Gen Z Helps Drive $111B+ in Private Label US Food & Beverage Sales
From men&#;s suits to dish soap, private label products have been part of the pricing strategy for retailers for more than 200 years in the US. To consumers, private label is synonymous with &#;discount,&#; &#;cheaper,&#; or &#;good value for the money.&#; Most people expect to pay a lower price on a private label or store brand product than they would pay for a national brand product.
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Today, we see a wide range of private label products offered by grocery retailers. What is interesting is how private label products can play different roles in a retailers&#; overall pricing strategy, depending on the category.
For instance, a quick stop into my local Stop-n-Shop shows a wide range of private label discounts from 21% to 59%.
AsparagusCorn, Green BeansSliced Carrots, PeasYamsBrand NameDel MonteDel MonteDel MonteBruce&#;sBrand Price$4.39$1.99$1.79$2.69S&S Price$2.89$1.29$1.29$2.09
Private Label Discount34%35%28%22%
CrackersPlain Graham CrackersSugar ConesFruit Bar (Apple)Crispy Rice TreatsHoney Nut Oat CerealFruit Flavored CerealBrand NameRitzNabiscoJoyNutri GrainRice KrispiesHoney Bunches of OatsFroot LoopsBrand Price$4.69$5.39$3.59$4.29$3.59$4.79$5.29S&S Price$2.99$3.49$2.49$3.39$2.59$2.99$2.19
Private Label Discount36%35%31%21%28%38%59%
The discounts reflect the role of the private label product in their categories and among their competitive set.
A Short History of Private Label Pricing Strategy
According to think tank Information Technology & Innovation Foundation, private labels from grocery retailers have been around since the s. Private label pricing strategy is not a new idea:
- One of the first was a line of four private label teas at A&P: Cargo, High Cargo, Fine and Finest
- By the s, Safeway operated nearly 40 manufacturing facilities to product more than 100 private label brands
- In the s, A&P sales were 25% private label
- In , about 20% of grocery store sales were from private label
- The Journal of Consumer Affairs published an article in showing private label prices were, on average, 21% lower than national brands
More recently, private label sales of food and beverage products are over $100B annually and have averaged seven percent growth each year for the last six years. The first year of the pandemic () resulted in a growth spurt of 13%, while saw flat private label sales. Private label experienced nearly double the dollar growth of national brands from November to November .
All this growth is supported by the wide range of products offered as private label. Albertson&#;s offers over 8,000 private label products under their Signature Select brand. Products include staples like canned fruits and vegetables to frozen pizza, fresh meat and paper goods.
Source: Statista
Despite the rapid growth in dollar sales, the share of private label in food and beverage has been flat for the last 4 years.
Source: Statista
Gen Z Buys into Private Label Pricing Strategy
This growth is expected to continue as a Progressive Grocer survey of Gen Z shoppers (born between and ) showed that these young shoppers are buying private label products.
- 67% are &#;extremely/very&#; aware of store brands
- 64% buy store brands &#;always/frequently&#;
- 56% are &#;extremely likely/likely&#; to try different store brands to find ones they like and are a good value
- 41% bought more store brands last year to cope with inflation
Gen Z&#;s affinity for private label dovetails with a positioning strategy template Insight to Action recently released. In it, drugstore shampoo brands are making a comeback through TikTok influencers touting luxury experiences and affordable pricing strategy. In a nutshell:
&#;Regardless of what economists say, Americans report feeling the pinch of increased prices after the massive inflation of the last few years. Emily Stewart, writing for Vox, puts it pithily: &#;the economy is good, and people hate it.&#; Everything costs more now, so it is not terribly surprising that fewer people can justify spending a lot on shampoo and conditioner.&#;
While retailers initially introduced private label products to meet a growing consumer need for lower-priced, high-quality products, retailers quickly realized more benefits to private label, including:
- Controlling product quality and ensuring supply
- Increasing retailer margin
- Innovative and exclusive products
Private Label Pricing Strategy Trend:
Controlling Product Quality & Ensuring Supply
Kroger is the poster child for using private label to control product quality and ensure supply. It currently has 35 manufacturing facilities across the US to produce its thousands of private label products.
While it doesn&#;t own any manufacturing plants, Trader Joe&#;s has created a near-cult following while offering only private label products.
