The Rise of Private Brands
Not long ago, store brands were synonymous with low-quality knockoffs. After all, Great Value lunch meat didn’t exactly inspire confidence. But things have been changing. Retailers such as Albertsons, Costo, Kroger, and Target have invested significant resources in improving their product quality and packaging, and the move is paying off.
Consumer perception of private labels has shifted. Brands like Simple Truth from Kroger have successfully tapped into popular demand for more health-conscious and sustainable products, and they aren’t the only retailer making headway in premium categories. This trend is only just beginning.
COVID Accelerated The Growth of Private Brands
Sales of private labels have been growing faster than name-brand items for the last four years. In 2019, sales of store-owned products increased by over 4%, three times faster than other brands. The pandemic only helped cement this trend.
With the economic downturn in early 2020, many shoppers became more budget-conscious. At the same time, supply chain problems and mass shortages forced many people to try brands they hadn’t considered before. One survey found that nearly one-fifth of respondents rely more on private-label products than they did before the pandemic, and 52% plan to stick with private labels even after things return to normal.
The economy is shifting back into gear, but so are concerns about inflation. If prices keep rising, it is reasonable to assume that budget-sensitive shoppers will only continue to move towards more affordable store brands that offer quality products.
Store Brands Give Retailers Superpowers
Private label products typically provide higher margins for retailers, increasing the profitability of each basket. This can make a massive difference for stores like Costco, which saw over 30% of total sales made up of Kirkland Signature products during the last fiscal year. Kroger isn’t too far behind, with its private labels capturing over 20% of total sales.
There is also the intangible benefit of additional customer loyalty. Successful product lines strengthen retailer brands and provide a distinct competitive advantage. If you like a store brand, there is only one place you can get it. (Who doesn’t shop at Trader Joes to pick up a box of dark chocolate peanut butter cups and the like?). But it isn’t all roses. Private labels bring their own set of challenges as well.
Private Labels Bring New Pricing Challenges for Retailers
Higher margins and undeniable growth potential are great for retailers, but succeeding with private brands requires advanced pricing strategies that can be difficult to master. Retailers aren’t just competing against name brands on their shelves. They are also up against a growing number of private labels from other stores.
The proliferation of premium brands adds another new dimension to this challenge, as the goal is no longer to simply offer the lowest possible price. Retailers must effectively match their private brand portfolios to the growing set of private brand assortment tiers from the competition, including non-traditional players like Amazon.
This requires analysts and category managers to spend time establishing tier to tier, item to item matches that they must maintain over time and update when suppliers and UPCs change. Understandably this is a complex process as many tiers need to be considered in each category, including:
- Mid Tier
- And others
For many retailers, this is too much to handle with internal resources alone. Thankfully, there are experienced vendors who can help.
RW3 Helps Retailers Win The Private Label Pricing Game
Maintaining a line of sight to private brand pricing at competitors is a vexing problem, but RW3 has developed the competence and the technology to handle it for you. We have already built a significant database of private brands and items across retailers and have established links for our existing clients.
We are very close to unveiling a new system based on AI and machine learning that will allow our customers to automate some of the most critical aspects of the matching process. In addition, our new front-end dashboard and web app will make it more efficient to complete the matching process and seamlessly manage ongoing price checks.
We look forward to introducing this capability to the industry shortly to help retailers seize the private brand opportunity as it continues to build momentum. If your organization wants to up its private-label game, our team of experts would love to help you get there. Let us know your goals, and we will provide recommendations based on our experience.
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