Generics Are Gaining on Name Brands

Recessionary forces are prompting shoppers to trade down from name brands, while off-brands are shedding their cheap-knockoff reputation

By Matthew Boyle

Whether they sell cookies or cough syrup, makers of generic products are profiting in perilous times. U.S. sales of private-label goods rose 10% in the year ending June 28, according to Nielsen, compared with a meager 4% gain for national brands.

Turning cheap in tough times isn't the surprise. What's different is that the rising quality of private labels may keep customers coming back. Products from manufacturers such as Perrigo (PRGO), TreeHouse Foods (THS), Home Diagnostics (HDIX), and Ralcorp Holdings (RAH) have evolved to name-brand quality and are starting to adopt similar strategies in marketing and innovation. "Today, store brands have a much more sophisticated offering," says Wendy Liebmann, CEO of New York marketing consultancy WSL Strategic Retail.

Several factors are behind this heyday for generics. In a homogeneous retail world, stores are looking to private-label offerings to distinguish themselves from rivals. Anyone can sell Cheerios, but Safeway's (SWY) O Organics line is so successful that it now licenses the name to other retailers such as France's Carrefour. With no ad costs, store brands also deliver higher profit margins.

Much of that money is being plowed back into the business. Home Diagnostics, which makes diabetics' blood glucose monitoring systems for retailers including CVS and Walgreens, invested $15 million to make its new product easier to use at a price that's roughly 35% below national brands. "We get pigeonholed as a private-label player," says CEO J. Richard Damron Jr., "but we spend a significant amount on R&D." Meanwhile, Perrigo, with $1.8 billion in annual sales of over-the-counter medications, just broke ground on a $25 million plant expansion in Allegan, Mich., and is acquiring companies abroad. "We're in a good spot now," says Perrigo CEO Joseph Papa.

The generics boom has also extended to TreeHouse and Ralcorp, which make private-label food such as salad dressings, soup, and hot cereal. "Not only are consumers trading down to lower-priced products, we believe that grocery retailers are stepping up their private-label focus to take advantage of that consumer migration," says SunTrust Robinson Humphrey (STI) analyst William Chappell. One sign that the balance of power may be shifting: Ralcorp recently paid $2.6 billion to buy Post cereal from Kraft Foods (KFT).