Lower Prices Could Hurt Private Label

A name like Smuckers may be good, but those of the neighborhood grocer aren’t half bad anymore.

That is the verdict of many consumers who have replaced brand-name foods with private-label alternatives made by third parties such as Ralcorp Holdings. The shaky economy has exacerbated a trend that began much earlier, when higher-quality foods labeled under trusted store brands gradually replaced “generic” foods that failed to grow market share.

The hitch is that recent food-price deflation has made it easier for brand-name manufacturers to offer discounts, likely helping them protect market share. Private-label firms, which can’t push their brands through advertising, tend to fare best when their household-name competitors are raising prices, leaving a potential opportunity.

It is tempting to bet on that scenario now, with some grocers already predicting inflation later this year. But any payoff could be a ways off. First, the recent pullback in soft commodity prices may mean brand-name manufacturers have less need to raise prices. Robert Moskow of Credit Suisse says his forecast for cost inflation in 2010 among packaged-food companies has fallen to 2.5% from 5% since the start of the year.

To read the rest of the story, please go to: Wall Street Journal