TREND WATCH: What’s Happening? Big-name retailers like Target and Amazon are pouring resources into developing more in-house offerings. These retail giants are following in the footsteps of companies like Costco, which has built a profitable empire out of its private-label brands.
Our Take: Once dismissed as an inferior alternative to national brands, private labels have become a hot prospect as retailers seek to boost margins. Generational change is also pushing private-label brands forward: At a time when consumers have endless options to choose from, Millennials don’t care about the name on the label—but rather about price, quality, and convenience.
This fall, Target wants shoppers to know that there’s “More in Store.” That’s the slogan of its latest big marketing campaign, which promotes a dozen private-label brands now or soon hitting store shelves, including home decor collection Project 62 and womenswear line A New Day.
Target is just one of many retailers doubling down on private labels. Since 2009, Amazon’s house brand AmazonBasics has gone from selling tech staples like cables and batteries to hawking a hodgepodge of over 900 products, from office furniture to cutlery to pencils. Last month alone, the company added hundreds of private-label items from Whole Foods to its online offerings. Likewise, back in March, Dick’s Sporting Goods announced that the company would be dumping 20% of its vendors in favor of its own private labels. Even Walmart is getting in on the action, with company executives highlighting the importance of private labels to drive sales and customer loyalty.
These retailers are hoping to replicate the success of companies like Costco, whose Kirkland Signature products now account for about a quarter of its total sales, along with grocery chains like Trader Joe’s and Aldi, whose house brands make up their bread-and-butter. The brand-free ethos is even fueling a new online startup, Brandless, which sells $3 household items and shows customers an estimate of how much they save by avoiding the typical brand markup.
What’s happening is no less than a market transformation—one that’s forcing name brands and advertisers to rethink how they reach customers from the ground up.
WHY ARE RETAILERS PUSHING PRIVATE LABELS?
So what’s in it for these retailers? Simple: At a time when stores are desperate to keep their costs down, offering exclusive products is a way to drive customer loyalty and boost profits without raising prices—since store brands lack the product development and marketing costs associated with name brands. And by creating more competition for branded products, private labels put pressure on manufacturers to cut prices or create more varieties to differentiate themselves.
The strategy is paying off. According to Nielsen, private-label sales in the mass-market category climbed 4.6% YOY to $49.6 billion in 2016. By contrast, big-brand sales in the mass-market category gained just 1.1%. Target’s decision to introduce more in-house offerings was influenced by the success of its private-label children’s brand Cat & Jack, which achieved $2.2 billion in sales after just one year. “Store brands are driving 20% of total consumer goods spending and contributing more than a quarter of overall growth,” the vice president of consumer insights at Nielsen, Jordan Rost, recently told Advertising Age. “They're taking share away, in some cases, from the national brands with which they're competing. That growth has been consistent in recent years.”
WHY ARE CONSUMERS BUYING PRIVATE LABELS?
The benefits of selling more in-house brands are clear. But why are consumers so willing to buy these products, which not long ago were considered cheap knockoffs of higher-quality name brands?
More bang for your buck. To some extent, store brands’ appeal can be attributed to the still-fraught economic climate. As with previous recessions, the most recent downturn made shoppers more price-conscious and open to trading down. At times like these, shoppers ask themselves, “Is it really worth paying $3 for a bag of Ghirardelli chocolate chips when I could get Walmart’s Great Value version for one-third less?”
Not your father’s in-house brands. But consumers aren’t just “settling” for a cheap version of what they really want. Increasingly, the image of private-label items is improving as retailers polish up their design and packaging. Madeleine Kronovet, a senior strategist at the branding agency RedPeak, explained in Advertising Age: "When [store brands] are appearing next to a Tylenol on a shelf, you’re no longer really believing that the Tylenol brand is offering more than Target’s Up & Up brand. You turn the label over and see it's the same ingredients."
Yes, cost plays a factor. After all, according to a recent report by Cadent Consulting Group, the share of CPG food sales that go to private-label brands tends to increase during recessions and decrease during economic expansions—suggesting that when consumers’ finances improve, they splurge for name brands again. But this time may be different: In 2017, private-label brands are projected to account for 17.7 percent of all CPG food sales, a higher share than during the Great Recession.
Generational change. Perhaps the most important factor is changing consumer preferences, which suggest that private-label brands will only continue gaining.
Today’s shoppers are better-informed and more inclined to care about substance or quality than branding. This is especially true of Millennials. Cadent Consulting Group data show that fully 51% of Millennials have “no real preference” between private-label and national brands. In contrast, only 39% of Boomers said the same. Moreover, a 2014 Harris Poll found that Millennials are the least likely generation to buy name brands across a variety of grocery categories—especially staples—including coffee, frozen and canned vegetables, dry pasta, and paper products.
