Private label continues to gain traction
Get great content like this right in your inbox.Subscribe
Private label just keeps chugging along.
Thanks to strong consumer demand for lower-priced alternatives to national brands and retailer desires to differentiate themselves from the competition, private label seems to keep gaining more traction in the retail world.
But there remains a strong undertone impacting private-label sales with Amazon and Walmart using the segment as a way to gain market share, usually at the expense of the other company.
Specifically in play are Amazon’s purchase of Whole Foods and Walmart’s decision to purchase Jet.com, both of which are expanding their private-label offerings. Whether this results in a seismic shift in the private-label universe or is just a glitch has yet to be determined, according to industry observers.
However, most believe there is room for growth on both ends of the retail spectrum as these products build up trust — and market share — among consumers, and are viewed by retailers as more than just low-priced and sometimes lower quality commodities with limited marketing and advertising support, but rather as an opportunity for differentiation.
Estimates for 2017 have yet to be released. However, in 2016, Nielsen reported that private label outperformed national brands in the mass merchandising segment, which includes such retailers as Walmart, Target, warehouse clubs and dollar store chains.
Overall, private-label sales were roughly $118 billion, excluding revenues from such private-label powerhouses as Costco, Aldi and Trader Joe’s. Their revenues would add an estimated $35 billion and push total store-brand sales to more than $150 billion, according to Nielsen.
Private-label dollar volume in the mass merchandisers/club/dollar store segment climbed 4.4% to $49.6 billion, resulting in a 0.5 point market share gain to 16.6%. A similar pattern emerged with regard to units, with private label advancing 4.2%, compared with only 0.2% for the brands.
However, store brands’ share declined in the slow-growth supermarket segment, coming with an 18.4% dollar share and 22.3% units share, Nielsen said. And it’s clear that the supermarket numbers dragged down overall private-label results.
Mintel offered a similar analysis, noting that the category’s 9% growth between 2011 and 2015 was largely the result of inflation. With food and drink prices falling, consumer confidence is increasing, and shoppers may opt for national brands. As such, unit sales may continue to decline in many categories, resulting in a 4.4% drop between 2016 and 2021, the research firm reported.
One big question mark is potential impact of online sales. Total online grocery sales are forecast to reach $100 billion by 2025, siphoning off sales from other channels. For now, attention is focused on Amazon’s acquisition of Whole Foods. The online retailer already is offering Whole Foods’ 365 products online. It also is expanding that brand, while considering the introduction of Amazon-branded items.
However, Amazon’s talons are digging even deeper into private label. Through the United States Patent and Trademark Office, Amazon has applied for or has been awarded numerous brands, including Beauty Bar cosmetics; Happy Belly, foods; Mae underwear; Mama Bear baby products; NuPro tech accessories, such as phone chargers; Single Cow Burger frozen foods; and My Habit for various consumer goods.
In fact, the e-commerce giant has a total collection of 34 private-label brands. Combined, sales of those products could add $1 billion to its gross profit by 2019, according to Morgan Stanley analyst Brian Nowak’s research notes.
However, one of the challenges is to convince shoppers to buy more Amazon-label products. Only about 8% of the people who bought apparel on Amazon have purchased its Amazon Essentials brand, according to Nowak.
A category still up in the air, according to industry sources, is over-the-counter drugs. Though private-label OTC brands have been moving ahead, one industry observer described the pace of growth as “glacial.” This is due primarily to what the observer calls the “branded fortress” — a combination run of little-to-no private-label marketing, regulatory issues and consumers’ intense loyalty to old-line national brands.
Despite difficulties with private-label OTC, the category is definitely on the table for Amazon, which store-brand drug maker Perrigo’s CEO John Hendrickson called a “natural player on the OTC side” at a September healthcare conference. Meanwhile, analysts believe Amazon will be in the drug distribution business within two years. The company reportedly is in discussions with mid-market pharmacy benefit managers, and has been hiring talent to assess the drug retailing market.
However, Keene Roberts, consumer health analyst at Euromonitor, does not see brick-and-mortar stores being shoved out of the OTC space. “There will be a slower or less significant shift in OTC products. When people have a cold, flu or headache, they’re not going to bother ordering online and waiting for it to arrive. They’ll just go to the store,” Roberts said. “However, it might be different for vitamins and supplements, where their well-being is not in jeopardy, and they’re willing to wait a day or two for a delivery.”
Meanwhile, the online business is turning into a slugfest between Amazon and Walmart, whose Jet.com is launching Uniquely J, its own higher-end private brand of grocery and household items, including coffee, olive oil, laundry detergent, paper towels and other items — a move that should help it compete with Whole Foods’ popular 365 house brand. Jet’s new line also is designed to give it an edge with younger customers in urban areas. This is all part of a strategy to make Jet more upscale than Walmart.com.
This may only be the tip of the iceberg in online private-label sales. Since private brands are not burdened by marketing expenses, they produce higher profits that help offset the cost of shipping orders to shoppers’ homes, industry sources said.
Additionally, the expansion of Aldi, the emergence of Lidl in the United States, continued consolidation within the drug store business and broader availability of organic and natural products are disrupting the industry and changing dynamics within private label. The end game, according to observers, is for retailers and marketers to treat private labels as brands and not just another low-priced commodity.
As an analysis by Euromonitor International noted: “Private-label retailers are collaborating with national brand owners more closely than ever to create a higher degree of interest and excitement across entire categories, rather than simply trying to undercut their branded counterparts.”
Looking ahead, Tamara Barnett, vice president of strategic insights at the Hartman Group, expects the private-label market to hold. “Right now it’s hovering around 15% to 16%. We saw the biggest jump in 2008 due to the recession. S