Premium private label gives the perception of higher quality, as well. There are many private label products that don&#;t have the retailer brand clearly marked on the front of the package. Good & Gather from Target is an example of this. Today, Target claims 45 private label brands, like Good & Gather, with 17 of these launched since . In many cases, these private label products appear (and are) high quality.
For instance, President&#;s Choice The Decadent is a very premium-looking and tasting cookie, despite being private label. President&#;s Choice is a private label line from Loblaws and, at one point, this Canadian cookie was a top seller in the US.
At Costco, the Kirkland Signature brand is an assurance of high quality at a good price across many categories. Despite many high-quality coffee brands on the market, Kirkland Signature Organic Breakfast Blend is the fastest mover in my friend&#;s household.
Our team has helped to develop premium private products that have their own brand. For example, Walmart&#;s Parent&#;s Choice Gentle Premium is available today. When we worked on this project, it was originally called Gentle Moments and did not have Walmart on the label, nor Parent&#;s Choice (a Walmart brand).
Private Label Pricing Strategy Trend:
Increasing Retailer Margin
According to a study by Mercator in , the average private label margin was 35%, while national brand margins were 26%. In an era of thin net margins between 1-2%, food retailers need all the help they can to bolster the bottom line. Expanding private label into more categories, especially larger ones, make sense.
Premium private label entries also allow retailers to achieve more margin, and according to one source is a growing portion of the private label market.
Private Label Pricing Strategy Trend:
Innovative & Exclusive Products
A private label pricing strategy can also help differentiate retailers from competitors by expanding beyond commodities. Jim Griffin, president of Stamford, CT-based Daymon North America details in the Progressive Grocer &#; Retail Innovation Outlook:&#;
&#;With up to 98% of national-brand assortments the same across retailers, private brands are the strongest strategic lever to drive differentiation and loyalty, and better meet shopper needs &#; leading to widespread retailer focus and investment in .&#;
For example, Target has recently introduced more than 1,000 new wellness-related products, with many in their food store brand, Good & Gather. Wakefern Food Corp has an open call for new sweet and salty snacks to add to their Bowl & Basket and Wholesome Pantry store brands. Southeastern Grocers has launched a new line of clean-label products under their Know & Love private label.
Innovation has become such a hallmark in private label pricing strategy that the Private Label Manufacturers Association (PLMA) annually give awards for innovative products. Some of the winners include:
- Nature&#;s Basket Sweet Potato Pancake and Waffle Mix (Giant Eagle)
- SE Grocers Naturally Better Organic Mexican-Style Street Corn- Flavored Corn Chips (Southeastern Grocers)
- Good & Gather Blueberry Muffins with Zucchini and Oats (Target)
- Nice! Gluten-Free Vanilla Crème Cookies (Walgreens)
Private label pricing strategy is expected to continue to grow in the US as retailers expand their private label products into more categories and even expand the product offering. With younger generations welcoming private label options, we can expect to see these trends continue.
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Last week I talked about how to build Private Label strategy through the category management foundations, with focus on topline category assessment results through market share, demographics and interaction data. As you might remember, Retailers need to ensure these profitable private label brands offer competitive differentiation by using the same strategic category management and fact-based approach for national brands and total category. This post, we are going to dive into private label pricing.
Where to begin? Data.
When you analyze Private Label data, you can look at it in similar ways, whether it&#;s Nielsen or IRI or internal POS data. However, the breadth and depth of the data that you have available will impact the level of analysis that can be completed.
Link to Gofar
If you have more than one Private Label brand, resist temptation to combine them into one brand. For example, don&#;t group &#;Generic&#; and &#;Private Label&#; together under one brand line in syndicated data. Instead, wherever possible, separate the two to capture significant (and sometimes surprising) differences between the multiple private label brands.
In Homescan or Panel Data, you can break out Retailer Private Label brands (e.g. Great Value, Presidents Choice, etc.) in your data instead of grouping into a single &#;Private Label&#; &#; this separation provides a clearer perspective on the uniqueness of each brand. Further, it significantly increases insights derived from interaction data and consumer demographic data. Vendors/Manufacturers who can provide these types of unique insights to Retailers will add a value that most Retailers don&#;t have available in their data set.
What&#;s Next? Price Gap Analysis.
Now let&#;s review a simple but compelling price gap analysis that provides great insights into price gaps between Private Label brands and National Brands.
Private Label Pricing Analysis Objective
Complete a price gap analysis to understand the impact that deep discounting on National Brands has on Private Label brands, and determine what the price gap threshold should be.
