Consumers continue to reach for store brands, producing record sales across major U.S. retail channels

By the most important industry measure – dollar volume growth – last year was another banner year for store brands in American grocery retailing.

Sales of private label in the three mainstream channels – supermarkets, drug chains and mass merchandisers – surged upwards, setting new annual revenue records across the board. At year's end, store brands accounted for nearly three billion dollars in incremental sales overall, an increase of 2.5% over the previous year and more than twice the gain recorded by national brands.

In the big supermarket channel, nearly one of every four products sold and $1 of every $5 of all sales was credited to store brands. The products are enjoying robust growth in the country’s drug chains, too. In supermarkets, unit and dollar shares now stand at 23.1% and 19.5%, respectively; in drug stores unit share is 17.3% and dollar share is 16.5%.

Across combined retail outlets, which include mass merchandisers and Wal-Mart Stores, shares came in at 21% in units and 17.7% in dollars. Total sales were $115.3 billion, a new record. Store brands picked up right where they left off in 2014. Over a three-year period, annual sales across the combined outlets have increased by $5.5 billion.

Supermarket’s billion-dollar bump

Increased sales of store brands gave the supermarket channel a billion dollar bump in revenue. Private label sales were up 1.8%, nearly three fourths greater than that of national brands, which were ahead 1.1%. The increase amounted to some $1.1 billion and raised annual sales of store brands to $62.1 billion, also a new high. Store brands accounted for 28% of all new dollars into the channel last year. Over the past three years, annual sales of store brands in supermarkets have increased $2.5 billion, more than 4%. During the same period, sales of national brands have gained 2%.

As they have for nearly a decade, store brands continued to be the principal growth engine in the drug chain channel. Private label dollar volume was up 0.3%, compared to a decline of 0.1% for national brands. The performance raised the annual sales of store brands in the drug channel to $8.3 billion, another high. Over the past three years, annual private label sales have increased by $200 million. Private label has accounted for 40% of all the annual dollar growth in the channel during that period.

Looking beyond traditional operators, there are additional billions in sales of store brand food and non-food consumables occurring in no-frills retailers, specialty chains and convenience stores that are not included in the figures. Also not considered are store brand products sold by chains specializing in office supplies; hardware, tools and do-it-yourself; home improvement, home decor and domestic goods; consumer electronics, baby care, pet care, and healthy and beauty and personal care. These are just a few of the non-grocery retail channels that are marketing a growing variety of store brand lines and items.

Providing value to consumers

Store brands continue to represent outstanding value to the American shopper. Time magazine reported earlier this year that consumers could be saving an estimated $44 billion a year by buying store brand products over national brands, citing a study by the National Bureau of Economic Research that looked into shoppers’ behavior toward the products. “So why are some shoppers still choosing the national brand over the store brand? The report suggests it’s because ads are more likely to mislead the least informed buyers. It goes on to show the best informed shoppers were more likely to buy the store brand over the brand name options. For example, chefs and pharmacists who were surveyed were more likely to buy store brand food items for their homes.” As most shoppers have come to understand, the difference in price is largely due to the so-called marketing tax, that is, advertising and promotional costs incurred by national brand manufacturers that are passed on to consumers in the form of higher prices. Major CPG companies are estimated to spend more than $20 billion annually on measured media.

“Growth continues to outpace industry average”

A wide range of industry observers affirm store brands current popularity and growth prospects. “Private label is clearly here to stay,” IRI said recently. “To prosper, it is critical for private label marketers to understand the role of their brands in relation to national brands. National brand and private label marketers have long been locked in a dance, each vying for share of consumers’ CPG expenditures, and the battle is fierce, for even small share wins provide a significant boost to the bottom line. The recession served to intensify the dance. Today, the choreography is more nuanced, with national brands and private label each playing a role and the consumer is at center stage. Private label growth continues to outpace the industry average.”

“To drive increased private label growth, retailer focus and commitment will be critical,” asserted Todd Hale, former senior vice president of Nielsen. “Best of breed retailers win by using a combination of organizational focus and operational excellence, and by ensuring they offer the right product at the right price to deliver the right margin across the store in given categories. Ultimately, retailers must understand shoppers’ demand for both store brand and national brand products and categories.”

In a recent industry report, “The Future of Private Label Food,” the Hartman Group said: “What millions of shoppers have discovered is that brand may not actually matter as much as they have traditionally felt, especially in value-added packaged-food categories. This could become a problem for legacy brands. Each private label performance segment has different constraints and growth levers from our perspective, reflective of the cultural history of brand in American food culture. We see that the ability of retailers to move their portfolios upmarket, enhance emulation quality and pricing, and leverage a strong banner halo will determine how prevalent private label becomes in the U.S. market.”

“Consumers continue to look for ways to save money,” a 2015 report from McKinsey added. “While the number of consumers cutting back on spending has stabilized, Americans are still pinching pennies. Throughout the recession consumers saved money on grocery and household-product by switching to store brands. That trend continues today. Consumers are not returning to higher-priced options. Nearly three-quarters say they do not intend to go back to purchasing more expensive brands. For one-third of Americans, this is because they no longer prefer the more expensive brand, having realized that the store brand offers better value for the money than expected and is of higher-than-expected quality.”

Retailers are responding to store brands popularity

In response to consumer demand, retailers across the country are freshening and extending existing private label offerings and rushing to their shelves whole new lines of store brands to leverage evolving lifestyles and desirable product attributes and to stay competitive with the rival down the street and its own popular store brands. Savvy retailers know that private label products are a foundation for customer loyalty and strong profits.

“Ubiquitous brands are in ubiquitous places,” explains Nielsen. “Everybody sells them which means people know they can buy them anywhere. It becomes a price game. That’s not a battle regional grocers can really hope to win. Winning retailers will be those who step up their innovation efforts to connect with and create demand for their private brand offerings across diverse and evolving population segments.”

Many of the biggest retail winners of the past half-decade, from Whole Foods to Aldi and Trader Joe’s; from Kroger and Safeway to Costco and the leading dollar store chains, have positioned store brands as their linchpin strategy. Retail chieftains like David Dillon, Steven Burd, John Mackey and James Sinegal, among others, have been unstinting in their praise for the role store brands have played in their chains’ success.

Top retailers understand that their store brands build relationships with a variety of unique and profitable targeted customers. For example, consumers are enticed to trade up to its premium or even super premium products while remaining within the chain’s tried and trusted store brand family.

As store brands move into another phase of growth, powerful drivers of that expansion will continue to be a good consumer experience with a store brand product, which is often carried over to patronage of store brands in other categories; and positive word of mouth from fellow shoppers and the media with respect to quality, innovation, performance and value.

 

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