Welcome to the new era of private-label brands in the US
US retailers are doing three big things they haven’t done in the past, Victor Martino writes, which is putting pressure on manufacturer CPG brands.
Kroger’s Simple Truth private-label non-dairy ice cream on sale in Myrtle Beach, US, 11 February 2021. Credit: Kristi Blokhin / Shutterstock.com
You might not know it but we’re at a seminal period in the history and development of retailer, or private-label, CPG brands in the US.
First, a little data. In a recent FMI survey conducted by research firm The Hartman Group, 41% of US grocery shoppers said they’ve purchased more private-label brands since 2020, with 30% citing higher grocery prices as the primary reason for doing so.
But, even more importantly, while 55% of US consumers said they buy retailer or store brands because they’re less expensive, 63% said private-label brands offer good value, which is why they purchase them.
Value is a much more long-term attribute when it comes to CPG brands than price only, which is a more transitory variable. Grocery inflation, resulting in much higher prices for branded products, for example, has been the primary consumer driver of private-label in the US over the last two years. Historically, as these branded products come back down in price, consumers tend to shift back to them rather than continuing to purchase store brands as their first choice.
Private-label CPG products had an 18.2% dollar share of the US grocery market, which is much higher than in 2019.
However, 2023 might be the year in which traditional consumer behaviour begins to change. Private-label manufacturers and the retailers that make, market and sell them will be watching closely.
In a recent study of 2,000 consumers by research group Attest, 73% said they intend to keep buying store-brand private-label products across all categories after inflation eases (which it’s been doing over the last few months), with only 9% telling researchers they will switch back to manufacturer CPG brands.
This potential counter-historical trend was also picked up by researchers in the FMI survey. In an analysis of the study and other data the association has compiled, FMI says it’s found that nearly 77% of consumers who are already buying private-label brands say they expect to purchase even more in the future.
These findings are based on consumer self-report data, which is open to interpretation, but hard sales data seems to indicate that, at least in 2022, consumers were voting with their pocketbooks. Private-label CPG products had an 18.2% dollar share of the US grocery market, which is much higher than in 2019, and FMI says it expects that percentage to hit 22.6% within the next two years, which is a healthy growth spurt.
CPG companies, particularly the majors which have raised prices to retailers and wholesalers significantly over the last two years, should be paying much more attention to the store brand challenge than they are. Just because consumers tuned in a significant way to big, familiar brands during the pandemic shutdown, boosting company sales and products, doesn’t mean they are hooked on iconic and other major brands. In fact, food inflation and brand price increases are showing in many cases a flight to private label as the numbers indicate and as the research indicates – what consumers are saying they will do – a change of behavior could be in the offing.
Even up until recent times, private label has mostly been about offering a lower-price alternative to national and regional CPG brands. In the late 1980s, this started to morph a bit when a few retailers started to add premiumisation to the store brand mix. In the 1990s, some retailers added organic and natural brands, and beginning in around 2010, a movement to look at private label more in a consumer brands paradigm began to take hold. Today, having a portfolio of brands, ranging from low price leader (bare bones brands) to premium, natural, organic and even gluten-free, keto and more niches, is considered the norm.
In the US, private-label products are increasingly becoming simply brands, as the lines between them and manufacturer brands – major, emerging and even start-up/early-stage brands – continue to blur.
The pressure on brands
Retailers are doing three big things they haven’t done in the past that are putting added competitive pressure on manufacturer CPG brands.
First, retailers are infiltrating every category with store brands. No category, even those with less than impressive total revenue, is exempt from the private-label challenge. In the past, US retailers made efforts to make categories more differentiated because most of their private-label efforts were focused on only cloning manufacturer brands rather than also including new product innovation. This is why retailers focused on categories like milk and soda pop – easy to clone, not highly differentiated.
Those days are gone for nearly all retailers and many, like Trader Joe’s, Aldi, Costco, Walmart, Kroger, Albertsons, Target and others, are running near-CPG operations within their retail operations, which is a practice that’s only going to grow and get better.
The strategy today for these and other retailers is to infiltrate every category with brands from low-price point to premium, natural, organic and more. Multi-channel, multi-category.
Credit: Courtney Hale / GettyImages
Additionally, retailers are increasingly conducting consumer research in the same ways big consumer packaged goods companies do, particularly in the area of food and beverage. Alongside this research is the incorporation of consumer interests into private-label brand product development. Up until a few years ago, this was an effort and expense most retailers avoided, instead cloning manufacturer products and then giving their store-brand superior pricing and shelf space as a way to try to push sales of their private-label brands.
US grocers are also incorporating consumer concerns in areas like environmental sustainability – organic, regenerative, etc. – and dietary needs – gluten-free, no sugar, reduced sodium – into their private-label offerings.
Lastly, retailers – not all but many of the majors – are increasingly viewing store brand marketing in the same way as CPG companies always have.
This means developing consumer marketing (creating consumer pull) as well as retail promotion (pull) strategies and then implementing these strategies with programmes. Retail media networks and elaborate social media marketing platforms are now the norm for retailers and their brands, along with other forms of consumer marketing, rather than the historical focus on retail promotions only. Push and pull go hand and hand when it comes to CPG marketing no matter if the brand comes from Nestlé or General Mills – or Walmart or Kroger.
In many European markets, private label has a much higher market share than in the US. But, with store brands now grabbing a little over a 20% share here in the US, manufacturer CPG brand companies, particularly the majors, should be getting a little nervous.
Over the next decade, there’s no reason that the percentage in the US can’t catch up to those seen in Europe. Much of it depends on how much investment grocers put into their store brand programmes – and retailers like Trader Joe’s, Walmart, Target, Kroger and Albertsons (to name just five) are putting in major efforts. If Kroger’s acquisition of Albertsons goes through, the combined retailer will also be one of the top five CPG brand companies by sales in the US.
The key for CPG companies large and small is to continue to innovate. That is still a major competitive advantage they have over retailers when it comes to consumer brands, along with the fact it’s 100% of their focus.
Marketing, too, is part of the secret sauce of traditional CPG brands. Consumer brands aren’t the core competency for retailers, so unlike CPG companies, they have to always be playing catch up, although in the new era of private label, US retailers are playing offense more and more. It also helps that they own all that in-store real estate called shelf space.