By Emma Thomasson and Richa Naidu
BERLIN/CHICAGO (Reuters) - Multicoloured, sparkly ice cream is an unlikely battleground in U.S. grocery stores. But Kroger (NYSE:KR) Co believes products like Kroger Best Unicorn Swirl ice cream will help it win market share from Walmart (NYSE:WMT) Inc, Aldi and Amazon.com Inc (NASDAQ:AMZN).
By churning out trendy new house-brand items, Kroger hopes to tap into broad sales growth for private labels. The push comes as grocers compete fiercely on price and race to expand online ordering and delivery, an area where the biggest U.S. grocery chain has lagged.
Kroger added 1,022 "own brand" items in 2018, and each supermarket on average stocks more than 15,000 private-label products such as pet food, clothes, furniture, meal kits and office supplies. Kroger's 16 house brands now account for more than 30% of unit sales, the company said in March.
"We don't see this slowing down at all," Kroger Chief Executive Rodney McMullen told Reuters in an interview in May.
Cincinnati-based Kroger has long made store brands that compete with name brands from Kraft Heinz (NASDAQ:KHC) Co, Nestle and others. But it started focusing more on its own brands in 2012 and flagged them as key to reviving sales growth when introducing its “Restock Kroger” plan two years ago.
Graphic on store brand growth: https://tmsnrt.rs/31Ff7UN
Kroger's Simple Truth line hit $2.3 billion (£1.8 billion) in annual sales to become the biggest U.S. natural and organic brand, the grocer said in March. Sales of its Kroger range and premium Private Selection food line are also growing, with the total own brand portfolio expanding 45% since 2011.
Kroger has been using data to spot trends and jump on them quickly, McMullen told Reuters, and unicorn ice cream is one example.
Starbucks Corp (NASDAQ:SBUX) kicked off the unicorn food craze in 2017, sparking a social media frenzy with its pink and blue Unicorn Frappuccino. Breakfast cereal and cake followed, and Target Corp (NYSE:TGT) launched a cherry-flavoured Unicorn Magic ice cream last year.
Kroger debuted its cake batter-flavoured Unicorn Swirl in March, and saw more than 2.5 million likes and shares on social media for the product on National Unicorn Day on April 9. It declined to comment on sales, beyond saying they had far exceeded the company's expectations.
"Kroger has been very clever about expanding into rapidly growing categories," said Neil Saunders, who heads retail consultancy GlobalData, highlighting brands like Simple Truth and Home Chef meal kits.
Simple Truth has likewise benefited from a social media boost. Kayla Schneider, 28, a vegan receptionist and beauty advisor from Fenton, Michigan, has 11,000 Twitter followers and earlier this year tweeted when Simple Truth vegan ice cream went on sale.
“I have a lot of followers who also share my type of diet and I like sharing new finds/yummy products so they can try them out as well,” Schneider said in a Twitter direct message.
Almost half of Kroger's private-label grocery lines, including bakery and dairy items, are produced in its 37 plants, giving it an advantage over rivals when it comes to quickly creating and testing out items.
Kroger makes more in-house than other U.S. retailers, with Walmart outsourcing all store-brand production until very recently, when it opened a dairy in Indiana, retail consultant Roger Davidson said.
"They (Kroger) are very serious about private label and in my opinion better than any consumer goods company in the U.S.," said Davidson, who used to oversee food procurement at Walmart. "Big CPG companies are really struggling," he said, referring to consumer packaged goods makers.
Kroger reports quarterly earnings on Thursday. It has been looking for ways to claw back market share from Walmart, the world's biggest retailer, and German discount chain Aldi. It also has to grapple with Amazon's fast-growing private-label sales, both online and in Whole Foods.
Aldi shares tanked in March when it reported a 10% fall in fourth-quarter revenue and lower-than-expected earnings for the first time since October 2017.
FAMILIES CAN SAVE $3,000 A YEAR
Soaring commodities and freight costs have pressured margins at companies like Procter & Gamble Co and Unilever (LON:ULVR) PLC in recent years, making it harder for them to compete.
Private-label products on average are about 20% less expensive than branded goods, according to data from market research firm IRI.
Nestle said in April there was no point in its Pure Life brand trying to outcompete private-label bottled water. The world's No. 1 consumer company is expanding its premium, fizzy and flavoured waters to eventually outweigh some lost volumes.
At a Kroger-owned Mariano's in Chicago, 24 bottles of own-brand water cost $2.50 versus $4.99 for Pure Life.
A U.S. family of five can save up to $3,000 a year buying private-label food, and get equal or higher nutritional value, according to Burt Flickinger, managing director of retail consultancy Strategic Resource Group.
U.S. private-label packaged food sales were $65.42 billion last year, up 7% from 2013, according to Euromonitor.
Own-brand products made up 14.9% of U.S. store sales in 2018, up half a percentage point, with frozen, pet and baby products growing fastest and millennials buying most, according to IRI.
That compares with an international average of 39.4%. The share is highest in Britain at 52.5%, in part due to discounters like Aldi.
Aldi is expanding rapidly in the United States and seeks to become the No.3 U.S. grocery chain with 2,500 stores by 2022. It sells products that are almost entirely house brand, including weekly deals on clothes, toys and homewares.
Last fall, Kroger rolled out an in-house fashion label called Dip, sold in 305 of its 2,800 stores. It added Dip homewares and furniture in 525 stores earlier this year.
But analysts say Dip, with clothes that are $19 or less, has been underwhelming.
"Any grocer that goes into non-food often doesn't do very well," GlobalData's Saunders said.
A Kroger spokeswoman said customer response to both Dip apparel and home goods had been favourable.
KETO, PALEO, FLEXITARIAN
Kroger has a 400-person team developing its brands. The company poached Gil Phipps in 2012 from Texas-based retailer H-E-B, which has sought to emulate British store brand leaders like Sainsbury's since the 1990s.
Phipps said Kroger's consumer trend data will dictate where it expands next: "We will continue to introduce more plant-based foods and products that fit various eating styles like keto, paleo and flexitarian."
But Walmart has also been adding private labels, while already squeezing Kroger on price and outperforming on e-commerce and automation.
In March, Walmart launched its Hello Bello line of plant-based baby products with actor couple Kristen Bell and Dax Shepard. A month later, it introduced Unicorn Sparkle ice cream selling for $2.24 for 48 ounces, compared to $2.50 for Kroger's Unicorn Swirl.
"I want to offer the best quality products for the best price, and we have been concentrating on that and I’m thrilled with the progress we have made," Walmart's U.S. CEO Greg Foran told shareholders earlier this month.
As part of the "Restock Kroger" drive, the company is also investing in store revamps and delivery, although a joint venture with British online grocer Ocado (LON:OCDO) is taking time to ramp up.
"I worry whether Kroger is really keeping the end consumer in mind. They have so many irons in the fire," said consultant Davidson.