Private-label products continue to gain market share. Why? Because private labels provide shoppers with an affordable alternative to national brands and give retailers a boost in profitability.
Every major CPG category saw yearly sales increases, but the top 100 CPG brands declined in volume, according to the Clarkston Consulting article, How to Achieve Margin Growth Without Mortgaging Your Top-Line. The article sites that a bulk of the decline was attributed to brand-shifting within categories and increased fragmentation of consumer preference for brands.
Cadent Consulting suggests that private-label dollar share could reach 25.7% by 2027, growing more than 8 percentage points from where it is today.
Private labels made up 16% of the market before the pandemic (up 2 percentage points since 2014), according to IRI. And, since the start of the pandemic in the US, private-label sales grew 29%, outpacing regular-branded product sales (which grew by 24%), according to Nielsen.
Read “Battle of the Brands” article in Issue 3 of Smoke Jumpers Magazine.
Private-Label: Pandemic Predictions
Food brands across the country (and world) are adapting to business changes due to the spread of the novel coronavirus. Due to the shelter-in-place order, consumption has moved from out of home to in-home.
Americans are increasingly experimenting with alternatives to their favorite consumer product labels as they cut back on spending and find go-to products in short supply. “We’ve seen a huge increase in private label,” especially toilet paper, cleaning supplies and packaged foods, said Richard Galanti, CFO at Costco.
Research firm AlixPartners found that a quarter of consumers have tried private-label brands for the first time during the pandemic, and at least 30% of consumers who tried private-label products plan to stick with them.
Thanks to empty aisles, shoppers might leave the pandemic with new brand preferences or lower brand loyalty.
- 71% of women now say that the virus is impacting where and how they shop, a 115% increase from late February 2020.
- 59% of women surveyed said that the virus was impacting how much they spent on products, compared to 56% of men.
- 47% of men say they are stockpiling groceries.
“Even before this begun, the growth rate of premium CPG had already begun to decelerate,” notes Dr. James Richardson to Food Navigator USA. Right now, many premium packaged food brands are experiencing a sharp uptick in sales but in the long run, consumer behavior could change. And, private label, according to Food Navigator USA, always does well in a recession. “Private label is likely to experience an uptick,” predicts Nick Fereday, Executive Director at Rabobank.
The pandemic is “going to create opportunity for some brands that aren’t the number one or number two leading brands in their categories, but it’s also going to put them under immense pressure. It’s going to put entire categories under immense pressure,” Keith Anderson, SVP of Strategy at Profitero says.
The crisis is eroding customers’ loyalty to big brands and spurring them to give other items, including the cheaper private brands, a second look, Kroger CEO Rodney McMullen told analysts last month.
3 Common Challenges for CPG manufacturers to Address
♦ Challenge #1 ♦
Multiple Price Point Private Label Competitors
Reality: Gone are the days where private label means lowest price. Private label brands exist across products and price levels.
Impact: Pricing promotions that once made national brands cost competitive to private label items, may drop its product into a separate tier where the lower price intended to drive volume becomes the consumer expectation for everyday price.
♦ Challenge #2 ♦
A Race to the Bottom
Reality: As private label takes market share away from national brands, the reaction is to significantly drop prices to stop declining sales.
Impact: The “follow the leader” mentality of competition will quickly drive price down throughout the product group, eliminating any margin difference between national brands and private label products. Retailers won’t allow this to happen since it threatens the sustainability of the category and the profitability of the retailer. As a result, retailers use shelf space as a bargaining chip to maintain profit margin, making it difficult to compete with private label products.
♦ Challenge #3 ♦
Reality: Retailers data makes informed decision making possible. Because of the timeliness of their data creates an inequity where retailers can leverage knowledge to shape manufacturer’s pricing and promotions for their benefit.
Impact: Without bringing usable insight to the negotiating table, manufacturers will continue to by at the whim of retailers that prioritize private label profitability over collaborative category development. As private label sales rise, so will the power of retailers to limit branded influence unless manufacturers can use their own analytics and optimization planning capabilities to create an alternative and inclusive narrative.
Retailers and Private Label
“At this point in time, private brands have never been more critical to retailers’ strategies,” says Carol Spieckerman, a retail strategist and trainer. “Digital has driven the ubiquity of national brands, so price comparisons are a click away. Private brands are one of the only ways to differentiate, drive destination shopping and blur price comparisons.”
Walmart’s Great Value label is America’s largest food brand. Doug McMillon, President and CEO of Walmart, says “If we have engineered our specs so that you really love our granola, then there’s a loyalty that passes not just through the store but into the e-commerce business as well.” “Product-driven loyalty becomes even more important that it was in the past.”
Kroger generates more than $20 billion a year from its private-label brands. “Our private brand is shaping the way we redefine the grocery customer experience,” Robert Clark, Kroger’s senior VP of Merchandising said. In Kroger’s third quarter 2017 earnings report, their private brand portfolio delivered strong results, making up 28.2 percent of unit sales and 25.6 percent of sales dollars.
Trade Strategy and Promotions
The rise of store brands has diminished manufacturers’ traditional advertising and pricing power. Embrace an agile operating model focused on brand relevance. Manufacturers need to convince shoppers that their brand is worth the money. To do this, manufacturers need a coherent branding strategy.
Excessive promotions train the consumer to wait for deals and shift the focus from the product to its price. National brands should pull back price-related promotions that can decrease consumers’ reference price points. When developing a promotions strategy, consumer product companies should more actively consider non-price-related promotions. While short-term promotions can increase sales, they can damage brand equity in the long run.
Prioritize analytics to meet the new challenges of private label growth:
1. Closing the Data Gap
A TPO automates and conjoins consumption, spending and shipment data into a centralized database. This allows for real-time base and promotional analysis and the calculation of definite lift coefficients to drive actionable decisions. This is the first step in closing the data gap, and applying one version of the truth about the execution and impact of promotions between retailer and manufacturer.
2. Measuring the Impact
With visibility to historical promotional and base volume data, analysts can quantify the return on the promotional investment. Equally important, is the ability to measure the impact private label price has on base or promotional performance. What happens to base volume when private label is promoted? How are promotions affected by private label everyday price?
3. Creating Collaboration
The onus of responsibility for bringing retailers and manufacturers toward mutual benefit is going to rely on the manufacturer’s ability to show numerical evidence of profitable opportunity. Predictive planning and optimization considers specific retailer constraints and calculates retailer KPIs. This forecast shows the impact of new promotional tactics and warns against retailer-driven and private label price slashing.
4. Optimizing Outcomes
Private label success isn’t going anywhere. Manufacturers that want to remain competitive and sustain growth in these categories need to realize it is not about spending more to chase volume or spending less to salvage revenue. It is about spending better. How do you maximize the return on your investment? Use the modeling and AI capabilities to optimize strategy and customer plans for the realities that exist today.
Private labels are here to stay
Manufacturers need to focus on product innovation and adopt a pricing approach that makes their product a must-have. Edwin Artzt, former Procter & Gamble CEO once said, “We’re not banking on things getting better with time. We’re banking on us getting better.”