Private labels were once targeted at low-budget shoppers. Today, growth in sales of private-label products outpace the sales of branded products by 3x, forcing CPG giants that have ruled the space for nearly a century to respond.
Around the middle of the twentieth century, there was what The Atlantic called a “Cambrian explosion” of brands.
Tide, Crest, Band-Aid, Lipton, and other branded packaged goods — and the conglomerates that manufactured them — reigned. Store brands from retailers were seen as down-budget choices.
Today, tastes have changed.
Costco, one of the top wine sellers in the country, now sees 15% of its overall wine sales going to private-label products. Target’s Cat & Jack kids’ line has delivered double-digit results since its 2016 launch, even as traditional retailers struggle to stay afloat.
Private-label sales are projected to grow to capture 25% of dollars in the next decade. This has major implications for CPG brands which once had a symbiotic relationship with the retailers that now pose the greatest threat.
We analyzed the six categories where private-label products are poised to disrupt — or already disrupting — some of the biggest brands.
Table of Contents
- Why now for private-label goods?
- Packaged foods: how grocers are improving margins with in-house brands
- Beverages: how private labels are beating the competition by slashing prices
- Pet food: how Amazon is using its private label to lure customers into purchasing more expensive goods
- Household products: how companies like Unilever are being forced to diversify their product lines
- Cosmetics: L’Oréal leads the way with research and digital change
- Clothing: how retailers are attempting to escape the industry apocalypse by introducing store brands
Why now for private-label goods?
Private labels have had a strong presence in Europe for years (in the UK, 40% of grocery sales are private label). Now the US is starting to catch up.
During the last quarter of 2017, private label sales grew at a clip of 3.2%, while manufacturer-branded products declined (by 0.5%). The dollar share of private labels in the US is now projected to surpass 25% over the course of the next decade.
Why the shift?
Distributors have more manufacturing power, logistics prowess, and the consumer data to give loyal shoppers across categories exactly what they want.
And there’s a huge incentive to wean people off of branded goods and onto retailers’ own product lines: from private-label sales, retailers can make margins 25-30% higher than from manufacturer brands.
From beverages to apparel to pet food and other categories, customers are prioritizing price in their buying decisions, and trusting retailers that the products they offer will be made as well as — if not better than — their brand competitors.
Searching “sparkling water” on Amazon Prime Now today gives you two options for twelve-packs: 365 Everyday Value brand water, priced at $3.99, and LaCroix, priced at $5.69.
Packaged foods: how grocers are improving margins with in-house brands
Profit margins on grocery store goods are thin — about 1.3% on average. A grocery store that buys a product for $1 and sells it for $1.30 is left with pennies after they subtract distribution, wages, and other expenses. Because of this, price competition is merciless.
Private labels allow retailers to price their products more competitively and keep the profits. They’ve figured out how to keep manufacturing lean and in-house, leveraging what they’ve learned from selling manufacturer brands for so many years. Retailers earn 25–30% higher gross margins on private labels compared to manufacturer brands.
In 2017, US private-label food sales grew three times faster than those of national manufacturers’ products, and the competition is heating up. Consumers are not only looking for value — they have high ethical, environmental, and taste standards.
In addition, CPG companies face a threat from a new kind of packaged goods company that promotes itself as the anti-brand, saying it prioritizes products rather than marketing. The startup Brandless, which offers a range of practical, organic food products for $3, has also seen rapid success since its July 2017 launch.
SoftBank led Brandless’ $240M Series C funding round in July 2018, at which point the company was valued at $500M.
To simply stay in the game, grocers of all sizes must know their shoppers at a detailed level and keep pace with evolving preferences.
Kroger leverages customer analytics
A large part of the grocer Kroger’s recent rise is through the success of its private-label offerings.
