five years ago.

The initial appeal usually lies in a house-brand's price: A 2-liter bottle of Kroger "Big K" cola was selling recently for 69 cents at a suburban Kroger store, compared with $1.79 for the same quantity of Coke.

Kroger officials won't say how much better their profit margins are on house brands compared to national, though they say they have sacrificed some profit during the recession to get new customers to try the company's brands in the hope of building long-term loyalty.

"We're growing significantly in what we make," said Calvin Kaufman, president of Kroger manufacturing. "We are adding shifts as well as adding people, and we keep getting more efficient to add to capacity."

Both Kroger and Safeway also make products for smaller chains. But Kaufman said that business is shrinking as Kroger takes more plant capacity for its own.

As Kroger has added store-label versions of soft drinks, cheeses, spaghetti sauce and more in the past year, it has created about 400 manufacturing jobs for a total of 7,400.

Many stores are improving their in-house brands' quality and variety.

"For consumers, it's a glorious thing," said Mintel analyst Faron. "They have more choices than ever before with extremely high quality and lower prices."

Pleasanton, Calif.-based Safeway says making its store-brand products helps it keep costs and prices down.

"We can produce private label products at a very attractive cost and pass that along to consumers," said Melissa Plaisance, Safeway's senior vice president for finance and investor relations.

Safeway, the only competitor that comes close to Kroger in the volume of in-house manufacturing, didn't release details about its factories' capacity or the number of products it makes in-house.

In-house manufacturing — which Kroger has invested hundreds of millions of dollars to upgrade and expand — is not for everyone. National grocer Supervalu, based in Minneapolis, doesn't see it fitting "within our current business model, or the strategy we have for our own brands program," spokeswoman Haley Meyer said.

And Wal-Mart spokeswoman Caren Epstein said the world's largest retailer benefits from its scale instead of owning factories to produce low-priced store items, led by the Great Value brand.

Both Safeway and Kroger also hire out to make many store-brand items.

Kaufman said it's crucial that Kroger brands conjure associations with good quality, not just low price. Otherwise, sales may fall away as the recession ends.

"What we're saying as a team is that this is an opportunity: Because of the economy, we're getting a lot more trial (customers)," he said. "We want to keep them coming back."