Have CPG Store Brands Plateaued?
Three years ago at the annual Private Label Manufacturers Association show in Chicago, McKinsey & Co. released data projecting the possibility that 24 percent of supermarkets sales could be store brands by 2016. This week at that same show, Nielsen reported the industry remains at the 2010 level of 19 percent.
Still the industry has several reasons to be hopeful the goal can be met.
"Private brand focus is unprecedented, and best-in-class retailers are investing in brand management activities like their branded peers," said Todd Hale, senior vice president at Nielsen. "With slowing population growth and pressures from current and unforeseen competition, winning retailers will be those who step up their innovation efforts to connect with and create demand for their offerings across diverse and evolving population segments."
Mr. Hale said that store brands are doing better than ever. "Store brand sales reached $111.6 billion for the 52-week period ending 8/31/2013, a level that is 18.5 percent greater than for calendar 2009. National brand sales during that period were $529.4 billion, up eight percent since 2009," he reported.
There was also a positive indication of the sector’s potential in the expo hall, where there were 2,535 booths, 10 percent more than last year. In addition, pre-registration for the show also reached a record high, with 9,500 people expected to attend, an increase of about 12 percent.
Among the special features of this year’s show was a Pet Pavilion to call attention to the rising importance of store brand pet foods and pet care. There were also dozens of exhibitors offering gluten-free and certified organic products, more than double the number from last year.
Discussion Questions
What does future hold for store brands in the U.S? Why are store brands in the U.S. not as strong as they are in Europe? What will it take for them to become stronger?
I’m not a researcher, but my hunch is that private label grocery brands don’t do as well as say, private label clothing brands from places like Macy’s. So I doubt that without a clear advantage like a significantly lower price or organic ingredients, grocery store brands will get beyond where they are. In other categories, the same holds true, but there is more chance for a clothing retailer or a Sears Craftsman type of brand to create loyalty and a following if the retailer is willing to put the investment into it.
Not sure about Europe, but Americans definitely are swayed by brand status, so independent brands with good marketing budgets create a lot of competition and generate cachet that merchant brands will always struggle to compete with.
Economically speaking, weren’t we worse off in 2009 (right after recession hit us during 2008) than we are now? At least the perception is we were, right? Consumers will buy store brands when the going is rough and may now be feeling better off and hence returning to non-store brands.
Store brands have traditionally competed with non-store brands primarily on price. As a reaction to this stagnation in store brand growth, look for retailers to change this and start offering truly unique products. It is encouraging that Amazon is looking to get into this area (was discussed on this forum earlier this week). Given that they have more pressure on this front (most CPG products are low value, high volume items and shipping costs are a real concern), look for them to come up with truly innovative ways to get acceptability/viability to the Amazon store brand.
CPG companies will step up and start going direct to consumer even more aggressively (if only to get access to customer behavior directly) and retailers will have to react. Some will improve their own brands (and not just price-wise) and some will partner will CPG companies much better and share critical customer behavior data.
Today’s store brands are not our father’s store brands. One can argue that those in the U.S. are not at the level of our European friends, but we have many that are very good. Target has done a good job in this area, to the point that some people feel there is no difference between a store brand like Target’s or the traditional national brand. It also provides good, healthy competition that will hopefully continue to drive innovation for new products from each sector of the industry, including the smaller companies that have increasingly been on the forefront of “good for you, better for you” products.
Emerging from the recession has had some effect on the value tier. I agree with Todd Hale’s perspective. The future is bright for those retailers who “think like a brand and act like a retailer.”
The key is to offer own label that provides a point of differential advantage versus the competing retailers. We don’t need any more commodity oriented value brands.
The U.S. has always been a branded culture. On the other hand, European food retailers have enjoyed positive customer sentiments which gives them permission to offer brands other than the national brands.
Research has demonstrated that the Millennial generation does not have the same brand affinity as the Baby Boomers. This bodes well for retailers and represents a threat to national brands.
