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Private Label II

October 08, 2023

Back in the spring of 2019, we wrote about private label – how retailers were investing in creating their own brands and how consumers generally rated private label brands as being of similar quality to national brands. Fast forward 4 years and fueled by inflation and price-sensitive consumers, private label sales in the US have hit a record high to $228.6bn according to the Private Label Manufacturers (PLMA -see chart below).

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This increase in sales of private label brands is particularly noteworthy since most national brands have been raising prices at least on par, if not higher than the rate of inflation.

What is particularly interesting with the increase in private label sales is that in yet another example of post-pandemic behavior change, consumers are willing to spend more for experiences (like travel, concerts, and restaurants) and are cutting back on more basic, non-discretionary items in an effort to contain household expenses (McKinsey, “The world of ‘ands’: Consumers set the tone”) . 

In Europe, private label is even more prevalent than in the US, making up nearly 40% of sales based on a recent survey by PLMA of 17 Western European countries (by comparison, US private label brands make up around 20% of sales).

For the consumer, some of the benefits of private label include:

  • Comparable quality, if not better, than national brands. Costco’s Kirkland brand famously ensures that everything under their label is of equal, or better quality than national brands through rigorous product testing

  • Quality guarantees ensure that the retailer stands behind their products

  • Cheaper pricing than national brands mean no need to wait for promotions

  • Private labels are often produced by national brands (one of my wife’s favorite stores, Trader Joe’s, mostly sells private label brands and there are countless blogs that disclose which famous brands are actually producing their goods)

For retailers, private label offers a chance to sell products at higher margins. Many retailers have notoriously razor thin margins, so private label offers a way to boost profits. Additionally, high quality at great prices (like at Costco and Trader Joe’s) lead to loyal customers. A win-win.

Somar will continue to monitor developments with private label as they have repercussions for both retailers and manufacturers. Since we look at the world through the eyes of the consumer, changes to consumer behavior, such as the case here, have profound changes on the way we evaluate benefits and risks to profitability.

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