Private label continues to gain traction
Private label just keeps chugging along.
Thanks to strong consumer demand for lower-priced alternatives to national brands and retailer desires to differentiate themselves from the competition, private label seems to keep gaining more traction in the retail world.
But there remains a strong undertone impacting private-label sales with Amazon and Walmart using the segment as a way to gain market share, usually at the expense of the other company.
Specifically in play are Amazon’s purchase of Whole Foods and Walmart’s decision to purchase Jet.com, both of which are expanding their private-label offerings. Whether this results in a seismic shift in the private-label universe or is just a glitch has yet to be determined, according to industry observers.
However, most believe there is room for growth on both ends of the retail spectrum as these products build up trust — and market share — among consumers, and are viewed by retailers as more than just low-priced and sometimes lower quality commodities with limited marketing and advertising support, but rather as an opportunity for differentiation.
Estimates for 2017 have yet to be released. However, in 2016, Nielsen reported that private label outperformed national brands in the mass merchandising segment, which includes such retailers as Walmart, Target, warehouse clubs and dollar store chains.
Overall, private-label sales were roughly $118 billion, excluding revenues from such private-label powerhouses as Costco, Aldi and Trader Joe’s. Their revenues would add an estimated $35 billion and push total store-brand sales to more than $150 billion, according to Nielsen.
Private-label dollar volume in the mass merchandisers/club/dollar store segment climbed 4.4% to $49.6 billion, resulting in a 0.5 point market share gain to 16.6%. A similar pattern emerged with regard to units, with private label advancing 4.2%, compared with only 0.2% for the brands.
However, store brands’ share declined in the slow-growth supermarket segment, coming with an 18.4% dollar share and 22.3% units share, Nielsen said. And it’s clear that the supermarket numbers dragged down overall private-label results.
Mintel offered a similar analysis, noting that the category’s 9% growth between 2011 and 2015 was largely the result of inflation. With food and drink prices falling, consumer confidence is increasing, and shoppers may opt for national brands. As such, unit sales may continue to decline in many categories, resulting in a 4.4% drop between 2016 and 2021, the research firm reported.
One big question mark is potential impact of online sales. Total online grocery sales are forecast to reach $100 billion by 2025, siphoning off sales from other channels. For now, attention is focused on Amazon’s acquisition of Whole Foods. The online retailer already is offering Whole Foods’ 365 products online. It also is expanding that brand, while considering the introduction of Amazon-branded items.
However, Amazon’s talons are digging even deeper into private label. Through the United States Patent and Trademark Office, Amazon has applied for or has been awarded numerous brands, including Beauty Bar cosmetics; Happy Belly, foods; Mae underwear; Mama Bear baby products; NuPro tech accessories, such as phone chargers; Single Cow Burger frozen foods; and My Habit for various consumer goods.
In fact, the e-commerce giant has a total collection of 34 private-label brands. Combined, sales of those products could add $1 billion to its gross profit by 2019, according to Morgan Stanley analyst Brian Nowak’s research notes.
However, one of the challenges is to convince shoppers to buy more Amazon-label products. Only about 8% of the people who bought apparel on Amazon have purchased its Amazon Essentials brand, according to Nowak.
A category still up in the air, according to industry sources, is over-the-counter drugs. Though private-label OTC brands have been moving ahead, one industry observer described the pace of growth as “glacial.” This is due primarily to what the observer calls the “branded fortress” — a combination run of little-to-no private-label marketing, regulatory issues and consumers’ intense loyalty to old-line national brands.
Despite difficulties with private-label OTC, the category is definitely on the table for Amazon, which store-brand drug maker Perrigo’s CEO John Hendrickson called a “natural player on the OTC side” at a September healthcare conference. Meanwhile, analysts believe Amazon will be in the drug distribution business within two years. The company reportedly is in discussions with mid-market pharmacy benefit managers, and has been hiring talent to assess the drug retailing market.
However, Keene Roberts, consumer health analyst at Euromonitor, does not see brick-and-mortar stores being shoved out of the OTC space. “There will be a slower or less significant shift in OTC products. When people have a cold, flu or headache, they’re not going to bother ordering online and waiting for it to arrive. They’ll just go to the store,” Roberts said. “However, it might be different for vitamins and supplements, where their well-being is not in jeopardy, and they’re willing to wait a day or two for a delivery.”
Meanwhile, the online business is turning into a slugfest between Amazon and Walmart, whose Jet.com is launching Uniquely J, its own higher-end private brand of grocery and household items, including coffee, olive oil, laundry detergent, paper towels and other items — a move that should help it compete with Whole Foods’ popular 365 house brand. Jet’s new line also is designed to give it an edge with younger customers in urban areas. This is all part of a strategy to make Jet more upscale than Walmart.com.
This may only be the tip of the iceberg in online private-label sales. Since private brands are not burdened by marketing expenses, they produce higher profits that help offset the cost of shipping orders to shoppers’ homes, industry sources said.
Additionally, the expansion of Aldi, the emergence of Lidl in the United States, continued consolidation within the drug store business and broader availability of organic and natural products are disrupting the industry and changing dynamics within private label. The end game, according to observers, is for retailers and marketers to treat private labels as brands and not just another low-priced commodity.
As an analysis by Euromonitor International noted: “Private-label retailers are collaborating with national brand owners more closely than ever to create a higher degree of interest and excitement across entire categories, rather than simply trying to undercut their branded counterparts.”
Looking ahead, Tamara Barnett, vice president of strategic insights at the Hartman Group, expects the private-label market to hold. “Right now it’s hovering around 15% to 16%. We saw the biggest jump in 2008 due to the recession. Since then, it’s been steady but decelerating, with incremental growth of 1% or 2% annually,” she said, noting that the company’s latest analysis showed private label at about 17% of the overall food market.