With the broad appeal of store brands being price, the next available attribute under retailer control is quality. These value equation fundamentals have not changed in decades. What has changed on a national scale, which is what we are looking at in the Nielsen data, is the availability of high quality store brands. Some big retailers may have been more focused on the price component from their private label suppliers due to the margin pressures they have faced since the recession hit shopper pocketbooks.
Between continued retail marketing prowess enhancements, SNAP and the next downturn in the economy, PL will continue to grow share, though not universally across categories and departments. Where branded manufacturers rebuff the PL incursion, they will still be shifting the margin pool toward the retailer, though, so it’ll be a fine line to walk.
As Zel Bianco points out, Target has done very well with store brands. The reason is at least two fold: 1) they employ well know designers (who are a brand themselves) to help create their store brand items, and 2) the store brands have a quality that appeals to consumers beyond price.
In general, stores make more gross margin on store brands and would like to see them grow as a percent of sales.
But with today’s omni-channel consumer shopping everywhere, store brands must be perceived as “quality”, not just a better price.
Merchandising and pricing, along with comparable or superior quality and variety are still drivers of store brand growth. Yes, it is true that store brand sales penetration outside the U.S., especially in Europe and Asia, dwarf that of the U.S. Americans are very brand loyal for CPG products, and with more CPGs going “direct-to-consumer,” they are combating store brands very effectively.
Certain product categories lend themselves to store brand success more than others. Merchandising compelling store brand choices in each category will continue to make small inroads toward further market share growth for store brands.
The challenge comes in when the store brand no longer is dramatically less expensive than the CPG brands, which is the case more often than not in many retailers.
Recall how, at the depths of the recession, the predictions were that (i) private label sales would spike to (pick your favorite forecast) ~40% of sales and that, (ii) the sales would quickly return to historic levels once economic recovery started? Obviously, the sales never reached these forecasted levels, but the levels reached have pretty much been retained. (Granted, we are not yet in full recovery.)
Perhaps this observation says that if the customer tries a private label and likes it, s/he will stick with it. But it also suggests that there currently is a ceiling in place due to extreme loyalty to certain brands in certain categories. Consequently, the retailer should analyze carefully where the wisest opportunities are for investment.
Expand into categories where customer behavior suggests a chink in the national brands’ loyalty, and go after such opportunities with high value, high quality offerings. Since nowadays many private labels really are of excellent quality, these initial explorations by the customer likely can increase the retailer’s ability to later penetrate the more challenging categories. But true investment is needed because a single bad customer experience with a private label often is very difficult to overcome in the future — and word does spread very quickly in today’s world.
Private Label has not topped out; it is growing. After the Great Recession and growth returned, there was not a drop in Private Label sales as we observed after previous recessions. Private Label growth is coming from improved formulation, improved packaging and new products.
What is most often measured is supermarket share and, as a share of the total at-home market, this has been declining. Membership, dollar, drug and convenience stores have all taken share from supermarkets. These retailers are expanding their Private Label offering as have supermarkets. The better retailers are over 30 percent Private Label and some are approaching 35 percent. I expect this to continue until supermarkets approaches 35 percent.
Europe has a different history. There were few national brands in Europe as television was state controlled and did not accept advertising. Retailers would travel to America and see products they knew their customers would buy. They went home and duplicated the product under their own label. By the time the national brands reached Europe, the market was already satisfied and they have been unable to take share away. This is why the European Private Label share is so much higher and remained at these levels for years.
There may be a lull in store brand growth today, but I think it will pick up given a combination of factors like generational changes, retailers thinking more like brands, and brands finding ways to go direct to customers.
I think it would be foolish for any retailer to think store brands will not continue to prosper. If the economy continues the current pace, with uncertainty in the future, most families will continue looking for better value.
The results to-date would suggest that product quality, packaging, pricing, position and promotion all still have room for improvement. Retailers like Target and Kroger, to name a few, are the ones setting the best practices for other fast followers.
More store brands are clearly in our future. They offer the quality that consumers demand, at the price that the market wants. What else is there? They will push national brands to better align themselves to the market in product features, prices and of course quality. Store brands are a win for every one and are growing for obvious reasons.