Why Private Label Brands Are Having Their Moment

Food & Drink Why Private Label Brands Are Having Their Moment Errol Schweizer Contributor Opinions expressed by Forbes Contributors are their own. Over 25 years of food industry expertise and retail innovation. New! Follow this author to improve your content experience.

Got it! Jun 30, 2022, 01:04am EDT | New! Click on the conversation bubble to join the conversation Got it! Share to Facebook Share to Twitter Share to Linkedin National food retailers such as Natural Grocers have extensive private label assortments. Natural Grocers Profit-driven price inflation and supply chain issues are impacting consumer buying patterns at grocery stores. Over 87% of consumers are opting for private label items or shopping at different stores for those items, particularly to save money.

These proprietary brands form the core of food retailer pricing and assortment strategy, and based on current inflationary trends, are getting ever more popular. According to SPINS , private label products have been on a growth tear for the past 52 weeks, pole vaulting from 3. 8% 52 week YOY growth to 10.

7% 4 week YOY growth in April. Indeed, store brand growth is outpacing total category sales by 14% in Frozen appetizers, by 10% in eggs, water and cooking oils, over 20% in refrigerated pastas and by over 40% in shelf stable functional beverages. Dan Buckstaff, CMO of SPINS, notes that, “There’s tremendous growth going on in private label right now, but it’s not uniform across categories.

Some categories, there seems to be more price sensitivity than others. ” Dollar sales of private label brands were almost $ 200 billion dollars across all U. S.

retail channels , or about 17. 7% dollars share and 19. 6% unit share of all groceries sold.

Over 45% of customers buy private brands because of pricing, followed by availability, quality and taste. And more than 41% of customers bought more private label brands recently than before the pandemic. Walmart and Kroger KR have each indicated that private brand sales have increased lately as customers reevaluate what they can afford due to stagnant wage growth and high gas, housing and food costs.

While this strategy puts pressure on the big CPG brands with deep pockets, they make competing for shelf space even tougher for innovative emerging brands trying to get established while surviving sky-high failure rates and shifting consumer trends. So why and how are store brands priced cheaper than the household name brands that we’re so familiar with? Let’s go through the math. By definition, private label brands are wholly owned by the retailers or their wholesale partners.

And what this means is that the brands themselves, including the packaging, the supply chain, the ingredients, the nutritional information, everything that makes up the product itself, is proprietary and developed by the retailer or wholesaler. This doesn’t mean that name brand companies make them either; there is a whole industry for private label products out there with vast capabilities and expertise, and they sometimes even make the name brands too . Store brands and name brands compete on quality, taste, ingredients and pricing.

Errol Schweizer MORE FOR YOU Amid Drought, Billionaires Control A Critical California Water Bank The World’s 1st Ayurvedic Herbal Eatery Blends Ancient Wisdom With Modern Tech Divide And Conquer: How Ross Franklin Turns Pure Green Into A Cold Pressed Juice Empire By Leveraging Leaner Infrastructure And Crowdfunding Category managers are highly skilled retail workers who decide what to merchandise and are responsible for the financial performance of their categories. As part of their regular category review processes, retail category managers may take a look at a given category and see what is selling well, what isn’t and what may be needed to improve various performance metrics, including sales, gross margins, customer retention and basket sizes. They will then work with an in-house or outsourced store brands team to determine what items need to be developed.

For example, they may want to make sure that they have a value-priced option for the best-selling items in a category or that they are on trend with popular items, like veggie burgers, grain-free tortillas or oat milk. They may need multiple price tiers in a category to fulfill varying customer needs, including value priced and more premium products. Or they may want to use the store brand as a competitive lever against some of the key name brand items that are being sold for less at competitors.

Then the private label brand team will work with a co-manufacturer who can actually formulate and produce these items at scale, either through an RFP process or based on a pre-existing supply relationship. This team looks at the formula, ingredients, the taste and organoleptic qualities of the name brand items they have identified as the most compelling equivalents. They essentially dissect the product down to its core components so that when they are formulating the private label products, they can get as close as possible to what’s on shelf.

Imitation isn’t just flattery, it’s a key retailer strategy under capitalism. Store brands will typically be merchandised to the right of their name brand equivalent and will be . .

. [+] priced much lower. Errol Schweizer The next step is to build a cost structure of the national brand equivalent versus the private label item and then make the store brand formulation more cost effective.

