Private Label: A Growing CPG Crisis
Retailers’ increasing success with own-brand products is forcing national brands to address their dwindling competitive advantages.
Throughout the history of private label products, most consumer product marketers could claim to be winning the battle for shoppers’ hearts, minds and wallets. But those days are over. The growth of private label sales in the U.S. now significantly outpaces national brand products, and the influence of iconic brands, particularly among Millennials, is waning.
Retailers like Aldi and Trader Joe’s have raised the bar on private label quality and continue to remake the category’s image. Meanwhile, chains including Kroger, Wegmans, Costco, Walmart and Target are expanding their private label franchises with compelling new products and aggressive marketing and promotional strategies that allow these so-called store brands to go toe-to-toe with national competitors.
“Retailers are forced to differentiate themselves (as new multichannel threats have developed) and are using private label not as a tool to round out the consumer’s choices, but as a loyalty play,” says Werner Graf, global head of CPG industry at Mindtree, Warren, N.J. “In essence, many retailers are now CPG companies. That’s a fundamental shift. What is a CPG company to do when its customer becomes a competitor?”
Several forces are driving the growth of private label, including online shopping and the ripple effects of Amazon. Retailers are increasingly using e-commerce to reach beyond their traditional shopper bases and sell store brands. Kroger and Walgreens, for example, now sell their own brands to consumers in China via Alibaba. (Kroger is also expanding distribution of its private brands, including Simple Truth, through a pilot program at Walgreens stores in the U.S.)
In addition, private labels such as Costco’s Kirkland Signature and Sam’s Club’s Member’s Mark – both of which account for more than 25% of total chain sales – are available on e-commerce sites via third-party sellers. Says Graf: “Consumers have more choices in products and the means of acquisition, and they have unprecedented ability to know what price they should pay.”
Private label has come a long way from its previous copycat phases and generic roots. It is increasingly viewed as a bona fide way to drive traffic in a crowded retail environment with few remaining clear distinctions between the major chains. More than half (53%) of today’s shoppers visit a particular retailer specifically to buy its store brands, according to research from Daymon. Furthermore, 85% of shoppers trust private brands as much as national brands and 81% buy them on every, or almost every, shopping trip.
“The success of Aldi, Lidl and Trader Joe’s has given retailers confidence that private label can stand on its own, without the need for legitimacy created by the national brand,” says Aimee Becker, senior vice president of brand development at Daymon, Stamford, Conn. While private label penetration rates in the U.S. may never reach the 35% to 45% level of the most developed international markets, she says, they could hit 25% to 30% – up as much as 10 points from current levels – within the next five years.
The Marketer’s Response
When pressed, at least publicly, marketers insist they are taking steps to address the growing private label threat. “We understand for most retailers it’s an important part of their strategy, both from an equity standpoint and a margin revenue standpoint,” Dave Taylor, president and CEO of Procter & Gamble, told analysts during the company’s fourth quarter earnings call last July. “We’ve shown over time the ability to win in that environment, where the leading brand and the retailer brand can mutually be successful.”
Industry experts paint a different picture. Marketers often underestimate the staying power of private label brands, they argue, in part because their past successes always appeared to hinge on softness in the economy. Moreover, many of today’s marketers refuse to accept the idea that store brands can be held in as high esteem by consumers as a Tropicana or Tide, which suggests a certain level of denial of the problem or a lack of appreciation for the recent transformation within the private label business.
“Most large CPG companies still have a 1980s view of private label. They are not aware of how much the industry has changed or how much it is driving and impacting retailer activity,” says Jim Wisner, a former Jewel-Osco executive who runs a marketing consultancy in Libertyville, Illinois. For some marketers, he acknowledges, it boils down to ego. “A lot of marketers overestimate the importance of their own brands and underestimate the importance of the retailer’s brands to the retailer. Others don’t understand the private label threat well enough to take it as seriously as they should.”
