The world of private label is changing--quickly and likely permanently.
As we investigated private label growth, trends, and successes recently, we uncovered a startling truth. Although private label has historically been cyclical and strongly correlated with economic times, private label has held its ground since 2008. Never has it had such a period of unfettered strength. Clearly recent economic struggles have contributed to this success, but with a staying power of seven years and growing, it begs the question of whether a more fundamental shift is at play.
A quick review of share of sales and growth from 2011 to 2014 across private label, large brands (branded products with greater than $1 million in sales) and smaller brands (branded products with less than $1 million in sales) reveals some unexpected trends. Although private label brands represent 20% of sales in 2011, they account for 22% of the collective sales growth from 2011 to 2014. Even more surprising? Smaller brands account for a mere 1% of sales in 2011, but a startling 22% of sales growth.
Are consumers just reacting to economic struggles and pricing pressures? No! Clearly that contributes to the trend, but based on our research, more than 60% of consumers find private label to be as good in quality as branded products, and a slightly lower, but still meaningful nearly 40% of consumers believe private label to be of higher quality than name brands.
Millennial shoppers, in particular, have less affinity toward brands, and as a result, are being won over by private label brands at unprecedented levels. Translation? This private label trend has staying power, so successful branded players will need to continue to differentiate to effectively compete or watch passively as private label gains further. Further complicating matters, retailers are generally on the private label bandwagon. For retailers, private labels are both a source of competitive differentiation and profit potential. Private label products generally realize 35% gross margin for retailers while branded products contribute noticeably less. so they are unlikely to dampen this private label trend.
So what are the implications of this new reality to the key players in question, to branded players, retailers, and even private label players themselves? We offer some suggestions:
1. A Wake-Up Call For Branded Players
In today’s current environment, branded players need to truly understand the nuances of the value equation (value = benefits/price) as it exists in their market. It is no longer about the next slightly better innovation or the modest price discount.
Instead, branded players need to consciously manage both cost differential and benefit differential versus their nearest private label competitors through the lens of their consumers. One has to remember that private label has not gained merely by being cheaper, but rather, it has gained through the combination of its price and the benefits it has delivered in terms of value to the consumer. In such a world, success may come in the form of small but highly valuable benefit delivery that a small set of consumers are willing to pay a great deal for just as often (or more) than it will come from a slight decrease in delivered benefit at a discounted price point.
In addition, some would argue that in today’s environment, your brand equity is defined by the consumer’s most recent brand experience. With more options than ever, if consumers are dissatisfied with your brand experience, they have many other options from which to choose. There is truth to this. And successfully optimizing your value equation addressing point number one above will go a long way to optimizing the product experience via benefit and price delivery.
However, with the growth of Millennials and the aftermath of the recent economic crises, branded players cannot be too quick to write off the value of the more holistic view of brand equity-building opportunities that their private label partners are more likely to forego. Considerations around social issues and sponsorships, online and social media engagement opportunities with consumers, mobile apps and digital impressions, even event marketing and package design as it makes sense. All of these elements will work together to create the complete vision of your brand, separate from price, and clearly additive to the traditional benefit lens.
2. Retailers Reap The Rewards
For those retailers who have not yet stepped into the realm of private label, it’s time to rethink that strategy. Here are some of its advantages:
• Drives traffic: In point of fact, retailers are pushing private label as a key source of competitive differentiation from other retailers and are gaining as a result.
• Drives profits: Private label drives profits for retailers. As we mentioned before, food retailers, for example, make a 35% margin on private label sales versus 25% on branded products on average.
• Drives total revenue per square foot: Overall, retailers winning in private label also outperform other competitors on total business economics as measured by revenue by square foot. These retailers have mastered the basics of the private label portfolio offering, with progressive, tiered private label offerings, and as such they have been enabled to take private label out of its standard realm and into the perimeter of the store to substantially grow revenue per square foot.
Private label pays as a result from a traffic, revenue, and profit standpoint. It’s hard to argue with those merits.
3. The Year Private Label Started To Act Like Branded Players
Finally, for private label players already active: First of all, congratulations! Secondly, its time to get back to work. You have enjoyed years of profitable growth, but as retailers and branded players take note, the world in which you compete will change dramatically.
That means you need to begin thinking, in some respects, like a branded player. Competition will be fierce from other private label brands and branded players. Developing proprietary consumer insight, investing to grow brand equity, and strategically planning broader marketing, communications, and pricing plans are going to gain ever more importance if you are to continue to realize growth at these historic levels.
It’s a brave new world of private label, but one that is not likely to revert back to its old ways anytime soon. The success of branded players and private label players alike in this new environment will be directly correlated to their ability to build differentiation through product, marketing, and consumer engagement--and the need for precision will be greater than ever.