2018 State of the Industry: Wake-up Call
If there is a resounding message from Daymon’s “Private Brand Intelligence Report 2018,” it is that store brands are as popular among consumers as they have ever been. However, there is clearly a case of the haves and have-nots regarding the success of retailers’ store brands programs.
Daymon estimates that in-store and online sales of private brands from traditional grocers, deep discounters, mass merchandisers, convenience stores and other retailers increased 4 percent in 2017, eight times more than national brand sales. Private brands contributed an estimated $50 billion in margin to retailers’ sales in 2017, an increase of $2 billion since 2016.
The haves, which Daymon calls best-in-class retailers innovating on many facets of store brands, are flourishing and achieving an average of 32 percent in private brand share of total dollar sales. But when the have-nots — retailers content with simply offering national brand equivalent and lesser store brands — are added to the equation, the industry average of private brand share of total dollars sinks to 17 percent.
Jim Holbrook, Daymon’s CEO, says private brands have entered a renaissance period and that Daymon’s survey of more than 2,000 consumers reveals how much store brands have gained favor with them in the past few years. According to Daymon:
• 85 percent of consumers say they trust private brands at least
as much as national brands.
• 84 percent of consumers say the quality of private brands is at
least as good as national brands.
• 81 percent of consumers buy private brands on every or almost every shopping trip.
• 61 percent of consumers say they purchase more private
brands than two years ago.
• 61 percent of consumers say private brand quality has improved in the last few years.
• 53 percent of consumers say they shop at a store specifically for its private brands.
But not all retailers are experiencing a renaissance in private brands. Holbrook says that on average private brands account for about 15 percent of shelf space. But the retailers deemed best in class — based on consumer perception of private brands, shopper loyalty, breadth of store brand assortment and other factors — have almost double the penetration rate compared to the retailers lacking the designation.
“The best-in-class retailers have figured out something that [other retailers] haven’t figured out,” Holbrook tells Store Brands. “It comes back to differentiation.”
Retailers need to build categories based on their offering of private brands and then fill in the gaps with brand-name products, not the other way around, Holbrook explains. The best-in-class retailers, of which there are about a dozen, are doing this but other retailers are not.
“The retailers that want to hang on to the emulation products and the national brand equivalents will not only fall further behind, they will go out of business,” Holbrook says. “This really is a defining moment. We believe that you can evaluate a retailer’s overall health just by looking at its private brands. If it has a weak private brand offering, [that retailer is] in trouble.”
Store brands have become and should become vital to a retailer’s overall health for three reasons, Holbrook says.
First, national brands are cutting back on trade spending and innovation. “When national brands are providing fewer resources to the retailer, then the retailer has to find [those resources] somewhere else and private brands are the answer,” Holbrook says.
Second, consumers are becoming less loyal to national brands, Holbrook notes. Today’s consumers don’t want to purchase what their parents purchased, and they are buying more niche brands. “Consumers are buying things they aren’t suppose to be buying,” Holbrook says. “They want better solutions.”
Third, retailers can make twice the margins off private brands than they can with national brands, Holbrook stresses. Retailers can also give their customers the products they want through better use of analytics and marketing.
“So why shouldn’t they create and curate their offerings?” Holbrook says. “Also, private label manufacturers have gotten better. They are smarter and more innovative.”
The resurgence of private brands is not a fad, Holbrook contends. The fact that consumers are embracing private brands in an upbeat economy — not just in dour financial times as in previous eras — is evidence that store brands are being viewed for their quality, innovation and exclusivity, not just their low prices.
Holbrook references the statistic that 61 percent of consumers say they purchase more private brands than two years ago, which he says reinforces the notion that consumers are becoming less loyal to national brands.
“I think people are looking to be disloyal,” Holbrook adds. “The national brands aren’t doing themselves any favors by cutting back on research and development and advertising to help keep their margins up. So it opens the door for private label — niche brands, specialty brands and local brands — to be more innovative and appealing.”
Holbrook understands that retailers must make a substantial investment in their private brands programs to keep them relevant, and he knows there is risk.
Consider the retailer that offers a national brand equivalent as its highest tier and is making a good margin on selling those products, Holbrook says. And now that retailer is being told it will have to invest in new product formulas, packaging and on other fronts to take its private brand program to another level to stay competitive.