Example #1:
Pricing analysis that determines what happens when a Private Label product is priced higher than the same size of National Brand.
Retail pricing on Private Label brands vs National Brands is complex.
In the example above, Retailer X has established that their product lineup in this category competes directly with one other National Brand competitor. They have completed a thorough 52-week price gap analysis to understand how they should be price positioning themselves vs their closest competitor.
From their weekly pricing analysis, this Retailer has been able to identify the weeks where their Private Label products were priced higher than the National Brand, and the impact that pricing strategy had on their sales and profit for Private Label, as well as total category.
Insights on Private Label Pricing Strategy:
- On week 4, Private Label was priced $1.51 higher than the National Brand equivalent, and this week ranked 49th out of 52 weeks in both $ sales and profit for Private Label. On the same week, the National Brand product has its 5th top ranked week in $ and 2nd in profit, ultimately resulting in week 4 having the 11th highest $ volume week, and the 35th in profit.
- If you compare results across these weeks, you can see that in every instance, National Brand ranked high in both $ volume and profit for weeks (shown above with blue numbers), and Private Label ranked its worst weeks (shown above in red numbers). Some of these weeks worked favorably for total category sales and profit, while others did not.
What should Retailer X do?
In an example like this, Retailer X may want to establish guardrails, so that their Private Label is never priced above the National Brand equivalent, or only within a certain percentage. This could help to increase sales on aggressively priced weeks for National Brand, and increase profit as well.
A keen understanding of price elasticity and cross elasticity needs to be done before adjusting any prices. This will help Retailers understand the optimal price gap between National Brands and Private Label brands. A profit analysis may also help Retailers understand different pricing and promotional scenarios and determine the best ones for the category.
Example #2: Compare average tonnage pricing to brand value perception.
As already established, not all Private Label or National Brands are created equal, and the price gap between them needs to be considered. In the example above, I have graphed Price on the X axis, which should be a tonnage or equalized volume price, not average unit price, and Perceived Consumer Value on the Y axis.
Of note, this is &#;value&#; based on consumer perspective, not based on where the Retailer or Manufacturer/Vendor wants their brands. This &#;value&#; is gathered through focus groups and consumer studies.
From here, we can then tier the graph into
Price or Value Brands (orange)
Mid Tier Brands (blue)
Premium Brands (green)
We can also plot key
Private Label Brands (yellow)
- The mid Private Label brand (PL#1), which is lower in price, with a mid to low perceived consumer value.
- Next is our generic label, or PL#2. It is low priced and lower perceived value. Remember that these two brands interact, so if PL#1&#;s pricegap is too high, consumers may switch to the lower priced generic brand.
National Brands (red)
- NB#1 is high perceived value and high price &#; recall that this brand had little interaction with either private label brand. This is because their value is so much higher, and consumers are willing to pay the higher price for this value.
- NB#2 is much higher in price, but the perceived value isn&#;t all that far from PL#1. If the gap gets too high between these two brands, consumers will trade down to PL#1, and if it gets too low, consumers will trade up to NB#2.
- Finally, NB#3 is similar perceived value to PL#1, and higher priced. Recall that it strongly interacts with both private label brands. So it&#;s in a vulnerable position. If the pricegap gets too high, consumers will trade down to one of the private label brands. Because there is no real perceived value difference, this manufacturer needs to determine how to differentiate itself more from the private label brand.
Imagine if this Retailer launched a 3rd private label brand, with higher perceived value than NB#2 and just below NB#1. This will put both NB#1 and NB#2 in jeopardy.
Generally, when a Private Label cuts their price it will have little impact on the National Brands. However, if the National Brand is close to a Private Label Brand, as in PL#1 and NB#3, a relatively small price cut can result in significant gains.
Further, if National Brands are far away from Private Label Brands in both perceived value and price, even a large price discount will not have a significant impact on Private Label sales.
Private Label pricing analysis is a valuable exercise for both Retailers and Manufacturers/Vendors. It helps each understand the interaction between Private Label and National Brands at different pricepoints, and helps them consider how these interactions affect total category sales and profit. So don&#;t forget to include Private Label as part of any category analysis and development of true category solutions.
Not sure how to complete this type of analysis?
Category Management Knowledge Group can teach you how to complete foundational to advanced analysis through category management training that will help you to make more strategic decisions for your Private Label brands.
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