Wal-Mart has considered switching to private-label spices, testing the idea by replacing McCormick products with generics in some stores, reports The Wall Street Journal. This could be trouble for national brand McCormick, who generates 11% of its revenue from sales to Wal-Mart, mainly by selling brand-name spices.
McCormick's sales at Wal-Mart may not be wiped out altogether if such a switch happened. The company also produces private-label spices that could replace some of its brand-name products on Wal-Mart's shelves.
Even so, McCormick's margins could take a big hit. The company's generic spices sell for 30% to 40% less than its regular products. On the cost side, materials and packaging expenses are probably only slightly lower for private-label spices.
McCormick's trouble may not end with Wal-Mart. A look outside to Europe, where private-label brands make up a far higher proportion of food sales, suggests the U.S. trend may have further to go across the grocery sector. Kroger, for instance, already generates about a quarter of its sales from private label and has discussed raising the percentage, according to Barclays Capital's Meredith Adler. Such products account for more than half of sales at some European grocers.
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