More than a decade ago, the retail market faced rising prices and inflation. But amid the COVID-19 pandemic, the inflation period underway is revealing a different strategy for store brands.
Previously, the strategy was to promote value brands and the lowest price possible. The current situation is revealing an opportunity to promote premium private brand products, according to Krishnakumar Davey, president, strategic analytics, IRI, who sat down with Store Brands.
Here’s an edited version of the conversation:
SB: How do retailers prepare for what's next?
KD: Our read of the situation suggests we may see price mix growth of even close to 7% to 10% by the end of the year for many categories, and that's pretty significant compared to anything that they have seen for the last 10 years. But on the other hand, foodservice, out-of-home food inflation is even higher because not only are they paying more for these things, but they're also paying more for the labor and the shortage of labor.
The labor costs are going up in addition to the raw material ingredients, so out-of-home food is already running much higher than in-home food and will continue to run. Consumers will be forced to trade down, at least a certain segment, and look for value channels, value-seeking behavior, value brands, or premium brands, which offer value. Value doesn't really mean right away lowest price point, but instead of buying two Kit Kats can I buy a bulk bag of Kit Kats?
SB: And the foodservice issue there feeds that premium store brand strategy because that's still a better value vs. going out to eat.
KD: Yes, and they’re doing a good job because that innovation also helps differentiate one retailer from another. We had Albertsons on one of our interviews and they talked about how their cauliflower pizza is really sought after. Once you have a differentiated store brand, then that just offers a number of other benefits in terms of driving the basket, attracting shoppers, retaining the shopper and driving loyalty, and also driving their price position in the marketplace.
SB: Is there an opportunity for store brands to gain share during this period?
KD: As the price gap between the national brands and store brands widens, store brands start to gain share. In the last two, three months of data, we are seeing the widening of the price gap as national brands keep taking price and store brands are not following as aggressively and widening their price gap. Some retailers have spoken openly about the fact that, "Hey, if the national brands take too much price then we will double down on our store brands to make sure our consumers still get value."
The other thing I would say, mass merchant and club retailers are the ones who are doubling down on value and on store brands. Think of Target, think of Walmart, think of Costco, Sam’s Club, and BJ’s. They have been investing in store brands for the last five years before COVID, and we see them continuing to do so now as supply stabilizes to continue to grow in that.