Sources: Walmart, Kroger, Target, Safeway
Are outsized private label gains in grocery a foregone conclusion?
Grocery store brands are expected to be big winners in the near term as inflationary pressures and a potential economic downturn force consumers to trade down. Unlike other challenging periods, however, store brands have more going for them than low prices.
FMI’s “Power of Private Brands 2022” study found that 42 percent of shoppers who are buying more private brands buy them because they like the taste and 43 percent because of their quality. Store brands also increasingly rate higher on sustainability and contributions to health and wellbeing.
Price, nonetheless, remains the leading reason for purchasing private labels. FMI’s survey found that 63 percent of private brands shoppers consider private brands to be a good value and 55 percent buy private brands because they are less expensive.
Kroger, Walmart and Target on recent quarterly calls have indicated that grocery shoppers are trading down to store brands. Kroger’s Rodney McMullen told analysts, “When the economy is tight, our brands always gain share.”
National brands, which are estimated to account for about 82 percent of grocery’s mix, have continued to make adjustments as store brands have rapidly expanded in the past few decades.
Indeed, national brands in 2021 grew faster than store brands for the first time since 2016 amid supply chain disruptions, according to PLMA’s “2022 Private Label Report.” IRI, which produced the report, found store brands facing more supply shortages in 2021 while stimulus dollars and reallocation of household budgets “spurred consumers to elevate in-home consumption with more premium purchases and new flavor experimentation” to the benefit of national brands.
Younger generations were also comparatively purchasing more national brands. Speaking to Convenience Store News, Mary Ellen Lynch, principal of IRI center of store solutions group, attributed the weakness with younger generations in part to the growth of e-commerce that tends to favor familiar brands.
National brands are expected to lean on innovation, familiarity and promotions, if necessary, to defend share. Sean Connolly, president and CEO, Conagra Brands, said on a recent quarterly call, “We believe the data shows that consumers are finding comfort in the quality, reliability and familiarity that national brands provide, particularly modernized brands like those in our portfolio.”
- Key Attributes Beyond Just Price Drive Shoppers to Private Brands – FMI-The Food Industry Association
- FMI study: Private brands not just about price – Supermarket News
- PLMA’s 2022 Private Label Report – PLMA
- Private Label Outpaces Name Brands for 4th Consecutive Year – Winsight Grocery Business
- Consumer Demand For Private Brands – IRI Worldwide
- Demand for Store Brands Declining Among Younger Demographics – Convenience Store News
- Inflation Accelerates Private Label Share and Penetration – Dataweave
- Why Are Private Label Products Not Thriving Amidst Inflation? – The Food Institute
- Conagra Brands (CAG) Q3 2022 Earnings Call Transcript – The Motley Fool
- Are store brands set for a big growth spurt – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: How likely is it that store brands in the grocery channel will gain meaningful share over the next two years? How do you expect national brands to respond, considering the current inflationary environment?
Poll
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The allure of brands is not going to dissipate quickly. Billions are spent building and supporting national brands. But with the kind of inflationary pressure we now have, some level of drift to owned labels is inevitable. I myself am experimenting and I’m pleasantly surprised with the quality, taste and texture of the store brands I’m buying. And these early successes are giving me great comfort in testing several store products. The box or can is not as important as the quality and value of the contents.
Taking a customer-centric approach, Jeff’s experience is similar to millions of customers that are feeling more open and willing to experiment and try a store brand item. To the extent customers have the same “better than I expected” response as Jeff did to the trial, store brand share will improve. Store brands compete for the mind of the customer and if the underlying quality is there, gaining trial is the secret sauce in their long term growth.
Absolutely, Jeff. Your experience tells the story. In an inflationary period, people who never thought to try a store brand, try. What many find is at a lesser price, they are getting equal or even better quality than what they had been using. They will not be returning to what they thought was their “tried and true” choices.
