Retailer demands on food & consumer products.

When Wal-Mart Stores recently persuaded Coca-Cola Co. to change the sweetener in a new diet drink, it was seen by many as a case of a retailer strong-arming a supplier.

But such moves may become more common. Retailers are keen at recognizing customer buying habits and are developing viable private-label competition to branded products. This combination makes retailers’ suggestions hard to ignore.

Private-label alternatives were once considered inferior knockoffs, but now are often high-quality competition instead, says Nick Gladding, a senior analyst at research firm Datamonitor. In some categories, private-label products often comprise the lion’s share of retail sales, particularly at warehouse clubs and superstores.

In a recent Gallup survey, about 75 percent of consumers defined private-label products as separate “brands.” In addition, a 2005 A.C. Nielsen report noted that “private label is the runaway retail train at the moment, and it’s on track to continue.”

There is a danger lurking for retailers, however. As they become more adept at creating new products, they may feel they can top major consumer brands. But few retailers can beat the brand manufacturers at their own game, says Brian Sharoff, president of the Private Label Manufacturers Association (PLMA).

Retailers such as Wal-Mart, Costco Wholesale Corp. and Trader Joe’s Co. have become skilled at making and marketing their own proprietary products, but not many retailers can build successful brands, Sharoff says. Creating new products isn’t easy: only one of 10 new product launches succeeds, while costing millions in research and marketing dollars.

But retailers that have thrived selling private-label brands may have leverage with consumer products companies when it comes to reformulating products, Bruce Barren, CEO of EMOC/Hanover, a venture capital firm based in Los Angeles.

If a consumer products company doesn’t listen to the retailer, another brand manufacturer will step in, Barren says. Competition is so fierce for shelf space that brand manufacturers don’t want to lose a good relationship with retailers, while branded product makers are fully aware of the power of private-label goods.

Store brands now account for one of every five items sold in American supermarkets, drug chains and mass merchandisers, representing about $50 billion of the $600 billion in annual food sales, according to the PLMA. “Some retailers have such distribution power that manufacturers would be crazy not to make a change to a product,” Sharoff says.

Last year, Coke was ready to introduce Coke Zero, a diet soda with the sweetener aspartame. But Wal-Mart suggested that the new diet drink be made with sucralose, better known as Splenda, citing customer demand for the sweetener.

Splenda has captured more than half of the $1 billion artificial-sweetener market since it was introduced in 2000. Eventually, Coke launched the soft drink as Coke with Splenda.

Other food makers benefit from listening closely to retailers. PepsiCo partnered with Taco Bell (formerly owned by PepsiCo), to come up with a special flavor of the Mountain Dew soft drink.

“We had a close affiliation with Pepsi and they understood our target demographics,” says Taco Bell spokesman Will Bortz. “This made it easy to collaborate with Pepsi, which we consider a strong partner.” PepsiCo spun Taco Bell off in 1998.

Retailers are closely monitoring which products have “juice,” says John Grubb, managing director of Sterling-Rice Group, a brand development consulting firm in Boulder, Colo.

While a brand manufacturer spends millions in promoting new products, a good deal of a product’s success depends on retailer support, Gladding says. As a result, the manufacturer faces an uphill battle in competing with not only other brands but with the retailer’s private-label products.

For their part, retailers feel that their proximity to the customer puts them in a position to give relevant feedback to consumer products and food companies.

“The feedback retailers get from their customers is useful to manufacturers,” says Stephanie Childs, spokeswoman for the Grocery Manufacturers of America (GMA). “Retailers are in contact with consumers and they can see what products succeed and fail.”

Childs says the collaboration between manufacturers and retailers also involves creating products and packaging that are unique for the retailer. In the future, brand manufacturers could work with retailers on creating special packaging.

For instance, Wal-Mart persuaded manufacturers to make a “super-concentrate” version of laundry detergent, in order to shrink packaging and get more product on shelves.

Apparel retailers have long had exclusive relationships with designers to create private-label brands. Target Corp., J.C. Penney and other retailers have hired fashion designers to develop exclusive apparel. But Childs notes that changing a product’s packaging and formula will cost manufactures, not retailers.

As a result, the consumer products and food business has to determine if the price of bending to retailers’ demands will generate enough sales to cover that cost, which can be millions.

“Whether a manufacturer changes his packaging for a particular retailer depends on the amount of increased volume that retail can expect to sell,” Childs says.

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