Young people’s indifference toward brands extends far beyond the world of retail. It has already disrupted industries like travel and fashion, where traditional services and retailers have ceded ground to trendy upstarts like Airbnb, Everlane, and Warby Parker. In many cases, the non-branded options are cheaper, but Millennials are also prioritizing other considerations like transparency and social responsibility.
What explains the slide in brand loyalty? Unlike their parents, Millennials have grown up in a far more fragmented media environment. They haven’t been exposed to the same degree of advertising pushing the biggest national brands via limited media channels.
In the Harris Poll, different generations’ preferences for certain name-brand products do seem to reflect the decades in which they were heavily marketed. The Silent and Boomers, for instance, are the most likely to prefer name-brand coffee, frozen vegetables, and paper products (yes, those Mr. Whipple ads for Charmin were that powerful). Generation X, meanwhile, is the most enthusiastic about name-brand junk food, particularly soda and snacks like chips and pretzels—which were so heavily advertised on kid TV shows in the ‘80s and early ‘90s. But Millennials recall fewer such saturation media blitzes. Facing an “infinite shelf” stocked with countless options (see: “The Little Brands That Could”), today’s young adults are shifting their trust from brands to retailers that they believe will carry high-quality selections. In other words: If Trader Joe’s sells it, it’s probably good.
WINNERS AND LOSERS
To be sure, not all name brands are in danger of extinction. The willingness to go generic does depend on the product. Americans tend to favor name brands for items that can have wider variations in type or flavor: Across all generations, most shoppers default to name-brand cereal, snacks, and soda. Also, younger generations do lean more on premium brand names in product categories that are newly popular and have seen increasing differentiation in recent years, like dairy items, bottled water, or pet food. Millennials are more likely than older generations to reach for Chobani (yogurt) or Aquahydrate (water) or Nutrish (pet food) even if they care less about branding in most other categories.
What’s more, the very biggest brands with the best reputation are somewhat insulated from the private-label takeover. When it comes to food, consumer-product conglomerates with truly iconic brands—like Coca-Cola’s Coke, Kraft-Heinz’s ketchup, or Mondelez’s Oreo—have less to fear from in-house brands. Those with more overseas operations, like Nestlé, are also more insulated from their rise. It’s companies like Campbell’s, which owns several liked-but-not-beloved brands like Prego, Pepperidge Farm, and Pace Foods, that are most at risk. Most of these conglomerates are so massive that they’re inevitably going to clash with private-label competitors in one area or another. They’re already running scared following a wave of industry consolidation.
It’s not just brands themselves that are feeling the heat. The packaged-goods industry spends about $100 billion annually on advertising, according to Cadent Consulting Group—and it’s skewed toward old (nondigital) media like radio and linear TV. For decades, the nation’s biggest spender on ads has been Procter & Gamble, which shelled out $4.3 billion in 2016. But facing declining demand from shoppers, P&G in recent months has slashed its ad budget by millions and halved the number of marketing agencies it works with. Another giant, Unilever, also announced ad spending cuts in August—sending shares of its biggest client and the world’s largest ad agency, WPP, tumbling. In many ways, these CPG conglomerates are the lifeblood of the industry, and their success or failure will determine the future of the media world.
WHAT’S IN STORE FOR BRANDS?
In the years to come, private-label brands will likely continue evolving along two different paths. Many retailers are pouring resources into expanding the variety of their private-label items and offering more premium and specialty options. Kroger, for example, set its sights on health-conscious shoppers with its brand Simple Truth; last year, the chain sold more natural and organic food than Whole Foods. Southeastern Grocers, meanwhile, created a three-tier model to differentiate their in-house goods.
Other stores are focused on narrowing choices instead. This includes German discount grocer Lidl, which is staking its success in the U.S. market on the hope that shoppers want a simplified experience in exchange for rock-bottom prices. It’s the same strategy employed by Aldi, which has built a devout following with its pared-back selection of items at rock-bottom prices. This summer, Aldi announced $3.4 billion U.S. expansion that is poised to make it America’s third-largest grocer by 2022.
Where do big brands fit into this future? That’s the real question. The diminished power of big brands has created what Barclays goes so far as to call a “sphere of despair”: Already struggling with shifting consumer tastes and relentless cost-cutting (see: “How to Strip Big Food Down to Its Essentials”), these brands now face the challenge of fending off cheaper, nimbler private-label competition. In turn, this spells trouble for the ad agencies that represent established brands, along with the entire media and entertainment ecosystem that relies on those ad dollars.
The biggest nightmare for the P&Gs and Unilevers and General Mills is that giant retailers (both bricks and clicks) will begin to establish their own brand equity and the future consumer will pay more attention to the identity of the store than to the identity of the manufacturer.
Much is riding on the ability of these product brands to set themselves apart—but not all of them will make it in the battle to reclaim or just preserve their share of the market.