And this is where they have to be careful because customers will look and see if the name brand item has the same cost per ounce, ingredients, and nutritionals as the private label version. So while they can’t make it too different, they have to pull as many elements of cost out of the equation so that they can have a much cheaper price on shelf. Whereas most category buying and negotiation is akin to hammering suppliers for better costs and quality, store brand negotiations are laser scalpel precise in shaving excess costs from the final price, because ultimately the point of a store brand is to communicate value.

And one way they do this is by negotiating dead net pricing. CPG brands have trade spend built into their cost structure, which they use to fund markdowns and promotions. Trade spend in and of itself is a vast business , with over $220 billion in annual transactions in the grocery industry.

Trade translates to about 10-20% of an item’s wholesale cost and these trade dollars are used to fund promotional and marketing programs, including free fills, display fees, sale markdowns, coupons, circulars and digital ads. So when you see something on sale at 2/$5 and it’s $0. 50 off, that $0.

50 was paid for by the brand, and most of the time the retailer is just passing that discount through to you. Trade spend is a huge part of the food retail business. Sometimes huge trade spend budgets helps one .

. . [+] brand monopolize a category and elbow out potential private label competition.

Errol Schweizer So the store brand will instead be at dead net pricing, which means the lowest possible cost with all the trade and marketing dollars pulled out. This is also known as EDLP, or everyday low price. In addition, the retailer will forecasts large quantities of private label inventory so that the logistics and handling charges are lower per item.

This also means the retailer must push high volumes of these value items to justify the inventory exposure. The retailer owns it all and the category manager is typically responsible for this inventory. This merchandising strategy is one of the reasons why Trader Joe’s or Aldi is so cheap; despite the quirky marketing, they each have highly centralized logistics and supply chains that support a much smaller number of SKUs than their competitors.

And then in terms of the retail price equation itself, the store brand team will assess the regular price point and gross margin and promotional price points and gross margins of the national brand equivalent. The goal here is to make the retail price as sharp as possible while trying to preserve as much of the item’s penny profit. Because if they’re going to supplement or replace the national brand equivalent with the store brand, they have to make sure that it doesn’t hemorrhage gross margin.

And that’s why sometimes you’ll see that a store brand item may have slightly different ingredients, slightly different nutritionals, because such adjustments all feed into the cost savings. If the purpose of capitalism is to create products for profit and then continually lower costs to achieve the best value, then that also summarizes the role of private label products at retail to a tee. Pure-play Ecommerce retailer Thrive Market uses its private label brand to highlight key trends and .

. . [+] dietary preferences for their customer base.

Thrive Market However, many store brand items have also won plenty of quality and innovation awards, particularly due to the efforts of category managers and store brand teams at retailers like Thrive Market, Natural Grocers, and Trader Joe’s, as well Kroger with their Simple Truth line and Whole Foods’ 365 label. Such products compete on par or better in quality and taste with many national brand equivalents, particularly when they are higher attribute items such as organic or allergen friendly. Dan Buckstaff of SPINS articulates how retailers navigate this contradiction.

“For so much of the natural innovation and wellness channel, it comes down to the products themselves. So the ingredients, how they’re sourced, how they’re positioned, creates a complicated set of things to get right to speak to the consumer. As a store brand, you want to make sure that you’re doing the diligence to get the right ingredients sourced and you’re speaking to the right benefits the consumers care about.

There’s a lot of things you have to get right in that innovation to be able to connect with the consumer preference. ” One final thing to remember with store brand items is that their financial performance still hinges on whether the gross margins on an item level basis match up or exceed what the gross margin targets are for that particular category. And this can vary by retailer.

So a retailer like Kroger or Walmart WMT will have category gross margins in the 20-30% range. While at Whole Foods, Fresh Market or Sprouts, the gross margins by category will be in the 35-45% range. And when they launch a private label item, they’re all trying to sell it for about the same price depending on the market, whether that is cereals or cookies or milk or yogurt.

However, their gross margins may vary based on their scale, their supply chains, their prices of raw materials and ingredients and their leverage with suppliers, something the Robinson-Patman Act is meant to regulate. And mass market retailers are hence typically able to achieve higher gross margins in store brands than in their categories and even overall enterprise. But smaller retailers with a higher cost operating model, such as specialty and regional grocers, natural food stores or independents/convenience stores, may have lower gross margins on private label items than their overall category because they are chasing low priced competition with much bigger purchasing power and lower operational expenses.

They will then have to price all other items effectively to offset this, putting more margin pressure on incumbent brands and emerging innovations to subsidize their value items. Ironic. The most important aspect of private label brands is that the whole formulation and pricing model is geared towards providing the shopper with the best bang for their buck, so they keep coming back for more.

And based on consumer trends, that seems to be working. Follow me on LinkedIn . Check out my website .

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