Private label has become a significant revenue stream for grocers.
No longer considered “generic," in-house brands command 17% of the market and bring in an estimated $120 billion per year, according to the Private Label Manufacturers Association. With mass merchandisers and e-tailers steadily growing their private labels, it’s likely that the explosive growth has only begun.
“Retailers want to deliver value to consumers, and private labels do that,” Christopher Huisinga, managing director and head of the consumer group for investment firm Stephens, told Food Dive in an email.
But just having a store brand on the shelf isn't enough. As leading grocers such as Kroger invest in private-label innovation, and as discounters, dollar stores and Amazon ramp up their grocery focus, the need to regularly update private label portfolios has become a priority for retailers.
Expensive, time consuming and vitally important
Store brand updates have accelerated recently. In the last 18 months, Kroger has introduced 1,000 new private label grocery and household items, totaling 30,000 products. Meanwhile, Hy-Vee announced it would remove at least 200 artificial ingredients and chemicals, including hydrogenated oils, artificial colors and high fructose corn syrup from 1,000 store-branded products. The revised packaging will have a “Clean Honest Ingredients” label.
Following a trend toward tiered brands, supermarket chain Southeastern Grocers transformed more than 3,000 private label products for its BI-LO and Winn Dixie stores into three new brands — SE Grocer Essentials, a budget line; SE Grocers, a brand that promotes quality and affordability; and Prestige; a premium line.
Changing the look or content of a private label brand is not a decision to be made lightly, according to Dave Harvey, vice president of thought leadership for Daymon, a branding and retail services provider. Private label brands typically need to be upgraded every three to five years in order to stay relevant with consumers.
“The average private brand program has over 3,000 SKU’s and [a refresh] can take 12 to 24 months and cost hundreds of thousands to several million dollars,” Harvey told Food Dive.
When private labels launch a new line, the rollout may be smaller — between 100 and 500 SKU’s, Harvey said — but more advanced research has been done to create the brand. To make a private label product more competitive, grocers must carefully research how to make a noticeable improvement over not only the existing private label, but national brand offerings as well.
Creating a strategic plan
Three years ago, PCC Community Markets decided to define its private label strategy. Until then, the grocer had a private brand, but it hadn't created a significant advantage for the Seattle natural and organic food cooperative, said Darrell Vannoy, PCC’s vice president of merchandising.
“It was not part of a strategic plan,” he told Food Dive. “It didn’t define the value of what it offered to the consumer.”
PCC decided to embrace local producers, be transparent about whom those producers were and offer clear product differentiation for customers. That meant not just competing with national brands, but taking their product a step beyond by having better ingredients, sourcing or pricing, Vannoy said. One example was the company’s development of PCC grass-fed yogurt.
“There was a need in the premium yogurt category to find a producer that could do, at a minimum, non-GMO, then organic,” Vannoy said. PCC partnered with Pure Éire Dairy in Othello, Washington, which was certified organic and grass-fed, and carried an additional animal welfare certification. Since launching in September, PCC's grass-fed yogurt has increased sales tenfold, Vannoy said. The new brand is now PCC’s second best-selling yogurt.
Is there a downside to updating?
Grocers have to consider more than just the success of their private label offerings, according Huisinga. They also need to take into account how these offerings will contribute to the overall health of the categories in which they appear.
“National brands advertise and can drive consumers to the store," Huisinga said. "If the branded players don’t have the funds to innovate and advertise, retail traffic can fall off."
Since private label brands typically don't do extensive advertising, he said, it’s often national brands that bring consumers to the store. At the same time, if a private label brand is selling well, why shouldn’t a grocery store give it more shelf space?
That’s what is happening at Costco, where its Kirkland Signature brand is edging out national competition, forcing its competitors to deliver innovative products at low prices to stay on the shelf.
“Don’t think of a private brand as only being an item. The service is the experience that is something completely proprietary and unique to you as a retailer.”
Vice president of thought leadership, Daymon
But sometimes a private label helps a national brand, Vannoy said. When PCC Community Market launched a private label coffee in 12-ounce packages last year, it was very popular, helping grow the category’s overall sales by 50%.
“It had great value from a price perception, met the standards of the category,” Vannoy said. “It was organic, shade grown and fair trade. It didn’t cannibalize the category.”
Harvey said he sees little downside to expanding private label products.
“It makes all partners for the retailer more attentive to understanding the local customer,” he said, noting that private labels can be flexible in responding to the needs of the local shopper and offering more innovative options.
Focusing on service and new categories
In addition to adding new products and tinkering with ingredients lists, retailers should consider expanding their store brands into new categories and services, sources told Food Dive.
Huisinga pointed to private label meal kits, such as Kroger Prep + Pared line, as one example. According to Nielsen, in-store meal kit sales surged to $154.6 million last year.
Grocers can go even further, according to Harvey, by building in-store experiences that feature private brands, such as a store bakery with a branded name.
“Don’t think of a private brand as only being an item,” he said. “The service is the experience that is something completely proprietary and unique to you as a retailer.”
Attacking the web
Leveraging private label sales online is another opportunity filled with creative possibilities. While just 12% of shoppers who bought groceries online last year purchased private label products, according to Cowan and Co., penetration is expected to grow rapidly as brick-and-mortar retailers expand their web presence and e-commerce sellers develop their own lines. Amazon sold $10 million worth of Whole Foods’ 365 Everyday Value brand on its site last year, according to One Click Retail, while Walmart’s Jet.com rolled out its own grocery line, Uniquely J.
Private label brands are changing consumers’ shopping habits — not just once they’re in the store, but when they make the decision of what store to visit. An estimated 53% of shoppers use store brands to determine where to shop, up from 34% in 2011.
Grocery shopping will continue to evolve, and as it does, the retailers that manage the magical trifecta of quality, innovation and affordability in their private label brands, while creating uniqueness through their services, will be the ones that stay ahead of the crowd in an ultra-competitive and ever-changing market place.