As of March 2018, Kroger’s Our Brands accounted for 29.5% of the company’s unit sales. Sales of its Simple Truth® natural and organic products increased 19% year-over-year in Q4’17. Total sales for Kroger store brands hit over $20B, dwarfing the sales of brands like J.M. Smucker ($7.3B) and Campbell Soup ($8.13B).
|Sales (TTM) ($B)||Market Cap ($B)|
|Kroger’s “Our Brands”||20.9||N/A|
|J.M. Smucker Co||7.36||12.91|
|Kroger Simple Truth®||2||N/A|
Kroger has been investing heavily in its own manufacturing facilities for decades. It now has a portfolio of over 40 plants to process everything from “Big K” Cola to spaghetti sauce, beating the in-house capabilities of Campbell Soup, J.M. Smucker, and even Kraft Foods.
Its acquisitions of smaller grocers like Roundy’s (2015) and Harris Teeter (2014) have bolstered Kroger’s supply chain further by integrating their warehouses and distribution centers into the company’s larger operations. Today, Kroger processes all of the fresh milk it sells, after acquiring a fully automated dairy plant in Colorado in 2015.
Kroger’s success has also come through an increased focus on its customer analytics platform 84.51°, which aggregates all purchase data and makes it available to brand partners for coupons and promotions. Kroger’s 300 CPG clients are able to access the platform and participate in the company’s marketing campaigns.
84.51° also helps Kroger develop its own products that beat the competition. The company has focused on sourcing and developing products that consumers don’t always recognize as Kroger products, such as Nando’s Peri-Peri sauce (a riff on Sriracha that incorporates African chilis) or a new smoked salmon line from New Zealand.
The company often takes popular items like chocolate bars and adds an upscale twist:
Knowing that customers are increasingly keen to explore niche products and new tastes, Kroger is able to innovate based on what’s already popular.
The grocer captures 97% of annual transactions from 60M households nationwide — more food purchase data than any of its US competitors. This data underpins other improvements to Kroger’s operations.
In 2017, Kroger stores redesigned their aisles to display the company’s private-label pasta more prominently after the product outperformed its brand-name peers.
This year, the company sold its underperforming portfolio of convenience stores. Kroger expanded its Instacart partnership and acquired Home Chef, seeing opportunities to improve convenience, simplicity, and personalized service for customers.
Discount grocers stock their shelves with private-label products
German grocer Lidl stocks 90% of its shelf space with its own products, which helped propel the chain to enter the US market in 2017. Competitor Aldi is also ramping up in the US with a similar model.
Now Walmart is seeing higher online conversions from its private-label offerings, and Amazon’s recent acquisition of Whole Foods was driven by the success of the grocer’s 365 Everyday Value store brand.
Beverages: how private labels are beating the competition by slashing prices
Price — not quality or brand — has in the last several years become the top factor influencing consumer choices when it comes to beverages, most prominently alcohol, bottled water, and caffeinated drinks.
With millennials earning 20% less than previous generations and consumers across demographics displaying price-sensitivity following the 2008-2009 Recession, companies that can deliver drinks at a reduced price are winning.
Alcoholic beverages exhibit particularly strong price elasticity. A 2013 metastudy by Tim Stockwell and Gerald Thomas at the Centre for Addictions Research in Canada found that a 10% increase in alcohol price resulted in an 8.4% reduction in consumption.
In other words, people buy more of these products when they’re cheaper and less when they’re more expensive.
Discounters like Costco are taking advantage of these economics and attracting more customers to their private label beverages through a strategy of slashing prices. The industry standard for alcohol markups is between 25-45% — Costco’s Kirkland brands maintain about 10-14%. That’s the difference between $9.50 and $7.84 on a $7 bottle of wine.
The strategy is working.
Annual global wine sales for Costco are now roughly $270M annually — 15% of its overall sales — and they are projected to grow over the next several years.
The incentives are just as powerful in the bottled water industry.
Generic products like Walgreen’s Nice! Spring Water and Stop & Shop’s Nature’s Promise Water Beverage are beating out house names like Dasani (owned by Coca-Cola) and Poland Spring (owned by Nestlé).