I believe that store brands will see really healthy growth in the next several years. Consumers will trade down to save money. The big question is, will store brands earn their trust and will customers find them good enough that they’ll stop missing their favorite branded items? I think that depends a lot on the retailer and their product development process. The issue for retailers is creating store branded items that aren’t just cheaper versions of the branded products, they have to stand on their own. Target is one retailer that gets this right more often than not.
For national brands, they need to really look hard at pricing and value. Differentiate their products in ways that retailers can’t quite match. They also need to step up their direct-to-consumer efforts to earn customers directly through things like subscriptions or loyalty programs that provide incentives for their customers to not feel the need to try new items.
Elevated own-brand offers are not new. Many retailers have been offering mid- and top-tier own-labels for quite some time. Indeed, Target and Kroger were developing these long before the current crisis. However inflation has increased the number of people switching brands and this has been advantageous to retailers. This is aided by the fact that some of the big CPG conglomerates are hopeless at innovation which is why they are losing out to both retailer brands and smaller, niche brands.
Target’s grocery pivot in the Before Times to shoot for majority own-brand in core categories, as a point of differentiation as well as cost control, continues to pay handsome dividends.
Yes, and (in my subjective opinion) a lot of Target’s own brand products — like Good & Gather, Favorite Day — look and taste better than some of the national big brand alternatives!
Consumers will be increasingly willing to try store brands if they are more affordable. But they won’t continue to purchase if the quality or taste doesn’t deliver.
In that case, they’ll buy the national brand still – perhaps in a better pack size, or they will try to use the product more frugally.
Maybe it’s time to stop using the phrase “trading down” to store brands? I am a loyal consumer of several store brands, not necessarily because of price but rather quality (I’m looking at you, Simple Truth Organic, 365, etc). Tom reports that 43 percent of respondents to the FMI survey agree with me. And when you put that 43 percent in the context of the uphill perception battle store brands face overcoming “trading down” language that reinforces negative stigmas, I would say their future looks extremely bright, with or without help from inflationary prices.
Private label brands of the big players like Costco, Kroger, Publix, Target and Walmart have been in the market for a long time – The trust for quality and taste is already there. For the big boys, I believe share will only increase – especially during high inflationary times. The price increases of national brands have gotten untenable ($5 for a box of Triscuits, $6 for a box of Cheerios!). At that level, consumers will trade down.
It’s inevitable that grocery private labels will gain share over the next few years of economic uncertainty.
Affordability, quality and variety make store brands more appealing to consumers. Since the 2008 recession, private labels gained momentum as worthy substitutes and brands in their own right. Declining consumer loyalty still inspires consumers to switch to own brands.
In response, national brands will boost their advertising spend to remind consumers of their legacies of quality and trust. To avoid raising prices, we’ll see more shrinkflation and generous promotional deals.
It’s about value, not necessarily price alone, in terms of the potential growth of private brands. It’s also about supply chain issues among some of the brands — for example, we’re willing to try Kroger’s private brand peanut butter in the absence of Jif on the shelves (never Skippy!) and find it a good alternative.
Whole Foods, Trader Joe’s and Aldi may have pioneered the dominance of “own brands” at various price tiers, but the mainstream grocers have followed suit. Again using Kroger as an example, it offers everything from its own generic label to more elevated goods under its Private Selection label and a wide offering of organics. It’s a winning formula that will outlast today’s inflationary pressures.
If name brand products continue to shrink into what some of us call “cheater packs,” store brands will become more attractive. As my friends here note, though, execution is everything.
In a word, yes, it’s very likely. It’s actually the perfect antidote for inflation. Perhaps the national brands can add “lower end” product, but that’s not great for their own brand image.
Private label will rise.
The answer depends on how you define “store brands.” If that means any product that isn’t a national, regional, or local brand not owned by the retailer I’d say the next two years look pretty good at this point. But, that said, there are no “foregone conclusions” in retail. As to national brands’ response there really are only three viable paths: lower prices, bring innovative products to market, or leverage advertising, marketing, merchandising, and/or trade and promotional funding to force “store brands” off the shelf. Will any one of them, or any combination of them, work? All things (taste, quality, safety, product integrity, supply chain, etc.) being equal, I wouldn’t bet on it.
