The new normal: how to grow with private label in retail

Everyone likes saving money, and when inflation surges the desire to save can become a demand. As of August 2022, the annual inflation rate in the European area was 9.1%, while in the United States of America it was 8.3%, and in several African countries rates soared into the double digits. Despite inflation and an increased pressure on spending, people still need to buy goods to feed their families, clean their homes, and keep their lives running. Thus, more and more consumers are looking towards cost-saving options for their everyday purchases, leading to a boom in the success in private label goods.

What is private label?

While there are unfortunately many losers in times of inflation, private label is certainly a winner. So, what is private label? Private label brands (sometimes referred to as store brands, house brands, own brands, or generic brands) are trademarked and managed by the retailer. Private label products are specific to individual retail chains, where the retailer retains exclusive rights to the product. Some popular private labels are Amazon Basics by Amazon, Simple Truth by Kroger, Great Value by Walmart, Specially Selected by Aldi, Kirkland Signature by Costco, and Tesco's Everyday Use.

The trend in retailing: private label around the world

Private label in retail is mutually advantageous for both consumer and retailer. With private label, the retailer gets to fill market niches, increase shopper and brand loyalty, and profit from a lower cost structure. Additionally, private labels allow retailers to reduce the double marginalisation (when both the manufacturer and retailer have independent profit margins, reducing the efficiency of the supply chain) that typically comes hand-in-hand with branded goods. Meanwhile, the customer benefits from purchasing private label products as they are typically more affordable than branded products, while still retaining high quality.

In the 1980s when private labels were introduced in the United States, the reputation of these products was that they were 'generic' and lesser in quality than their national brand competitors. However, in the last two decades, consumer attitudes have shifted, and globally private labels now account for 19.4% of all overall FMCG value sales. In Western Europe in particular, private labels account for 36% of the market share (with Switzerland, the United Kingdom, Spain, and Belgium all accounting for more than the region's average share). Additionally, according to Insider Intelligence by eMarketer, private labels can be the main impetus for shoppers to choose a particular retailer, with 66% of customers reporting that if they like a retailer they assume that their private label products will be of a high quality.

Evolution of retailing: private label in times of economic trouble

With the outbreak of COVID-19, the success of private label came nearly overnight. The Private Label Manufacturers Association reposted that private brands jumped 12.3% in US dollar sales in 2020, due to the shutdown of restaurants, a huge increase in grocery ecommerce, and the necessity to cook at home.

According to Numerator, a data and technology company serving the market research space, 1 out of every 5 US dollars spent in online grocery is private label branded. They explain, “As inflation continues to rise, price is becoming more important than brand name for many consumers. In recent months, the number of consumers who say price is more important than brand name has grown across all income levels.”

Additionally, in this current time of inflation and economic leanness, private label has seen a continuation of this great growth in popularity. Nielsen IQ has found a correlation between higher inflation markets and the speed of growth in private label. For example, with an inflation rate of 61.6% Turkey’s market share of private label has grown to 28.6% within the last year, while Ukraine, with an inflation rate of 24.3% has grown private label’s market share to 14.7%.

This growth in market share is a great opportunity for retailers to introduce, grow, or expand their own private label offerings. Additionally, Nielsen IQ reported that when economies recover from a recession, the shifts in customer behaviour often remains; meaning that by focusing on private label in retail, businesses are likely to see customer loyalty continue under differing economic circumstances.

Manufacturing and supply chains for private label retailers

In order for the retail industry to capitalise on the popularity of private label, they have two primary options for manufacturing. Products can be produced by a third-party manufacturer that specialises in private labels or products can be produced by the retail chain themselves -- making the retailer not only a retail enterprise, but also a manufacturer, a relatively new hybrid-role.

By outsourcing production to a third-party, retailers can continue to focus on their areas of expertise and do not have to take on the responsibility of manufacturing themselves. On the other hand, retailers that choose to produce their own private label products have the advantage of overseeing the entire product journey and can more easily maintain product quality.