PLBuyer: U.S. Private Label Forecast Revised Higher
Through a special arrangement, what follows is a summary from a current article from PLBuyer, presented here for discussion.
A new report from Rabobank International predicts that U.S. private label share will reach at least 25 percent to 30 percent by 2025, and could be as high as 33 percent.
The reason? A shift in power from consumer packaged goods companies to food retailers, as well as consumers gaining trust and loyalty with innovative and higher quality retail brands.
"Some good product categories and national brands are more vulnerable to this shift than others," said Nicholas Fereday, the author of the report, titled What Would Apple Do? "But the game has changed and the attraction of retailer brands is ever-increasing, even for confectionery and snacks. For national brands, innovation and adaption are as essential as ever for survival, but bold and risky initiatives are required to hold back the retailer brand onslaught."
Mr. Fereday said in the report that once retailers got a foothold with their private label products in a category they rarely slumped. From 2010, he said private label sales have grown faster than national brands by 2-3 percent annually as retailers were "learning to give consumers what they want through greater investment in product innovation and category management. In short, retailer brands are growing both in and out of recession."
And he expects that trend to continue, economic malaise or not.
"Today, retailer brands claim about a 16 percent to 19 percent share of the retail food market," the report said. "Extrapolating from recent growth rates, Rabobank expects to see retailer brand market share in the U.S. approaching today’s European levels of at least 25 percent to 30 percent within the next decade. In volume terms, this translates into roughly one in every three food product purchases being a retailer brand."
However, the upward revision in U.S. private label sales from a year earlier will not change the group’s global expectation of 50 percent private label share by 2025. Fereday said that conclusion matched with recent comments by Tesco CEO Philip Clarke, who said there was a natural limit to retailer brands of 30 percent to 50 percent, because consumer choice would be curtailed beyond those levels.
Mr. Fereday also said the growing penetration in private label of new forms of retail, including hard discounters such as Aldi, as well as dollar stores, was "a less appreciated source of retailer brand growth."
Discussion Questions
Do you see private label penetration in the grocery category accelerating over the next decade? What factors do you see driving or inhibiting PL share gains in the years ahead?
I guess I’m confused — haven’t we been reading reports in this space that private label business has either leveled off or declined as we are [supposedly] coming out of the recession? If so, hard to believe it’s going to accelerate. And I don’t know where the authors have been the last 20 years, but haven’t we seen, at least since the birth of category management, that retailers have taken over the power that was long held by the manufacturers?
What’s to stop a fast-moving train? Private label has earned consistent parity with national brand quality and design and at a lower cost to the consumer.
As the economy tightens, resistance to PL lightens.
Absolutely, PL growth will continue to outpace national brands over the next decade. Retailers have more power than ever over the offerings in their stores and the best ones have invested in their store brands to drive quality and innovation through their suppliers while marketing their brands to consumers. I do agree that there is a ceiling where choice will slow the penetration, but the good news for retailers and PL suppliers is that there are many categories left to grow and that the supplier community is getting better and better at delivering great products efficiently.
As retailers continually look for ways to differentiate themselves, Private Label is top of the list in my opinion right next to outstanding customer experience. As I have stated in the past, Trader Joe’s and Wegmans get an “A” for both and their performance shows the model can work and work well.
Things that will impact adoption: Overall US and world economy, product innovation, quality. Price will become less and less important as Private Label builds trust through outstanding quality and innovative products.
National Brands will need to keep their edge by investing more in not advertising, but innovation that is not easily replicated by Private Label manufacturers (easier said than done), direct to consumer sales and added value that the consumer appreciates and is willing to pay more for will also be opportunities for national brands to gain share.
Either way, the consumer will win. Better products and variety for less.
There are two major factors that will drive private brand growth. They are interrelated. The first is demographics. The younger the demographic, the less enamored with CPG brands and marketing. In fact, the youngest demographics are quite cynical about the products put out by big CPG companies.
The second is the end of broadcast marketing. The mass marketing tools used to reach captured audiences in the past are rapidly becoming less valuable. Traditional CPG marketing will be dead in 5 years.
The one inhibiting factor for private brand growth is quality. If retailers focus on price rather than quality they limit their audience. The private brand mantra vis-a-vis the brands must be a better product at the same price or an equal quality product at a lower price. The is no room for quality denigration.
An Rx company recently asked me to brief their execs on the CPG industry. My materials search turned up a year 2000 version of the primer on the state of the industry presentation that I have updated and used many times over the years. One of the slides was a prediction of the “state of the industry” in 2010. For fun, I graded the exam.
I got four out of five major predictions right. The one I missed was a prediction that Private Label would be 35% of U.S. Food and HBA retail by 2010. My basis for the prediction was a five year U.S. PL growth trend and a comparison to the PL levels of countries ranging from Australia to Canada to Europe. Totally wrong.
Why? And will it be different now?
I see two major differences in the U.S. PL market — particularly food — and others.
One is that retailers in the U.S. largely continue to view PL as a value play. (Witness the attribution of recent gains to “the recession.”) They simply have not evolved to the idea of Proprietary Brands yet. Proprietary Brands innovate on their own. Proprietary Brands are often price parity or even leaders — not price followers.
The second is the fragmentation of U.S. consumers. We are still a nation with many first or second generation immigrants who tend to cling to brand loyalties or prefer national brands. We are also a nation accustomed to both affluence (relative to the rest of the world) and the choice affluence affords. We don’t “trade down” unless we either discern a true lack of value in the national brands (milk, meat, etc.) or simply have to for temporary economic reasons.
To achieve 30% market share, retailers are going to have to become brand developers and marketers. They aren’t there yet.
At Perception Research Services, we recently unveiled results from our own private label study. In addition to seeing upticks in certain categories where shoppers choose PL, we learned that shoppers actually feel good about buying Private Label products. Over half (51%) say they feel smart/savvy when they purchase these products and very few – only 11% – say they feel self-conscious, with almost none – 3% – saying they feel embarrassed when doing so. PL penetration in the grocery category will continue to accelerate over the next decade. Our latest data shows more types of Private Label being purchased as significantly more shoppers claim to have bought more Private Label products than they did in 2010 (38% vs 32%), and reported purchasing 54% more product categories (7.4 vs. 4.8).
Consumers are looking for value more than ever today, globally. Around the world, countries in Europe and Asia dwarf the US PL penetration. PL is here to stay, as it has been for more than 40 years at this point. With quality and pricing getting more competitive, the growth will continue.
Private label will continue to grow. In a national survey we recently conducted, 35% of all shoppers, 40% of shoppers with annual household income of less than $35,000, 37% of shoppers less than 25 years old and 34% of shoppers over 55 all indicated that they will be purchasing more store brand/lower-price brands over the next several months. By comparison, in all cases, 8% or fewer of people in the same categories said they would purchase these products less. This is a trend that will continue as product quality gets better and price is more affordable than national brands. Of course there will be exceptions but overall growth, yes.
Increased private label penetration is directly correlated with the fact that these products represent higher margins than other products to most retailers. “Own brands” are also seen as a way for retailers to differentiate themselves from their competitors. Lastly, these products are often offered at price points lower than other products offered in the category which makes them attractive to budget-conscious consumers.