“It’s a daunting task,” Holbrook says.
But it’s a task that requires deep consideration from the retailers that are not adapting to the changing dynamics of private brands.
“Our intent is to provide a bit of a wakeup call,” Holbrook says of the report, “and to get retailers to realize that the status quo just isn’t that great.”
Daymon analysts elaborate on findings
Daymon’s “Private Brand Intelligence Report 2018” reveals an industry that is robust, evolving and ripe with challenges that equate to opportunities for store brands across the retail sector.
Several findings in the report left a positive impression on Daymon analysts. While those findings bode well for the industry, the Daymon analysts maintain that retailers and manufacturers must embrace the challenges in front of them to further the development of private brands.
Dave Harvey, Daymon’s vice president of global thought leadership, says a statistic from the report that impressed him is that 53 percent of the more than 2,000 consumers Daymon surveyed for the report say they shop at a retailer specifically for its private brands — a telling sign that exclusivity is beginning to infuse the industry.
“It shows consumers understand that products exclusive to a retailer matter,” Harvey adds. “Having your own exclusive products is one of the most important considerations in your strategy.”
Harvey was also impressed that 74 percent of consumers say private brands are a better value for the money, a statistic he does not attribute to just low prices.
“There are other markers of value that are becoming important in private brand programs,” he says, noting that quality, product customization, transparency and sustainability are factors adding value to private brands.
Sixty-one percent of consumers say quality has improved in private brands, a statistic that caught the attention of Nicole Peranick, Daymon’s director of global thought leadership/culinary.
“It’s really incumbent on retailers and manufacturers to elevate their quality standards, as consumers are having greater expectations in this area,” she adds. “In order for them to be successful, they need to have a continuous quality improvement process in place to keep up and even over-achieve in certain areas.”
Sixty-one percent of consumers also say they purchased more private brands in 2017 than they did two years ago, a statistic that Harvey and Peranick expect to rise.
“Consumers are gaining confidence in the quality of private brands, but more importantly they understand that retailers are coming to the table with unique offerings,” Harvey says.
Peranick notes that consumers have more channels from which to purchase private brands, citing Walmart-owned Jet.com’s debut of its Uniquely J line, which features an array of private brands from coffee to household cleaners sold exclusively on Jet.com’s website.
According to Daymon’s report, wellness brands are the fastest-growing segment in private brands, including free-from, organic and non-GMO products. It’s an area of which private brands need to continue to push forward, says Carl Jorgensen, Daymon’s director of global thought leadership/wellness.
“Retailers of private brands are taking a hard look at their portfolios and seeing not only where they can reduce sugar and sodium but where they can reduce other ingredients that consumers object to,” Jorgensen adds.
But it’s vital that retailers communicate wellness messages through products, he stresses.
“There is emerging marketing language — ‘a hint of salt’ or ‘gently sweetened’ — that implies these products still taste good even though much of the salt and sugar has been removed,” Jorgensen states. “The whole job of reducing sodium and sugar is getting easier for ingredient manufacturers. They are innovating with new ingredients and techniques to keep the level of flavor, texture and mouth feel of products where they need to be.”
The increased popularity of wellness products is closely associated with transparency, an area featured in the report and another area where private brands can capitalize, Jorgensen states. Customers want to know where products were made, how they were made and the traditions behind any special ingredients they contain. By providing this information, private brands can gain loyal customers. “This is a huge opportunity for private brands,” Jorgensen adds.
The fresh department is closely aligned with wellness products, and the opportunity for retailers to define themselves with private brands on the store’s perimeter is significant, Harvey notes.
“There is high private brand perception in fresh department categories where national brands really don’t dominate,” he adds. “[Fresh-prepared products] aren’t easy to outsource so they lend themselves to being produced in the store. By their nature they would be private brands.”
Jorgensen says consumers judge a retailer’s excellence and to what degree that retailer cares about consumers’ health by its fresh program.
“Fresh has become the marker of health and wellness at retail,” he adds.
While it has been challenging to merchandise produce products as private brands, progress is being made in that area, Jorgensen notes.
