Not too long ago, the sales of private label products stood as a useful barometer for food retailing and the economy in general. When the economy was in decline, which caused a drop in food sales, private label sales increased and the sales of branded goods dropped. When the economy improved and food sales picked up, spending shifted from private label goods to branded product. Seems logical, right? The reason for that phenomenon is obvious at face value: Private label product is seen by consumers as an economical and satisfactory substitute for more costly branded product.
But then a few years back, things changed, causing the trusty barometer to go awry. A sustained growth in private label developed whether the economy was down, up or indifferent.
Let’s see what happened.
First, the term I’ve been using here – “private label” – became obsolete. Retailers started to abandon the concept that private label should represent little more than entry-level price point goods – in effect, cheap generics put in front of less-affluent consumers. Instead, retailers started to see that their own labels could be better cultivated. They invested in their quality and merchandising. It became common for retailers to refer to non-branded goods as store brands, private brands or our own brands.
The New “Brand”
Notice that the new nomenclature underscores the key word “brand.” Store brands have matured into new branded goods in the eyes of many consumers. Younger consumers haven’t spent a lifetime immersed in non-stop advertisements for branded goods thanks to media fragmentation. In a surprising reversal of fortune, store brands became the new and interesting thing and branded goods became the generics.
Another factor that bolstered the fortunes of store brands was the Great Recession. It isn’t entirely clear if the recession fueled the development of private brands, or if the recession caused an uptick in sales of store brands that retailers decided to exploit. I’d bet the latter is the case.
In any event, consumers turned to store brands to save a little money and never looked back. Consumers realized that store brands were not only new, interesting and of good quality, and by comparison, branded goods looked old and tired. So why would anyone spend more to get branded goods that have a perceived lower value?
To this day, store brands continue to forge ahead and branded goods continue to struggle to retain their place in in the retailing cosmos. This was all to the good for retailers because store brands are generally a lot more profitable than branded goods because a sizable slice of branded goods’ retail prices are dictated by marketing costs. Private brands have next to none of that cost. Yet, branded goods aren’t doomed to complete failure. But there can be little doubt that some old-line brands will be discontinued or sold off. That’s especially true because we’ve returned to perilous economic times that exacerbate anxiety and financial security.
Here’s the larger context: Our governmental leadership is proving to be ineffective, absent or counter-productive. Wall Street is highly erratic and generally erasing consumers’ fortunes and faith in the future. In sum, uncertainty is at such level that there there’s no way to predict anything about the long-term future of the economy. Maybe we stand on the brink of another recession, and an ugly one it will be.
Ironically, the fact that the future looks so uncertain is reason to believe that store brands will prosper as consumers continue to see them as a good value and economical. We’re at the top of the iceberg: Store brand sales are growing at about three times the rate of branded product.
Now, let’s move to the store level to see what’s going on in the world of store brands. The star performer has to be Costco’s Kirkland brand. That brand alone accounts for nearly $30 billion of Costco’s total annual sales of about $119 billion. Kirkland’s sales have been achieved the old-fashioned way by putting a quality product that’s reasonably priced in front of consumers and letting sales grow slowly and steadily.
Kirkland, a name chosen because it’s a Seattle suburb where Costco was once based, spans numerous categories in both food and non-food. Much of the food product is natural or organic. It’s not possible to make a fair comparison, but it’s interesting to note that sales of Kirkland products alone are roughly double the annual sales of the entire Whole Foods chain.
Another serious contender is Kroger’s Simple Truth private brand of natural and organic product. It was introduced about six years ago and is now chalking up in excess of $2 billion in annual sales.
Store Brand Specialists
Meanwhile, both Aldi and Lidl sell a very high percentage of their own brands and virtually no branded product. Lidl continues to struggle as it rolls out stores in the U.S., but Aldi is probably the fastest-growing chain of any in the U.S. Both Aldi and Lidl are German companies with a huge store presence in Europe and elsewhere. Trader Joe’s, another German-owned company, also has a product range with a very high proportion of store brand product.
It wouldn’t be difficult to cite many more examples of highly successful store brands, but suffice it to say that store brands probably have about a 28 percent share of food-store sales in the U.S. That’s as high as that metric has ever been.
It’s possible that in upcoming years, something like 40 percent of such sales will be in store brands. That would put the measure within striking distance of Europe’s, where around half of all sales in food stores are produced by store brands.
One joker in the deck is manufacturer allowances. Branded-goods manufacturers lavish sizable allowances on food retailers that carry their products and as a way to incentivize them to sell more. Store brand manufacturers don’t offer allowances, so at the moment many retailers have a strong financial reason to prevent the sale of private brands from completely taking over the store.
Conversely, if consumers show they prefer store brands – and they do – retailers will have no recourse but to eventually capitulate. Who knows? The whole world of retailing may be won by strong store brand players such as Costco, Aldi, Trader Joe’s, Urban Outfitters, Unqlo, Ikea, H&M, American Eagle.