Private label has shown an increasingly promising business opportunity over the past few years as retailers in the United States and around the world invest in private label to stand out with exclusive products that build brand loyalty. And the COVID-19 pandemic has surprisingly –or maybe not so surprisingly– aided in driving private label sales and has helped store brands gain traction in a post-pandemic world. Let’s take a look at the trajectory of private label going into 2020 and how changing consumer shopping patterns are contributing to its success.
The rundown on private label
Private label sales have been increasing over the past three years. In 2019, private label sales increased to $143.4 billion, up $14 billion since 2015. Plus, consumer packaged goods (CPG) private label sales now account for 3% of online dollar sales, up from 1.3% two years ago. Why? Because today’s consumers are a lot more willing to spend their money on store brands versus name brand products made by big brands like Procter & Gamble or Unilever.
Traditionally, much of private label consumer packaged goods popularity was seated in value grocery stores. According to Nielsen, in 2019 private label items made up 57% of annual CPG sales at value grocery stores in the U.S. At premier fresh grocery stores like Whole Foods Market or Sprouts Farmers Market, just 23% of CPG sales came from private label items, similar to mass merchandise/superstores like Walmart and Target, where private label accounted for 22% of CPG sales. But those numbers are changing. Now several retailers such as Target, Kroger, Aldi, Thrive Market, and even Amazon are boosting their private label efforts. For example, Target just launched its private label high-quality food brand Good & Gather.
With that in mind, retailers are also investing a lot more time and effort into “premium private label” which is resulting in customers buying more private labeled goods from retailers like Whole Foods or Target. The premiumization of private label can be noticed when you look at the pricing tier of products. Discount products represent the majority of store brand sales in the U.S., but in the past three years, they have had to share that space with premium private label products. Premium tiers of private label products have grown in this time, and now represent more than 19% of sales, because consumers are not only willing but prefer to spend money on store brands.
What advantages do retailers have?
Retailers have a strong advantage when it comes to private label. That advantage? Having a direct relationship with the customer and access to customer data from transactions and loyalty programs. The ability to have access to a database where retailers can analyze their customer data and understand how their customers shop is something that CPG brands (in retail stores) cannot do themselves. In addition to access to consumer shopping behavior, retailers get to control shelf display space. So retailers can reserve that prominent, eye-level shelf display space for their own private labeled products. This means not only do retailers have the upper hand in quickly incorporating products based on consumer demand, but they also spend a lot less money on marketing, specifically in-store.
How COVID-19 is affecting private label sales
Consumer shopping behavior has changed drastically since the COVID-19 pandemic became more widespread. Consumers have been, and some still are, rushing to stores and stockpiling on products not caring about which brands they were grabbing as long as it was in stock. Who has benefited from this new shopping behavior? Private label brands, especially those in certain categories like grocery. According to a Goldman Sachs report, the CPG industry itself is expected to see average retail sales growth hit 30% by the end of the quarter due to consumers spending more time at home due to the virus. And with certain name brand products like toilet paper, paper towels, dried goods, canned goods, and frozen foods seeming to be out of stock forever, customers have been reaching for store brand products.
Consumers are also taking their shopping digital, and how consumers shop digitally is very different from how they shop in stores. In stores, consumers are more likely to shop by brand, whereas online shopping is searched by product type. And with delivery platforms like Instacart and Amazon being leveraged for online shopping, consumers are searching by product type on these platforms more than ever, and oftentimes they’re discovering store brand products they may have not grabbed if they were shopping in the store.
Then there is the behavior shift to focus on value as unemployment reaches an all-time high in the United States. As we move out of the pandemic and into a recession, there will likely be less brand affinity as consumers will be more skeptical about spending money on expensive items, making store brands that much more appealing. We’ve seen this before during the 1981 to 1982 U.S. recession when private labels peaked with 17% in US supermarket sales then settled to an average 14% in the two decades ending in 1996. Private label then peaked again between 2008 and 2009.
While private label sales have grown exponentially over the last few years in the CPG industry, their popularity will only continue to thrive in post-pandemic life as consumers become more careful with their dollars. And as consumers’ shopping behavior continues to shift, there is a great opportunity for brands to become private label capable and for retailers to expand their private label initiatives in the coming months.