High-Value Private Labels A Threat To Regional, Independent Grocers
Walmart told the world everything it needs to know about the retailer’s new private food label in the name of that label alone. It’s called bettergoods, and it’s right there in the beginning: “better.”
Over the past few decades, private grocery labels have acquired a sort of “cheap” reputation – for both their price and quality. Critics say they’re low-grade imitations of the name brands we’ve come to know and love. Though that reputation is often unearned, it’s hard to shed that generalized tag once it’s been applied.
With bettergoods, Walmart’s largest food launch in the last 20 years, the retailer has set out to attract shoppers with a product that meets consumer expectations for value without sacrificing quality. The new product line should give regional and independent grocers cause for concern — not just because of encroaching big-box competition, but also because of the additional profit that Walmart can earn on these high-margin items.
The economics of private label
A few popular private labels, such as Walmart’s Great Value or Whole Foods’ 365, have been around since the 1990s. But the overall history of private grocery labels exceeds that lifespan by more than 200 years.
The first textbook on the industry — Private Labels: Store Brands and Generic Products, authored by retail veteran Phil Fitzell — says that the private label came to be in the early 1800s, first in fashion and later in grocery. Coincidentally, one of the earliest players in the private label space was future President Abraham Lincoln, who owned a grocery store before he attended law school. Lincoln’s client and close friend, Jacob Bunn, was a retail and wholesale grocer. To honor the Lincolns, Bunn named some of his grocery products, like Mary Todd coffee, after them.
Why have two centuries of grocers pursued their own private labels? The primary reason is financial. Private-label goods are manufactured specifically for (and oftentimes, by) the retailer; that means the retailer is not responsible for any intermediary brand costs. If they do own the manufacturing process, the retailer also has more power to conduct quality control and deliver excellent goods. Ultimately, this means that retailers can sell their private-label products at a lower price than similar name brands without sacrificing margin. For consumers, the benefit is obvious — that combination of low price and high quality means tremendous value.
In that way, private labels benefit both consumers and retailers — even more so when the product is of similar quality to its name-brand equivalents. Whole Foods pioneered the organic private label, and competitors such as Kroger’s Simple Truth have spun up over the past decade or so.
The threat to regional and independent grocers
Private labels experienced a record-setting year in 2023, accounting for nearly 21% of all grocery unit sales. Why are these products booming?
One reason is that today’s inflationary environment is driving more consumers to seek value. Industry research shows that today’s grocery shoppers visit up to five banners per month as they prioritize value in every purchase. Even as inflation begins to cool, this cross-shopping behavior indicates consumers are still second-guessing their spending.
Another important consideration is that the quality of private labels across the grocery industry has increased dramatically over the last few years, as evidenced by lines such as bettergoods. Whereas previous generations of consumers may have had a difficult time choosing private labels due to the sacrifice in quality, today’s shoppers don’t face the same dilemma. Market research firm Alpha-Diver’s Snack50 report measures customer affinity for various snack brands; in 2024, the top six brands were all private labels for the very first time.
That’s what makes these new products dangerous for regional or independent grocers: Value-seeking shoppers, who have spent the past few years trading down or trading out to protect their budget, can now trade up for less. Big-box retailers and dollar stores have been encroaching on grocers’ territories for years; with lines like bettergoods or Target’s Good & Gather, these conglomerates are winning more wallet share from customers on items that come with higher margins than average.
Plus, giants such as Aldi can afford to keep prices low by stocking primarily private labels in its stores. Today, 25% of all American grocery shoppers transact at Aldi — a figure that’s doubled over the past six years. Now, the international chain is planning to reinvest the profits it earns from those high-margin transactions to open 800 new stores in the U.S. in the next five years.
For grocers with the resources to spin up their own high-quality private label, there’s clearly a tremendous opportunity to win more visits and more profit. But doing so requires immense upfront capital, something that’s not available to most retailers.
What’s the fix?
The industry trends are clear: Basket sizes are shrinking because consumers are spreading their trips around. In this inflationary environment, shoppers want to maintain their current lifestyles without paying more for them, and private labels are helping to make that happen. Most retailers don’t have the resources to launch a line of their own and are looking for other (profitable) ways to empower customers to put more in their baskets.
What other options are available to brick-and-mortar grocers? There are the tried and true tactics that retailers still turn to:
- Item placement: Retailers strategically place certain items in key locations around the store — think about impulse buys like candy or magazines by the registers, or seasonal items with promotional displays that cap the ends of center-store aisles.
- Item assortment: Some stores stock specialty items that you can’t get anywhere else. Private labels would fall under this bucket.
And now we see more progressive retailers dabbling in revenue management strategies like dynamic pricing and personalized promotions. The former allows retailers to adjust prices to account for changes in business changes like slow or peak hours, and the latter allows retailers to provide each customer with the value they need to put more in their baskets.
No matter the approach, grocers would be wise to ensure their selection addresses the underlying issue: Consumers need relief at the register, and retailers need margin-accretive solutions. Private labels offer that, but other approaches do, too. If regional and independent grocers can provide value and protect their margin, they’ll be in a position to provide better goods (two words) to their communities for the long term.
Tyler Renaghan is the vice president of Retail at Upside, the largest food and fuel platform in the US. Upside’s marketplace connects millions of consumers with tens of thousands of brick-and-mortar retailers through personalized offers.
