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The way consumers view private labels have changed a lot over the past few years, but what does that mean for retailers?
In the first quarter of 2024 private label brands made up 38.2% of fast-moving consumer goods (FMCG) sales in Europe1 and this is not a new tendency. In 2022 IRI (Information Resources, Inc.) estimated that European private label sales already totalled €194Bn.2
But what is the appeal of private label brands?
For consumers, the answer to that question is pretty straight forward—Private label brands have a financial appeal.
In times of uncertainty, such as inflation, war, shortages or other hardships, consumers have a tendency to turn to private label brands over big brand names, and that is exactly what is happening now. Between the war in Ukraine and the rise in the cost of living, consumers are looking for a bargain and this is mirrored in the way consumers shop, not just in Europe.
In 2023 one out of every five food or non-food grocery products sold in the U.S. carried the name of a retailer or own-brand and was supplied by a store brand manufacturer.3
But while this is a response to inflation, the tendency doesn’t shift the moment the economy starts to improve. According to Danish retailer Rema 1000, consumers turned to their private label brands during the financial crisis of the late naughts but many of them stuck to the private label brands after the financial circumstances improved.4
But getting consumers to make the switch from big national brands to private labels doesn’t necessarily come naturally.
While the benefits of private label brands are obvious for the consumer, you might be asking yourself what the benefit is for retailers (aside from generating happy customers).
But private labels are a huge benefit for retailers willing to invest in them as well, as private labels make retailers less dependent on big national brands and it’s not just supply-chain issues either.
Investing in a private label brand means retailers:
In short, private labels give retailers more control over everything from design and positioning to cost, materials, and quality of the finished product.
When it comes to private label brands and getting consumers to make the switch to private label products there are three areas you should focus on:
Private brands need to be positioned more like a brand in its own right than a knock-off copy of household names, if they want to make sure consumers choose them over national or international name brands. And to do this, retailers need to capitalize on the brand trust they’ve already built.
The consumer landscape for private brands has changed dramatically over the last couple of years to a point where we now have a consumer group dubbed private brand loyalists—consumers who prefer private labels over national brands.
And according to research from IRI, the proportion of private brand loyalists now equals national brand loyalists in all key European markets.5 Additionally, according to Daymon, 89% of US consumers trust private brands just as much as national brands.6
And why is this trust important?
When you have established trust with a consumer group, they become more likely to try other products in your portfolio. Essentially, if your toilet paper is good, it increases the chance of consumers purchasing your cereal, dairy, sweets etc.
Another reason why innovation is essential for your private brand strategy is when you’re establishing differentiation. Research shows that competing retailers' assortments overlap by as much as 98% which means that your assortment of national brands is no longer a deciding factor for consumers to enter a retail store.
Private brands, however, offer items that can only be purchased in your store, so if consumers prefer your private brand over the one of the competition it could also be reflected in sales of national and international brand products.
In fact, 75 % of US private brand loyalists have a preferred store where they shop, while 48% of UK consumers agree that the private range is crucial when deciding where to shop.4
Which is why an innovative private brand strategy can help both increase and maintain consumer loyalty. Private brand innovation's most significant advantage is its ability to extend loyalty beyond the portfolio, with stronger private brands creating brand-loyal consumers.
We’re not claiming that a multichannel focus is a new thing in retail strategies. Not even by a long shot. However, since the pandemic, the multichannel approach has shaped e-commerce and the digital landscape of retail. As consumer needs changed, retailers adapted to the new purchasing behavior and this tendency didn’t roll back after restrictions and lockdowns were removed.
So, when we’re talking about private branding we need to think about how, when and where consumers carry out their buying journey, and we need to be able to meet them on the channel they are using for each step.
This means ensuring that private brands are fully represented in your e-commerce universe; consumers can't buy what isn't there, and they won’t be inspired to buy what they can’t see. In the same vein, your private brands need to be fully represented in display and search.
Creating an integrated strategy that includes merchandising, product information, package design, and cross-channel marketing is critical to ensuring private brand multichannel success.
But this doesn’t mean that you can neglect what goes on in the brick-and-mortar stores. In 2023 online purchases made up 19% of total retail sales and that number is expected to climb to 25% by 2027.7
Another important aspect of the multichannel strategy is your access to data and how you apply the information you gain from other channels. Key learnings from your online strategy should be applied in-store, blurring the lines between channels and establishing the consistent multichannel shopping experience.
