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Private brands in the U.S. are at an inflection point. What is already a $250-billion market per the Private Label Manufacturer’s Association (PLMA), is poised to enjoy outsize growth in the coming years. It is fast becoming a core differentiator for food retailers. Indeed, we believe it represents a $100-billion opportunity over the next 5-10 years.
Fast-forward 5-10 years, and the private brand landscape is unrecognizable. Far removed from its humble opening price point beginnings, it is now a bona fide pillar of every successful grocer. It has a role in most categories and is especially prominent in packaged, fresh, and prepared foods. It plays across the good, better, and best value tiers. Consumers select their grocery store based on the unique, differentiated, and innovative private brand offering. Share has doubled from just under 20% to nearly 40%. It differentiates assortments, drives traffic, and cements loyalty. It is a powerful weapon in the battle for share of wallet.
That future roughly describes the current private brand landscape in the U.K. but as U.S. grocers attempt to catch up, many aren’t prepared to take full advantage of the opportunity gap. In the U.S., private brand accounts for 19% of food retail sales, while Western Europe is nearly double at 36%. Many consumers that initially came to private brands for low price have been converted by high quality. Shoppers today are often less enticed by a brand name than by the overall value proposition a product delivers, far beyond price.
FIGURE 1: Growing influence of private brand
Leading U.S. grocers in private brand invest heavily in innovation capabilities and take a radically different approach than the rest of the market. They focus on the consumer first to holistically define shopper need states and forego trade revenue, as needed, to give their brands a level playing field against national competitors. This offensive strategy pulls category leaders and merchants out of a myopic view of the business and provides a meaningful framework to truly exceed consumer expectations.
FIGURE 2: Retailers outperforming the pack in private brand
In the U.K., private brand plays a starring role in every grocer’s strategy. In the U.S., however, there are structural impediments that discourage private brand from taking the main stage.
Grocery in the U.S. is fragmented, with many players that are smaller than the big U.K. grocers, resulting in those who don’t have the resources to build sophisticated innovation capabilities. Walmart, Kroger, and Aldi can invest in worldwide research, product development, and advanced marketing, but that level of support for private brand is out of reach for many grocers.
Another significant factor influencing the growth of private brand in the U.S. is the strength of national brands. Decisions about placement, space allocation, promotions and marketing are made based on slotting fees, trade funding, and other vendor spending, so often merchant focus is geared toward national brands. Additionally, category captain roles give suppliers a role in grocer strategies. These dynamics often create an inherent disadvantage for private brand, unless grocers create and implement strategy to prioritize their own brands.
U.S. grocers also tend to focus on how existing products meet consumer needs. However, this approach often comes at the expense of the longer-term, more strategic view, that focuses more on innovation to address unmet customer need.
FIGURE 3: Common private brand challenges for U.S. Grocers
Those manufacturers that can alleviate the structural impediments U.S. grocers face, will capture a larger share of future private brand growth. Beyond the table stakes of low-cost production, efficient logistics capabilities, and on-shelf reliability, manufacturers can make themselves more valuable to their retail partners by offering consumer insights, R&D, ingredient sourcing, packaging design, marketing, and more. Manufacturers that invest in these areas will have the opportunity to act as strategic business partners and advisors to grocers, providing a broader view of consumer needs, trends, and opportunities in the market.
Manufacturers should build their next-level services menu with their target customer base in mind. Internal capabilities vary significantly from one grocer to the next, so knowing and addressing the needs of each individual customer will be essential as manufacturers look to form long-term partnerships.
FIGURE 4: Private brand manufacturer capabilities
For example, grocers currently licensing private brands from a wholesaler to provide shoppers a low-price alternative to national brands — but wanting to build a program that differentiates and drives traffic — will need a more hands on manufacturing partner to guide innovation consumer research, product development, and product management services. A turnkey solution could be a great offering for retailers early in their private brand journey.
Some next-level grocers may have internal innovation capabilities, requiring a different, more customized approach from their manufacturers. They may seek a strategic partnership that will not only amplify their own capabilities, but also gives them flexibility to move in and out of seasonal items, provides limited-time offers and other SKUs that create interest and keep them uniquely relevant to their shoppers.
The most sophisticated food retailers have robust internal private brand infrastructure, so they will need manufacturers that can produce low volume at low cost to enable new item testing— but that can also provide speed to market and scale quickly when products succeed. Supply security and on-shelf reliability are also critical since retailers of this scale are dealing with significant volume.
FIGURE 5: Private brand capability ladder
The right manufacturer partnerships will be the difference for grocers that succeed in building a value-creating, traffic-driving private brand program. Manufacturers that cultivate a deep understanding of the needs of their individual customers and build services to support them will reap the benefits of outsize participation in perhaps the largest growth opportunities in U.S. grocery over the next decade.