Graf has a somewhat more nuanced view. “The acceleration of the private label threat has perhaps taken a number of CPG manufacturers by surprise,” he says. “Even when private label was conflated with generic brands back in the 1980s, most brand manufacturers were aware and watchful of the threat. But it was a different animal then. The products were not branded per se, unless you consider generic a brand. The packaging was typically no-frills and the quality noticeably inferior. CPG companies could cap the risk in their minds since brand loyalty wasn’t directly threatened.”
‘Joined at the Hip’
Private label has always had certain inherent advantages over brands from manufacturers. The products consistently generate higher margins in the food and beverage industry, for example. In the coffee category, private label manufacturers can satisfy consumer demand for sustainable ingredient sourcing and other eco-friendly initiatives, “but not at a premium price to the national brand,” says Clay Dockery, U.S. division vice president of corporate brands at Massimo Zanetti, an Italian beverage company and one of the largest private label coffee producers in North America.
The mutually beneficial relationship between private brand suppliers and retailers goes beyond pricing power. Dockery sums it up in two words: customer intimacy. “Our companies are joined at the hip in our desire for success,” he says. “We’re able to leverage greater insight into retailers’ go-to-market strategies and tend to have more open conversations about their long-term direction. We’re constantly working together to figure out how we can sell more of the products. I don’t think brand marketers can duplicate that.”
In addition, the relationship is becoming less transactional and more strategic. “More retailers are reducing the frequency of bids, where in the past every two years you’d see who had the best price and you’d make a decision about changing suppliers solely on the basis of price,” says Dockery. “Retailers have gone from a price advantage, margin-built strategy to a recognition that if their own brands are special enough – and the consumer can only get the product at their location – then they will have a big edge with shoppers.”
Private label’s strength is now materializing in accelerating sales growth. In the early to mid 2010s, its share of the CPG market remained flat at around 18%. In 2017, however, Nielsen noted “a complete reversal in the growth trajectory compared to branded manufacturer items.” By the fourth quarter of that year, store brands were posting dollar growth of more than three times the rate of branded products.
Brian Sharoff, president of the Private Label Manufacturers Association, says that a number of factors can explain the recent surge. “Innovation comes in many forms: better ingredients, better packaging, better product concepts or more responsiveness to consumer needs,” he says. Speed to market also tends to favor the retailer. “Retailers have developed specialty items and other innovative products more quickly than national brands,” notes Sharoff. “Part of the reason may be that national brands are too dedicated to the mass market to create niche products. Another reason may be that retailers, especially at the store level, are closer to the consumer and therefore able to translate shopper needs into products more effectively.”
One of Many Threats
To be sure, private label is one of many competitive threats facing today’s CPG manufacturers. Stories abound concerning the rise of challenger brands and direct-to-consumer brands in categories from razors (Harry’s, Dollar Shave Club) to eyewear (Warby Parker) to ice cream (Halo Top). Experts argue that each of these insurgent threats, including private label, demands a greater commitment from CPG marketers to innovation and a clearer communications strategy to remind consumers – especially younger generations – of what is special about their brands.
“Challenger brands and private label brands have a lot of the same appeal,” says Timothy Campbell, senior analyst at Kantar Consulting. “Private brands provide value and a lower price with the perception of similar quality. Challenger brands may be priced higher, but they offer a tangible benefit to justify the premium. Big brands are stuck in the unenviable middle. They’re not telling their story in a compelling enough way about why shoppers should be willing to choose them.”
Experts including Campbell believe that marketers are not doing enough to leverage their strengths in consumer research to create more emotional connections with trusted name brands. Some argue that CPG companies have too long rested on their laurels, failing to leverage or extend their brand promise and allowing private brands to step into the void. Kirkland Signature Hazelnut spread, for example, “sells very well,” according to Campbell, and sits right next to Nutella on Costco shelves. “Nutella has a unique formulation and cult-like status, but in this environment, marketers cannot expect to be able to protect those advantages forever.”