With consumer brand loyalty at an all time low and inflation at the highest levels we’ve seen in decades, it makes sense that both retailers and consumers are shifting attention toward private label brands. For consumers, private label often offers the same quality (sometimes even better) at a lower price. For retailers, the benefits are even greater – not just higher margins, but more control over critical things like promotions and packaging decisions (i.e. control over shrinkflation decisions). In some cases private label even offers better supply chains. Private label provides retailers with an alternative option and a negotiating piece when national brands raise costs or run into supply challenges. The savviest retailers are aware of the great potential that private label has in today’s retail environment and looking for every opportunity to grow that business strategically. The right analytics and pricing/promotional strategies can be key in this as well – sometimes something as little as shifting a pricing gap from 10 percent to 6 percent can shift demand from one brand to another. Even with national brands fighting back, it is likely that private label growth will continue to happen for the foreseeable future.
Store brands do well in hard times and the longer those hard times go on the stronger the retailer brands become as people try them and then get into the habit of buying them. There is an age profile difference as older people who have built up a trust with their regular grocery retailer are more likely to try and then stay with their own brands, younger generations who buy more online do not build that trust in the same way. However as the economy bites and they do trade down they are likely to continue buying own label provided that they deliver quality and value. It is the retailers who need to make sure they set the bar high and deliver high quality great value on their own label products as that is the best way they can gain and build loyal customers.
Store brands and private label assortment offerings are nothing new in the grocery industry. With the relentless inflationary state of our economy, we should expect a more significant proportion and shelf space allocated to private labels. In most circumstances, Target, Whole Foods, Kroger, and other grocery operations’ private label quality and product development are nearly at par and comparable to more expensive private brands.
Fundamentally, private labels are a force to be reckoned with, and customers gravitate toward these value-centric offerings. It will all come down to execution and consistency. Consistency breeds familiarity, familiarity breeds confidence, and confidence breeds sales.
If the quality meets expectations, private label grocery items will do well. It’s simple. Household budgets are tighter, therefore price becomes more important. This is an opportunity to gain some market share with price-sensitive consumers.
In the recent words of Stew Leonard, “Customers are [now] buying what they need, not what they want.” Customers are doing what it takes to save on each trip.
Store brands often serve either as discount driven (compared to national brands) or lead with higher quality/taste, but with value. Grocers have a chance to make these savings obvious on their store brands by explaining the value-quality promise for each product. While national brands will lead with advertising, promoting their promise and couponing in all forms to keep customers in the fold.
Many of these private label products are made by the big name labels. So you are getting the exact same product at a cheaper price. With inflation and a potential recession I think they will be big winner for sure.
Our most recent study, just out in the last couple weeks, shows that 38% of grocery shoppers surveyed are buying more store brands instead of national brands to deal with food price inflation. The only items that had higher percentages were buying more items on sale (43%), eating more at home instead of restaurants (46%) and purchasing more food and groceries at stores with lower prices (46%). So clearly, this is a strategy many shoppers are adopting which, in turn, will result in more share growth for store brands.
Years ago, the good retailers realized that private or own label, provided an opportunity for real differentiation. What retailer doesn’t carry Coca Cola, Campbell’s or Kellogg’s products? Now, the current inflationary environment has placed an additional spotlight on these offerings whose quality matches or surpasses the branded products in many categories. Meaningful share gains are inevitable.
Price, price, price. The high quality of store brands compared to the value they offer over national brands becomes a major issue during inflationary times like the ones we are experiencing today. This translates into market share for private label, and will continue to grow private label market share so long as we have strong pricing inflation.
This will be interesting to watch. In the UK grocery market own brands tend to make up 40% of sales by value — compared to 20% in the US. The US grocers potentially have a big opportunity for growth — and with it margin capture. Given that families in developed economies are facing a cost of living squeeze, it could be a good time for own brands — many commentators on household budgets highlight the savings that families can make on their food budget by switching to own brands.