4 Reasons Consumer Goods Brands Are Losing Out To Retailers' Private Labels
Warren Buffett recently took Kraft Heinz to task for its poor performance. Disappointed in the investment Berkshire Hathaway made with 3G, the Brazilian investment firm, when they merged the two food-and-beverage giants together in 2015, he laid some of blame on competition from retailers’ private brands. Now the Private Label Manufacturers Association (PLMA) is out with a new report that reveals just how big private label’s share is. Private label accounts for just under 20% of consumables market share. Private-label brand sales of $128.6 billion, rising 4.4% in 2018. By comparison, national brands gained only 1.1% growth in sales across all retail channels, including mass merchandisers, club stores, dollar stores, grocery and drug stores. Some of the biggest and best store brands retailers in the country, such as Costco, Amazon, Jetcom, Aldi and Trader Joe’s are not part of those numbers. If these sales were added to the total, the PLMA “conservatively” estimates the private label business reached $170 billion in 2018 .
Costco introduced the Kirkland brand in 1992, 27 years ago, and that brand did $39 billion last year, whereas all the Kraft and Heinz brands did $26 or $27 billion. A hundred years plus, tons of advertising, built into people’s habits, and now Kirkland, a private label brand, comes along and with only 750 outlets does 50% more business than all of Kraft-Heinz brands. Consumers are smarter and don’t want to add to Warren Buffett’s wealth.
It is not hard to see why private label appeals to consumers and why more shoppers are choosing a retailers’ store brand over the national brand. It isn’t just price, there are broader consumer trends at work which have nothing to do with private label, but which private label is the beneficiary of.
Here are four reasons why private label is growing and national brands from Kraft, Heinz, Campbell Soup, General Mills and others are struggling.
Better value, not just cheaper price
Without doubt, cheaper prices for house brands makes shoppers look twice at these products. It is the perception of equal or greater value from the house brand as compared with the national CPG brands. In a 2019 PLMA survey two-thirds of consumers agreed with the statement, “In general, store brand products I have bought are just as good, if not better than the national version of the same products.” Consumers are aware that private label products are often manufactured by the same companies that make the national brands and to the same exacting standards. They’ve tried them and like them, with some 40% of consumers saying they “always/frequently” buy store brands. And some 25% said they plan on buying more private label brands in the year ahead.
Retailers have broader view of what shoppers want
Retailers are quick to identify shifts is consumer preferences, thanks to their ability to look horizontally across the entire shopping basket of customers, whereas national brands tend to see vertical data only related to their category. That puts national brands behind the trends shaping consumers broader preferences. As a result they tend to be slower to respond, like the trends toward organic and natural foods, cleaning products, health and beauty and more premium, upscale offerings. It used to be the national brand was the premium offering and the store brand was the generic. Not anymore, now you have Whole Foods, Trader Joe’s and even Walmart, offering more premium selections and leaving the national’s behind.
Simplifying the paradox of choice
Mass merchandisers, supermarkets and drug stores are overflowing with products. The Buying and Selling of Food in America reported that in the 90s the typical grocery store stocked about 7,000 items. Today the average supermarket contains 40,000-50,000 items. And many more new products keep coming. Harvard professor Clayton Christiansen estimates that 30,000 new CPG products are introduced each year. This creates a huge “paradox of choice” for consumers. Tide, for example, comes in powder, liquid and pod form and in formulas for regular wash, high-efficiency (HE), plant-based and hypoallergenic needs and with extra stain-fighting and fabric softener additives. The other leading detergent brands have the same profusion of choices. Costco offers four Kirkland varieties on its shelves. Private labels are the solution. Shoppers trust the store, otherwise they wouldn’t be shopping there. They have tried its other private label products before and liked them. The choice becomes simple. Millennials want simpler choices. Tesco and Sainsbury are getting the power of simplicity. Each retailer uses a single color for their private label brands so a customer can look down the aisle and immediately be clued to the store-brand offering.
Loyalty shift from brands to stores
Retailers have the advantage to get up-close-and-personal with their shoppers, whether or not they are using that ability to the max is another question. Shoppers have a more personal, tactile relationship with a retailer because of the experiences they have in the store. As a result, the retailer-customer relationship can be more real in a way that the one with national brands cannot. The good will toward the store that engenders can translate into more sales of the retailers’ private label. Costco offers little in-store service, but the interactions customers have with Costco sales associates are friendly and positive, plus on weekends there are those nice people scattered throughout the store offering shoppers a snack and a chat.