Retailers’ opportunity in private labels / brands
30 December 2020 - Premiumisation of consumer-packaged goods
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Consumers are reacting differently towards consumer-packaged goods (CPG) especially during and post-COVID-19 pandemic. In one way, there has been an increasing demand for safe and healthy products with consumers’ minds on health, hygiene, food safety and supply chain. In a GfK Consumer Pulse Study, essential food, fresh food and hygiene are the top priorities for consumers to maintain wellness following the worldwide pandemic. We believe retailers can explore these priority areas further and bring to market products that fit the consumers’ demand criteria.
Retailers’ opportunity to vertically integrate through private labels to capture sales margin
As the pandemic has caused the global economy to contract significantly, consumers have switched from premium-priced branded products to other private brands as household purchasing power has been affected. However, there is always opportunity for retailers to bring premium products to the market due to greater buying and spending power for quality products, as well as the availability of new and innovative brands. For example, retailers have the capacity to vertically integrate through private labels to capture sales margin by offering their own private label goods to compete with CPG companies. Hence capturing all the margins between the production cost and the shelf price.
Private labels can fetch 25–30% higher margins than traditional brands for retailers
Based on a U.S market study, the growth of private labels is one of the pivotal trends in the retail and consumer products. Retailers are focusing on private label brands as they offer 25–30% higher margins than traditional brands. Private label products encompass all merchandises (sold under a retailer's brand) that are produced by general and specialised manufacturers or at times, by major retailers and wholesalers themselves. These products may include among others, fresh, canned, frozen, and dry foods, snacks, health and beauty, cosmetics, pet foods, over-the-counter drugs, household and laundry products, auto aftercare and DIY.
Retailers can create a unique value proposition by acquiring private brands who are known to be innovative and trendsetting in the CPG industry to control a greater share of the product range in key categories and to increase sales margins. In Europe and the U.S, retailers are investing to elevate their private-brand capabilities to the next level of growth. For example, U.S-based Kroger has made its store brands ‘Simple Truth’ to become the leading natural and organic brand in the country since its launch in 2013, with annual sales exceeding $2.5 billion in 2019.
Perception of store brands as quality labels favourable to consumers
Global perception of store brands has been favourable too with 71% of respondents in a Nielsen survey found perceptions about private label quality has improved over time. Investments in private labels have also been fruitful for retailers with increasing contribution towards sales growth. Store brands or private labels grew 14.6% y-o-y during 1Q2020 compared to National brands or Branded products which grew 11.5% only.
Retailers’ potential to understand consumers and offering innovation brands to fit ever-evolving lifestyle
Retailers have every opportunity in private brand innovation to understand consumers’ ever-evolving lifestyle changes and to solve their new needs and values. This was discovered in Daymon’s Private Brand Report 2020 that a total of 62% of consumers have shown interest towards new ‘made-to-order’ foods whilst 58% are on sustainably sourced products. Retailers can consider six key action plans as mentioned in the report write-up to position and differentiate their private label brands. Among the action plans, we believe customer research serves as strategic key inputs for formulating a better market strategy.
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