©Goodboy Picture Company via Canva.com
Do National Brands Have a Bigger Private Label Opportunity?
A university study concluded that national brands stand to benefit from producing more private labels for grocers, although doing so brings “complex trade-offs” that carry some risks.
The research from marketing professors at Canada’s McGill University, New Hampshire’s Dartmouth College, and Universidad de Salamanca in Spain found that the suppliers of private-label products to grocers remain a “well-kept secret.”
However, their study exploring private label suppliers to six of the largest grocery retailers in Spain found that “manufacturers with a large national brand business” were the primary suppliers of private label supply, particularly at retailers where private label is not heavily discounted. They also believe the practice of national brand manufacturers also making store brands will “become even more commonplace” with robust growth trends toward private-label growth.
The Private Label Manufacturers Association’s 2024 Private Label Report found that private label sales in the U.S. grocery space grew 4.7% in dollars in 2023 and have expanded 34% since 2019, driven by consumers seeing savings with high food inflation. Other studies continue to show improved taste and quality to be reducing the stigma around purchasing store brands.
As far as benefits, the university study concluded that when a manufacturer starts supplying private labels to a retailer, its national brands see a “significant increase in relative distribution depth at that retailer,” including more items being stocked with better visibility. The benefit is “even more pronounced” for national brands that had been losing shelf space.
The researchers wrote in a press release, “Manufacturers see private label supply as a way to exploit scale and try to gain influence with retailers to benefit their national brands.”
Nonetheless, the increased in-store presence was found to offer “no corresponding boost” in the share of national brands, with growth ultimately tied to consumer demand. The researchers wrote, “While supplying private labels can be a strategic move, it is not a cure-all for struggling national brands.”
In a Harvard Business Review article from 1999, researchers from the University of Toronto and Washington University were already touting the margin opportunities brand manufacturers could gain by helping stores develop premium private labels without the costs involved in advertising, promotions, and slotting fees.
They also cited the benefits of developing “slightly lower quality” private labels for their national brands to fend off rivals making a similar move. Further, developing closer relationships with a retailer by helping with private label development was cited as a way for a supplier to “get special privileges,” including greater access to consumer information as well as influence over shelf allocation and promotions in their category.
National brands are widely assumed to be making a majority of private labels, although most only talk about their challenges in competing against private labels. Costco’s co-branded Kirkland lines with Starbucks for coffee and Hormel for bacon are two rare instances of identified partnerships.
Discussion Questions
Is private label development a growth opportunity for national brands or more of a way to preserve market share with grocery partners?
Do national brands and grocers have to be so secretive about partnering in private label development?
Poll
Loading …BrainTrust
Jeff Sward
Founding Partner, Merchandising Metrics
Dave Wendland
Vice President, Strategic RelationsHamacher Resource Group
Private label grocery sales grew by 15.9% in 2022 and by 9.2% last year. This is faster than the overall market, so private label is taking a higher share of spending. National brands need to take a view on their response. Some will opt to compete, which makes sense when there is strong differentiation and high brand loyalty. Some may opt to jump on the bandwagon and produce products for retailers. Each requires a careful analysis of the ultimate impact on sales and margins. What currently works in favor of many national brands looking to move into private label is that private label in the US has evolved well beyond being price focused, indeed the fastest growth is now in the premium segment.
Ultimately, national brands want to generate sales and deepen relationships with their retailers. Producing private labels for retailers is a good way to do it. Private labels are a threat to national brands, but since these are often the same producers, the loss in market share is somewhat offset by the increased revenue from selling private labels. The growth in private label brands is strong and getting stronger. National brands may not like it, but if they don’t supply retailers, another national brand competitor will. It’s more acceptable to lose your national brand sales to the private label you produce for a retailer than it is to lose the retailer to another national brand competitor. And while the game of secrecy is still very much part of the private label playbook, I question how “secret” it really is any more. Are consumers that naive? Increasing less so.
Back in my Hefty Bags days, in the 70s, we supplied both branded Hefty and a retailer’s private label. The results were exactly as described in the study.
We were the preferred supplier and category captain. Hefty got better shelf positions and more items in distribution. Our PL was priced low because it didn’t have to carry 20% advertising and promotion. We still had stocking fees for Hefty, but no such thing existed for PL. When it came to store promotions, Hefty got preference over Glad. Orders were shipped together, more likely to be full truckloads.
I guess we could call it a symbiotic relationship. As a product manager for Hefty, I certainly saw PL as a competitor, but the company really didn’t care which they sold as the ROIs were about the same.
From a consumer perspective, our research shows that shoppers view private label as similar in quality to national brands but priced better. So from that perspective, national brands that can leverage both sides of the fence, may have a good opportunity to capture more sales and share.
There are perfect examples of this that I experience, for example, at Costco. Their crew-neck men’s undershirt under the Kirkland brand is as good or better than one can find, and for less. These shirts are not manufactured in some basement sweatshop just to provide margin. They are manufactured by a quality brand (I don’t know which). But, if it’s going to manufacture a quality product under Costco’s private label, in the quantities in which that retailer purchases them, the brand can only gain.