“One of the transitions the industry is making is in the transition from PLU to UPC codes on produce,” he adds. “And what that does for private brands is make those private brand sales easy to track so retailers can begin quantifying their private brands performance in fresh. This is a tangible example of the kinds of investments retailers are making to add more of a private brand presence in fresh.”
Data from Daymon’s “From Shopper to Advocate: The Power of Participation” study is also featured in its “Private Brand Intelligence Report 2018,” and reveals that 59 percent of U.S. consumers seek out engagement when they shop. According to the study, “Six in 10 shoppers crave experiences to stimulate the senses. That is, these shoppers want interaction in the retail experience, want to feel included, and want to provide opinions and ideas to retailers and brands to make their mark.”
Peranick says “co-creation” — shoppers wanting to provide direct input to improve products and services and even co-design new products — can positively impact a retailer’s private brand program.
According to Daymon, 2018 will see the growth of crowdsourcing technologies to allow shoppers to directly participate in innovation efforts. Concepts like online gamification, pop-up retail spaces and virtual innovation labs will be employed to test new products and services in real-time to accelerate speed to market.
“[Co-creation] offers white-space opportunities both from an in-store perspective and a marketing perspective to create breakthrough innovation,” Peranick says.
While there is room for innovation in private brands, some retailers and manufacturers remain skittish because of the investment risk, Peranick notes.
“So how do you mitigate that risk? You do that by engaging your shoppers through things like co-creation,” she adds. “You get feedback early on in the process so you not only mitigate the risk but also secure loyal followers when a product is on the shelf and commercialized.”
A segment of Daymon’s report focuses on price checks, and the agency’s analysis reveals that while 83 percent of retailers are running price checks on key value items — those items that are consistently on promotion and purchased by price-sensitive shoppers on a frequent basis — only 60 percent of those checks include private brands. Daymon says that key private brand value items are being undercut by national brand promotions an average of 12 weeks a year.
“If private brands aren’t price competing with national brands, why even have them on the shelf?” Daymon asks in the report. “An effective solution is to run private brand promotions at the same time as the national brand to reduce being undercut.”
Data shows that retailers can generate a better lift running two promotions at the same time versus the combined lift retailers get from running two independent promotions.
“However, we found that this technique is rarely used — as only 17 percent of retailers are employing a price protection program,” according to Daymon. “The other 83 percent? Well, they lost $147 million in private brand sales last year due to undercuts.”
If retailers offer private brands of quality and value, they need to communicate this to their customers, Harvey says. But if those retailers are undercutting the prices of those private brands with national brands, then those messages will not be conveyed. “So it’s damaging to a retailer’s [private brand] strategy,” he adds.
The ever-increasing competition among retailers is another challenge. Daymon says in the report that German-based deep-discount retailers Aldi and Lidl, which continue to expand in the U.S., will force the entire grocery industry “to be more efficient and more engaging.”
“Through the sheer force of these stores, many traditional players are set to become casualties to the discount channel, projected to be the food industry’s fastest-growing channel through 2022 with 5.8 percent in growth,” the report states, noting that 65 percent of retailers saw at least a 10 percent increase in dollars lost to deep discounters in 2017.
The report also notes that “shoppers will come to expect high-quality private brand items at super-low prices no matter where they are.”
Will this be a good thing for private brands? “It’s kind of both,” Harvey says. “But I would say it’s more about opportunities [for retailers] than challenges.”
High-quality private brand items at low prices could lead to more innovation and new product offerings in categories that might have been traditionally dominated by more expensive national brands, Harvey states, allowing private brands to capture more momentum.
“Of course the danger is retailers offering products at lower prices but without delivering the quality,” he adds.
Daymon, in partnership with Nielsen data, also found that the higher degree of uniqueness that a retailer has in its private brand assortment, the more loyal its shoppers are.
“Not only do private brands build on a retailer’s value proposition with high-quality items at an affordable price, but they can offer authentic solutions to make consumers’ lives easier,” the report states. “Private brand products that cater to consumers’ needs are well-positioned to drive sales and loyalty.”
While offering low prices on private brands is essential, according to Daymon, Jorgensen cautions against going too low, which can erode a retailer’s profitability.
“Ultimately, it’s a zero-sum game,” he adds. “What we are seeing is consumers’ perception of value extends beyond price.”
Aylward, the editor-in-chief of Store Brands, can be reached at [email protected]