Over the past half decade we, as retailers, have had to contend with supply chain challenges such as lockdowns, labor shortages, and a rising cost of materials, and there are vital lessons we can take from those challenges to proactively manage our supply chain and private brand strategies, which could potentially help minimize complications and errors in the future.
Industries across the retail landscape are still grappling with challenges related to their supply chain, from a shortage of workers and closed factories to transportation bottlenecks and rising commodity prices.
Because of that there’s a benefit to being proactive in how you manage your supply chain and your private brands.
When working to become more proactive in how you manage your private brands, there are three things you should consider:
Nursing relationships with suppliers and partners is not a new concept for retailers. In fact, retailers primarily succeed through long-term strategic partnerships.
The primary advantage of having a well-oiled supplier network is the ability to ensure order fulfillment. Another advantage is the ability to innovate in collaboration with suppliers. Some retailers collaborate with suppliers to create new or exclusive items, a mutually beneficial endeavor that distinguishes the retailer's assortment from competitors while creating an exclusive segment for the supplier.
While supplier centralisation has been quite common in the past, driven by factors such as avoiding vendor management complexity, purchasing at scale, and navigating government regulations, retailers should consider diversifying their supplier network as a more diverse supply base lends itself to greater variety and more opportunities to develop an interesting product portfolio.
70% of global consumers think that food-beverage prices have risen since mid-2021. [8] And over the past years we have seen an increase in prices. In Denmark, for instance, food prices have risen 24% over the past three years.4
It is important to note that while as retailers we may be under pressure to pass on internal cost increases, determining the best approach should never be based solely on short-term gains and losses.
On a category-by-category basis, a variety of factors should be considered in this calculation, including price elasticity, consumer willingness to pay, category dynamics, national brand pricing, target price gaps, and brand positioning.
While, as retailers, we should mitigate these challenges as much as possible through supplier networks and pricing strategies, we need to be proactive in communicating the challenges we face to consumers to nurture transparency and trust.
And the transparency should be related to everything from products that are out-of-stock, to price increases. Many European retailers provide transparency in their pricing breakdowns to ensure consumers understand where their money is going.
Other retailers have committed to price freezes and are communicating them to encourage long-term consumer loyalty rather than short-term stockpiles and hoarding.
Finally, emphasizing private brands as a solution for consumers as they navigate the impact of things like price increases can be used as an opportunity to drive long-term positive impact.
Consumers are still facing significantly reduced incomes, and private brands can provide them with alternatives across all categories.
As retailers we need to rethink private brand strategies to avoid falling behind our competition and to meet the changing expectations of consumers. Over the last years, private brands have been seen to increase trust and loyalty, extending beyond the portfolio.
To capitalize on this trust, retailers need to prioritize private brand innovation and look at all tiers and categories that could benefit from innovation, not just those that drive purchases.
When looking at the supply chain, retailers need to learn from experience and try to rethink the construction so it benefits the private brand strategy in the best way possible.
As costs continue to soar, we should update our purchasing strategies to mitigate some of these increases, working in tandem with suppliers to control input costs and determining whether consumer-facing price changes are strictly necessary.
Finally, we need to be proactive in communicating supply changes to consumers, providing an opportunity to create transparency, build trust, and expand private brand trails.
Overall, there are many unknowns in retail. When faced with a long list of challenges, we can only rely on one constant variable: consumer needs and values will continue to be what drives purchasing.
And because of that, we need to align our private brand strategies so they can meet the expectations of consumers not just today but tomorrow as well.
[1] https://www.statista.com/statistics/1376708/consumer-goods-private-label-value-market-share-europe/
[2] iriworldwide.com/IRI/media/IRI-Clients/International/Private-Labels-Deck.pdf
[3] https://www.plma.com/sites/default/files/files/2024-02/yearend-report2024-final.pdf
[4] https://dagligvarehandlen.dk/reitan/discountkaede-oeger-salg-af-egne-maerker
[5] IRI Private Label Consumer Survey, February 2021; Private Labels: Hiding in Plain Sight. No longer cheap, generic, look-alike Substitutes. They are your biggest Competitor, 2022
[6] daymon.com/wp-content/uploads/2022/05/THE-FINAL-2022-Private-Brand-Intelligence-Report.pdf
[7] https://www.statista.com/statistics/534123/e-commerce-share-of-retail-sales-worldwide
[8] daymon.com/wp-content/uploads/2022/05/THE-FINAL-2022-Private-Brand-Intelligence-Report.pdf
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