This opportunity holds true beyond just grocery. In the unique stage of retail we are in, where the definition of department stores are being redefined and channels are being blurred, brands and retailers have to be creative to capture the attention of consumers. Take for example the collab brands emerging such as Opalhouse x Jungalow, Studio McGee x Threshold, Sonoma Kids x Disney are just a few examples. National brands are working to be more accessible while private brands are working to level up and borrow quality clout.
Private label has been growing for about 44 years by my memory. I remember listening to a Kroger representative in 1990 talking about their private label strategy.
So this “movement” is not new. What the national brands are doing here is making sure they have a role to play and generate revenue and profits no matter how popular private label gets (have private labels reached a steady share of the market? Who knows). Long live national brands! Long live private labels!
Retail is a process of managing a portfolio of products. Different risk levels. Different shelf life. Different levels of magnetic attraction as perceived by the customer. Different sales and margin opportunities. It used to be as simple as the national brands being the big draw and private label being the bigger margin opportunity. But that’s now shifting. Private label can be the big draw as customers put increased importance on price and value. AND private label is the better margin opportunity for the retailer. That suggests to me that many brands will benefit from being in the game on both fronts. Brands are going to lose market share to private label. Full stop. So a brand might as well be the supplier of that private label. It might be left pocket/right pocket behavior, but it beats watching the $$$ glide over to the pockets of a competitor.
I don’t think I understand the question. Of course Private Label is more profitable for retailers. Are you saying it’s better if a large brand makes the recipe vs. a Daymon? Everyone uses co-packers so there’s a lot about this question that just confuses me.
If retailers want to use National Brands to build their private label groceries….great. I just don’t see how it matters.
The majority of national brands have some degree of involvement with private labels, as the study suggests, which enables them to drive additional revenue streams and build relationship capital with retailers during inflationary periods. I would argue some of the premium private label products are outstanding in quality, price, and impulse attraction, giving national brands a real run for their money.
Private label development helps national brands grow as demand soars for store brands. National brands earn efficiencies of scale by monetizing their manufacturing expertise to serve retailers’ needs. Also, retailers and brands evolve from transactional dynamics to mutually-beneficial, long-term partnerships.
Manufacturers may not want to reveal their private label partnerships because it could erode their brand and pricing strategies. Consumers might switch to private labels for comparable products.
Yes, if capacity equates to opportunity. The growth of private label isn’t news. No doubt that executives at every national brand has considered many projections and charts. Each situation is different.
Regarding being secret, silence is important when the sanctity of a higher-end brand is at risk.
“If you can’t beat them, join them” as the addage goes. Private Label has enjoyed tremendous growth the last few years as consumers look for ways to react to inflationary pressures on their budgets. This comes after years of consistent, albeit slower, growth in private label. For retailers, the incentives for a strong private label program, especially in CPG categories, is huge. Increased loyalty, richer margins, all significant. Brands have been concerned, and rightfully so; their biggest worry is consumers who switch to solve an acute, short-term problem will find the quality of the house brands to be good enough that they won’t see the value of the brand.
The strategic question for brands is, do we continue to fight for market share, or do we help the retailer, source their private label program, and continue to drive sales and market share? Seems like a fairly straightforward choice in my opinion.
Sometimes when facing the realities of a market, new perspectives must be considered. There is no denying that private label and national brands must co-exist on shelf to satisfy shoppers. With that knowledge, I personally believe that creating a win-win relationship between grocers and national brands could be successfully built around a dual product strategy. The risk of cannibalization is minor compared to the potential gains for both. I foresee many more “partnerships” emerging across the grocery segment — among other channels.
I don’t know if being secretive really matters. Although we will continue to see the growth in private label as quality and brand equity increases, there are many shoppers who just need or want to see that big brand name. Moreover, people are busy, they might not always remember that big brand x makes this product for retailer y.
Private label development is largely a growth opportunity for national brands. However, you can’ discount that it’s a way to preserve market share with grocery partners. Either way, private label brands will continue to grow in sales, especially in hard times.
Private label brands may still have growth opportunities in big chain grocery stores, but it’s likely a slimmer upside. Taste and quality levels are designed for middling to lesser levels, following one-size-fits-all strategy, and offered at a lower price.
Yet the bigger opportunities in private label growth is towards the many regional and independent grocers who represent 33% of all grocery sales nationwide. These stores have wider needs in variety, selection, and quality levels. They are looking be differentiated for their customers who seek something beyond the chain store experience.
Private label development presents both a growth opportunity and a strategy to maintain market share for national brands. By supplying private labels to grocers, national brands can increase their presence on shelves and gain leverage with retailers. However, it’s not a guaranteed solution for struggling brands, as success ultimately depends on consumer demand.
As for secrecy in partnerships, while some transparency could benefit collaboration, maintaining confidentiality may be necessary to protect competitive advantages and negotiate favorable terms. Overall, private label development offers a strategic avenue for national brands to expand their reach and strengthen relationships with grocery partners, but it requires careful consideration of risks and benefits.