Why store brands are worth more than you think
Building a successful store brand program is neither easy nor cheap. Retailers must invest heavily in branding, packaging, procurement, promotion and personnel to make it all work. And that doesn’t even consider the loss of lucrative trade spending from national brand manufacturers. While we all understand that store brands can deliver higher gross margin rates and per unit profits, is it really worth all the effort when you add it all up?
In 2016, the Private Label Manufacturers Association (PLMA), in collaboration with Wisner Marketing Group, took a look at the real economics of store brands. Assessing syndicated data, published studies and other sources, PLMA demonstrated conclusively that the return on invested capital from store brands was more than twice what retailers realize from selling national brands that their shoppers can buy most anywhere. This past year we had a chance to take a deeper look at the issue in a project we are doing for the Food Marketing Institute (FMI) along with Information Resources Inc. (IRI) and the Competitive Promotion Report. With data from five retailers across 10 categories, here is what we learned:
The consumer saves
• On average, store brands cost 28 percent less than comparable national brands.
• Extrapolating those savings using FMI and Bureau of Labor Statistics household purchase data, the average U.S. household is saving $761 per year from store brands. For a family of four, the figure rises to nearly $1,000.
The retailer profits
• Assuming the typical household re-spends just half of its savings ($380), this would result in $1.2 million in additional yearly sales generating a $282,000 increase in gross margin dollars. We call this the “residual sales and margin effect.”
• In our sample, store brand margins were up to 66 percent higher than national brands, averaging 35 percent for store brands vs. 21 percent for national brands. Dollar margins were more than 7 cents higher per equivalent dollar of sales.
• Comparing average costs, store brands create an industry-wide $17.1 billion in inventory investment that results from the lower cost of most store brand items.
• Store brands accounted for 19.2 percent of sales in supermarkets and 28.2 percent of the total gross margin dollars.
• Store brands were far more efficient than national brands accounting for 13 percent of items, 22 percent of sales and a 31 percent of margin dollars in our chain-chain analysis.
• Adding this all up, the net gross margin return on invested capital was 53 percent for store brands vs. 24 percent for national brands even when costs of managing the program are included.
Finally, research reports have confirmed that stronger store brand programs consistently generate more national brand trade funds than weaker programs. This makes sense since national brand manufacturers must compete more aggressively to maintain their market share.
In addition, study after study has also demonstrated that store brand shoppers spend more, are more loyal and are significantly more profitable.
There are very powerful and compelling reasons to improve private brand performance and increase private brand penetration if you wish to compete successfully. The proof is in the numbers.
Editor's note: Jim Wisner is president of Libertyville, Ill.-based Wisner Marketing Group, a firm that assists manufacturers, retailers and trade associations in developing and implementing solutions to complex marketing, merchandising and product development issues.