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04/15/2022

The State of Private Label

Industry experts weigh-in on the current economic climate and its impact on the private label industry at large.
Zachary Russell
Associate Editor
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Since March of 2020, the private label industry has felt the effects of the Covid-19 pandemic. Product and labor shortages, inflation and supply chain challenges have all impacted the retail and grocery sector, often in a combined fashion.

Nearly four months into 2022, as Covid-19 cases continue to fall for the time being, the problems associated with the virus that impact the global supply chain still remain.

“Some of the main strains on the global supply chain that are expected to continue into 2022 are semiconductor supply shortages, shortages in container shipping, and shortages in professional labor for transportation carriers and at seaports,” said Carman Allison, VP of sales and development at NielsenIQ. “The rising costs of transportation, labor, and energy are challenging the global supply chain while also impacting financial institutions and governments all over the world. The reason: rising costs are another way to describe the next point of our predictions, inflation.”

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Inflation chart

The yearly inflation rate for the United States is 7.9% for the 12 months ended February 2022, the
highest since January 1982, which was 7.5% according to U.S. Labor Department data published March 10. When it comes to a solution, retailers are eager for more action to be taken by the government.

“There is a bit of challenge for many economists and the Federal Reserve to try to distinguish between real inflation of the economy or transitional inflation in the economy due to the effects of the pandemic and the global supply chain challenges,” added Allison. “This might explain why the Fed has focused on keeping a low-interest-rate environment, as it is more concerned with battling the pandemic and global supply chain strains than with real inflation striking the economy. It’s not clear how long the Fed will be able to keep its current position if real inflation keeps its momentum and does not slow down. If the effects of the global  supply challenges and its inflationary triggers do appear to be cooling off, and real inflation is causing havoc, we can expect the Fed to begin increasing interest rates.”

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Private label sales

Despite challenges, overall private label sales are increasing, which is common during inflationary periods. According to IRI’s 2021 Consumer Demand for Private Brands report, from October of 2019 to October of 2021, the share of store brands in total grocery sales had shrank from 17.5% to 17.3%, but total sales rose from $828 billion to $963 billion.

While the overall market share of private label brands as a whole shrank slightly during the period, certain categories of store brands have seen major gains during the past two years. Top growing edible store brands categories include shelf-stable breakfast foods (+274% vs. 2YA), ham (+736% vs. 2YA), sports drinks (+182% vs. 2YA) and more. Top growing non-edible categories include hair conditioner (+196% vs. 2YA), baby toys, gifts and furniture (+131% vs. 2YA) and external pain relieving rubs (+110% vs. 2YA).

During an inflationary 2021, store brand product sales hit a record $199 billion in 2021, according to data from IRI provided to the Private Label Manufacturers Association, a 1% total sales growth from 2020. Private label saw growth in six categories: Refrigerated foods saw store brand sales increase by 0.7%, followed by general merchandise (+1.7%), health care products (+0.2%), frozen (+0.8%), produce (+11.4%), and beverages (+2.7%). The growth didn’t stop when the calendar changed either. In January of 2022, private label sales grew 4.2% in dollar volume across all U.S. retail channels, compared to the same period in 2021. The increase was about equal to the 4.4% growth of national brands, according to the IRI data.

“Private label is poised to benefit as we begin to see high inflation in consumer packaged goods,” said Krishnakumar “KK” Davey, president of client engagement at IRI. “ Private label lost share during the pandemic, but is seeing improving trends now with most retailers. After many years of investing, retailers have a more-developed private label portfolio now with presence in most categories and multiple price tiers that contributes to slower private label growth, but a couple retailers are renovating or expanding their offerings and gaining share.”

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Grocery shopping

Davey added that as inflation continues, so will private label sales, especially in categories hit the hardest by inflation.

“Generally, categories experiencing high inflation are doing the strongest in private label, and private label growth in these categories is generally lower than name brands,” he said. “There will be a higher demand for value due to high inflation. We will see continued investment from retailers in enhancing private label offerings in 2022.”

For retailers looking to overcome these challenges, technology could be part of the solution. Philip Melson, client partner at Fractal Analytics, a leading AI technology provider for retailers such as Mondelez, Mars, and more, said that retailers are continuing to utilize AI to develop private label strategies. These priorities for retailers include investments in product assortment, item localization for customer preferences, optimal pricing mixes, and finding cost efficiencies in the supply chain.

“The assortment opportunity with store brands is not just to compete with national brands on price but range and innovation,” said Melson. “Store brands have been shifting the last few years to be more than just a price play and have become a key differentiator for the retailer. We expect this trend to continue in the long term. Leveraging data to understand customer preferences, shifts in needs is critical to determining the next step in developing that strategy. Again, machine learning is perfectly equipped to identify the most important drivers that result in optimal sales levels and make recommendations to maintain that balance at very granular levels.”

Though the current state of the economy is worrying for many, it’s clear that the private label industry is continually trying to adjust to meet the needs of consumers.