On the drug side, the outlook is somewhat mixed. “We’ve seen a lot of energy around private label in the supermarket, discount grocery and specialty retailing sectors,” she said. “Channels that have not been traditionally associated with a strong play in food like convenience stores and drug will have a greater challenge in creating strong private-label programs. But as these channels expand their fresh food offerings and develop a proposition that’s not based solely on snack foods and quick utilitarian trips, more opportunities for store brands will emerge.”
Barnett sees an opportunity for drug stores to tap into the experiential side of wellness. “Health and beauty sections are going to provide a real opportunity to create premium private-label offerings that enable stores to promote the lifestyle proposition,” she said.
Andrew Mandzy, director of strategic insights at Nielsen, noted that sales of products with organic claims or certifications increased nearly 10% last year. For retailers, private label may be an entry point into the organic market, he said, noting that private label organic products on average are 18% lower in price than branded organic products.
“Globally, private label remains an important sector of the marketspace,” said Euromonitor’s Roberts. “In OTC products, there’s still a lot of consumer loyalty to brand names. However, overall trends show retailers moving private label into areas like herbal and organic products, and that may come into play in a number of categories like cough syrups.”
Another big opportunity lies in reformulated products, she said. “Unless you have an prescription-to-OTC switch, it’s hard to bring out a completely new product. OTC companies are doing a lot of innovation in reformulating and repositioning existing drugs like Advil Liquigels,” Roberts said. “That’s the new market space. Products like Advil and Aleve are names that consumers already trust. So existing products, including private label, can be reformulated to make them more relevant to consumers.”
Some chemically-based OTC drugs — even aspirin — have some trust and familiarity issues to overcome. “To a certain extent, private label in those segments still has to prove itself,” Roberts said.
However, industry analysts believe that most categories have a lot of upside potential for private label. “During the recession, people were increasingly willing to trade down for a brand equivalent. To some extent that has endured,” Barnett said. “But the bright spot is that we’re seeing the proliferation of more premium private-label products — particularly in pockets of the food and beverage industry that are fresh and youth oriented. These are areas where brands haven’t solidified consumer-brand preferences.”
Specifically, Barnett cited such products as bottled water, K cups, freshly bagged salads and refrigerated pizza. “Private label has shown its greatest strength in perimeter-food departments as opposed to center store. This compounds the opportunity for private label since there’s so much energy in that space. Retailers understand they can develop private-label offerings that speak to the consumer desire for fresh premium products,” she said.
Other areas will remain difficult for private label to crack. Among them are beverages, snacks, cereals and yogurt, according to Barnett. “They continue to be a challenge as manufacturers up their investments in brand innovation,” she said, noting that a brand such as Chobani has really energized the yogurt space.
In underperforming segments, retailers are still looking at some products as commodities, and this is where greater innovation is needed, said Barnett. “There are strong opportunities for premium private-label products in beverages, cereal, yogurt and sports drinks. But you have to keep innovating and understand that innovation has to be supported by more traditional shopper marketing and merchandising strategies.”
Unfortunately, some marketers, as well as retailers, continue to view private label as nothing more than a lower-priced alternative. “It’s a big mistake for retailers to focus on just providing some name-brand equivalent. The opportunity is to invest in private brands and give them as much attention as branded manufacturers give their products.
“Consumers are more savvy about curating their own selection of branded and private-label options. They’re not just interested in having a cheap alternative based on price alone, especially as the economy continues to improve,” she said.
Moreover, shooting for lower margins in private label is not the path to take. “That’s where the opportunity for premiumization is important. If you look at growth in unit pricing, it’s been stronger in private label then it has been in branded products,” Barnett said.
“We did an analysis about a year ago that looked at growth in unit pricing for private label. It was about 27% compared with about 18% for branded products. So you can’t make an assumption that private brands have to take a hit on margins. When you’re offering something that’s anchored in a premium product experience, you can be less than the national brand alternative, but still have the opportunity to maintain and increase margins,” she said.
“This doesn’t have to be a trade-off for retailers. If you invest in a segment that’s growing with an opportunity for real distinction, there’s real upside potential. If you’re not willing to invest and create a product that’s differentiated, then you have to consider lowering margins in order to compete solely on a price-based proposition,” Barnett said,
This also will dictate whether retailers take a tiered approach in private label. “It depends on the category. Highly commoditized categories only need one tier. In some cases, you might want to only have a premium offering and not a mainstream one,” Barnett said. “It takes category experience to figure out which is appropriate.”
Interestingly, most industry observers believe that demographics do not play a large part in private-label preferences among consumers.
“Across the board, we’re not seeing a mix of relevance when it comes to private label,” Barnett said. “We don’t see millennials any less or more likely to look to private labels than their boomer counterparts. They’re just more highly attuned to what differentiates products. They want to first know a product’s attributes. Then they will be more receptive to private label.”
However, marketers also should be taking a closer look at some of the younger cohorts. “They’re very tapped into experiences, and recognize that those experiences don’t have to come from one single brand. They’re also much more fragmented in how they spend their dollars. This means there will be even fewer barriers when it comes to private label,” Barnett said.
But Euromonitor’s Roberts believes the biggest difference between groups is simply a matter of disposable income. “Those that have more of it are generally consumers that have greater health concerns like the older generation. But they are also inclined to go back to brands they know or what their doctors recommend. On the other hand, millennials may be more motivated by price, but they also buy less because, in general, they are healthier,” she said.