Price remains the primary driver of private label purchases, but shoppers no longer believe they have to sacrifice quality in making that choice. A recent Kantar survey showed that only 25% of shoppers in the private label food/grocery and health-and-beauty categories agreed with the statement: “I assume most private label products are lower quality than national brands, but I am willing to make that trade-off to pay a lower price.” Conversely, 66% of shoppers agreed with the statement: “If I like or trust a retailer, I generally assume their private label products will be good.”
Brands don’t always have to fight the private label trend. Todd Hale, a CPG industry consultant who observed the growth of private label over three decades while at Nielsen, suggests that brands can piggyback on the appeal of store brands by offering retailers new ideas for category-driven promotions, as well as by identifying opportunities for programs outside their core categories. “If a brand has a distinct characteristic or unique appeal to shoppers, then the marketer should be able to build a program with private brands that won’t cannibalize one side or the other’s sales,” he says.
Graf, an advocate for greater collaboration between brands and retailers, agrees. “Anything that makes a brand more valuable to the retailer is a good thing: consistency, predictability, ability to drive margin, transparency, ease of working relationships,” he says. “Roughly 86% of goods are still sold through stores. Brands should help retailers know why the relationship will drive traffic and prove it through data and analytics.”
Some marketers, however, may find themselves stuck in a cycle of trying to combat private label by commanding more shelf or floor space. “You can’t just throw more trade funds at the problem,” says Wisner. “There’s nothing wrong with keeping up the frequency of activation, but it’s not a long-term strategy. Eventually, a company will run out of gas, and in the meantime it diverts valuable funds from shoring up the core brand promise.”
Macro Strategies to Grow, Diversify
At a macro level, CPG companies are looking to develop new sources of organic growth as part of their response to many threats, including private label. In recent years, global food companies such as General Mills, Kellogg and Campbell Soup have invested in venture funds and incubator programs to develop a range of new capabilities in everything from supply chain and logistics to direct-to-consumer models and e-commerce.
Companies are also using these vehicles to expand beyond their core businesses through alternative research and development. Tyson Foods, for example, is using its $150 million New Ventures investment fund to back companies like San Francisco-based Memphis Meats, a startup that has been experimenting with stem cells to produce livestock-free lab-based meat.
Some small to mid-size CPG manufacturers have diversified into the private label business, creating a hybrid model like that of Massimo Zanetti, whose beverage portfolio also includes consumer brands such as Hills Bros. and Chock full o’ Nuts. This is far less common among larger companies (one noteworthy exception is Kimberly-Clark, which produces diapers for Costco’s Kirkland Signature line), experts say, in part because they’ll then no longer be able to claim manufacturing superiority over private brand producers. Plus, such a move can create a cultural shock inside the organization.
“Large multinational CPG firms are too hardwired with old ways of doing things to be able to do private label well,” says Wisner. “It’s a whole different set of relationships with the customer. There are different timelines, economics. Until you begin to internalize those things, you end up trying to run private brand like a national brand and you can’t respond to your customers effectively. Look at an organization like Treehouse. It’s got something like 80 plants, 24,000 SKUs – no one has to deal with that level of complexity in the branded world.”
Still, the temptation may be too good to pass up. Kroger’s Simple Truth line became a $2 billion enterprise in just five years. And there are many other untapped opportunities. Private brands have dominated fluid milk for years, a trend that Dockery expects to extend throughout dairy and eventually into the center store. Coffee too, he says, is underdeveloped. “About 21% of unit volume in center store is private brands, but coffee is only about 15%. We have a ways to go to get to the level we’re targeting, but we’re making methodical progress toward our goal.”
Even categories and channels that traditionally have not had much private label presence, such as drug and beauty, are jumping on board. Says Dockery, “There are multiple ways to get to growth. It’s a terrific business.”