Private Label Growth: a Moment or a Movement?
September 13, 2023
Have you noticed that your favorite potato chips are now $1 more than they were last year, and $3 more than they were three years ago? If so, you’re a victim of inflation. If you’re now reaching for the Kroger brand of chickpeas instead of the name brand, is it solely because of price or because you’ve realized the quality is just as good for an even lower price?
For the past two or three years, inflation has run rampant during and post-Covid. We have seen 8-12% price increases become common for consumer goods every year, thanks to government restrictions, production limitations, shortage of materials, supply chain disruptions, etc.
Thankfully, this year, in 2023, we can see that inflation in consumer prices is finally slowing down (3.7% versus 2022). Many commodities and staples have shown sharp price declines (e.g. eggs, poultry, produce, gasoline).
However, many core center store products and pantry staples have maintained elevated pricing even as supply issues have been mitigated. After two or three rounds of price increases over the last few years, many center store grocery products are now retailing at a 30%+ premium over pre-Covid prices. Several consumer packaged goods giants are reporting minimal or negative unit sales growth, but significant revenue growth, and very attractive profit growth due to price increases, cost-cutting, and improvements in the supply chain.
The consumer has been faced with sticker shock at the shelves, but by and large, they have stayed loyal to brands, maybe out of a desire for normalcy and maybe also because of a lack of attractive lower-cost alternatives. Retailers reported shortages of product supply from private label suppliers, many of whom also produce products for national brands, as they give priority to their major national customers.Consumers were as likely to find empty shelves for private label products, who offer fewer varieties and sizes, as for national brands over the past two years.
Nonetheless, private label growth is happening. Nielsen tells us that, “Private label sales, which offer an average of 13% savings compared to national brands, have grown by 4% in June [2023]. Retailers with diverse and well-established private label offerings will benefit from this trend.” Now that the supply chains have been replenished, the private label versus national brand dynamic is worthy of reassessment. So what are some of the reasons, beyond price, why private labels are seeing growth?
Quality Is Up
In the past, choosing a value brand often meant trading down in quality. If you’re a middle-class child of the 90s, you knew this life. “Great Value brand cereal over Kelloggs? Don’t let my friends see!” “Mom, can we PLEASE buy Coke instead of America’s Choice Cola??”
Well, a lot has changed since then. Knowledge and resources have increased. With the widening gap in on-shelf pricing grocery chains now have extra dollars available for purchase contracts, increased attention on product quality, and are able to require consumer testing by suppliers.
At-Home Chefs
More people are cooking at home for cost reasons and because they work from home. When you are creating a meal from scratch the cost and value of each ingredient can be more carefully considered. McKinsey tells us that, “the food-at-home market, which had been slowly losing share to food away from home before 2020, has surged 8.7 percent, four times its historical growth rate.” Now that we know consumers are opting for “cooking in-home [as] the new normal…, you need to understand how exactly brand shoppers [and] category shoppers are seeking value to keep up.” (Nielsen)
TV shows like Chopped invite us to get creative in the kitchen and Master Chef makes us feel like at-home chefs who can create something of restaurant value? Cooking at home makes us become more health conscious which inevitably leads us to becoming more label conscious consumers.This examination of label claims and ingredients can make the case for private label more compelling.
Category Selection
Store brands can be very competitive in categories where the national brands rely on reputation, heritage, or longstanding equity for their leadership positions, but which have no measurable distinctiveness or superiority in product performance. Frozen vegetables, coffee, and spices come to mind.
In addition to these categories a survey conducted by Acosta Group presents more categories where private labels hold a large share of sales. “Across the store, the highest shares of private label are in departments like Bakery, Dairy, and Household Care, where private label share ranges from 30% to 40% of sales.”
Branding
The reason that national brands command premium pricing is the branding itself, how it looks and what it represents. When Private Label invests in the presentation of the products via upgraded package design and strong branding it signals to the consumer the equal standing with the national brands.
Store brands are paying careful attention to the product presentation on the package to generate visual impact and quality imagery. Claims and product attributes that suggest superior performance are featured, just like a major brand would.
Everyone can take a note from the Trader Joe’s playbook. They have created a private label name for themselves that presents more like a national brand. They’ve done it through creative ingredients, distinctive products, and especially through their branding and packaging. It’s bright, colorful, fun, and unique. It almost feels like you’re purchasing exclusive products when shopping at TJ’s.
What’s Next?
“Consumers have taken notice of the potential savings in our current inflationary climate and pivoted to private label in droves.” And so, “This means grocery brands need to work even harder to compete with private label growth.” (Nielsen)
It’s doubtful that disinflation will ever become the norm, and the reality is, because companies are seeing that inflation hasn’t kept many consumers from purchasing certain products, those prices may never drop in the future.
Peggy Davies, president of the industry group Private Label Manufacturers Association (PLMA), says “Having opted for a store brand over the national brand for the first time, there’s a strong likelihood the shopper will stick with the store brand.” In contrast, BDO’s David Berliner states that when penny-pinching is no longer the norm, “we can’t assume consumer behavior is going to stay the same.”
Now that Private Label is a reinvigorated contender in the race for consumer grocery dollars it’s time for major brands to up their game and deliver on premium performance that goes with their premium pricing. If they don’t, the share of own brand sales in grocery will continue to rise and further enhance the power of the major retailers at the expense of CPG manufacturers.