In 2017, the generic private label category of bottled water outpaced the nearest rival (Dasani) by 2.3x and accounted for 29% of all domestic bottled water sales.
Given bottled water’s relatively light manufacturing process and low production cost, it’s easy to cut prices and maintain strong margins. Bottled water sells for an average of $1.22 per gallon in the U.S. — 300x the cost of a gallon of tap water.
Many large companies like Nestlé are setting up bottling facilities in economically depressed areas like rural Michigan, where they receive additional tax breaks for building infrastructure and creating jobs while paying next to nothing for the water itself. This helps them increase their margins.
Driven by sparkling and still waters, private-label beverages outperformed the entire private-label market in 2017.
Energy drinks and coffee beverages also exhibit cross-price elasticity with soft drinks.
A study from Texas A&M shows that customers will switch between leading brands of energy drinks like Monster and Rockstar when prices go up, making them ripe for a private label surge.
Energy drinks already provide attractive margins for distributors, and retailers don’t require much shelf space. The current private-label base is relatively small compared with bottled water, yet the market has flourished — it saw a 15.7% increase in sales in 2017.
Similarly, ready-to-drink cappuccinos and iced coffees were the fastest-growing segment of private label beverages in 2017, with a 654.8% change over 2016. The category brought in total sales of over $42M. This contrasts with growth in coffee sales overall, which are declining at nearly 1% annually.
Seizing the opportunity, Amazon has stepped up with the release of coffee pods under its new Solimo brand. The product quickly entered the top 25 sales for the category and generated $60,000 in revenue per week.
Coffee, combined with cold drinks, is now a top-selling category on Amazon.com, accounting for over $350M in sales in Q2’18.
At US multi-brand outlets like Walmart and Costco, sales of private label water, coffee, tea, wine, and spirits combined to generate more than $7.8B for the year ending October 8, 2017 (a 7% increase over 2016) and a total of over $92.4B in all channels.
Pet food: how Amazon is using its private label to lure customers into purchasing more expensive goods
Pet stores don’t make money on pet food; they make most of it off other products and services with much higher margins, like chew toys and pet grooming.
Margins on pet food are just 1-2%, but they can reach up to 50% on crates, bowls, and services.
But this business model makes pet stores vulnerable to Amazon.
In 2018, Amazon sent tremors through the pet food industry by launching its private-label brand of dry dog food called Wag at a discount to other popular in-store offerings. A 30 lb. bag of Wag costs $44.99, compared to $46.99 for Blue Buffalo. Prime members can receive discounts on bulk orders, bringing the price down even further to $34.99.
Pet food sales are projected to hit $30B in 2018, and private label already has the lead among branded dog food. Amazon’s entrance will likely only further this advantage.
If Amazon captures a majority share, it could quickly undercut companies that are less diversified like recently acquired Blue Buffalo and put a dent in CPG giants like Purina (Nestlé).
Pet food is a challenge to sell online because of its bulky size and shipping difficulty. Amazon has an advantage here given its worldwide delivery network for items of all shapes and sizes.
The company has another hook that differentiates it from competitors: technology.
Amazon recently rolled out an online research tool called the Amazon Pet Profile to help customers better understand their pets’ needs and deliver tailored content to make the shopping experience more friendly and efficient. New users receive a 20% discount on their first pet food.
Pet Profile is helping Amazon increase user engagement, spur the growth of Wag, and draw customers to higher-margin items in its AmazonBasics line. In 2017, Amazon pet carriers and beds generated approximately $2M in sales, representing 80% growth YoY.
As Amazon collects deeper insights on product and price preferences from over 80M premium Prime members, it will be able to use this data to improve the entire purchasing cycle of pet food and pet products — building out inventory of high-demand items, updating products based on feedback, and retiring items that aren’t popular.
As interest in Wag increases, the company will be able to optimize AmazonBasics accordingly.
Household products: how companies like Unilever are being forced to diversify their product lines
Despite large cash moats and profits that dwarf most startups, CPG giants are struggling to remain relevant as consumers seek more convenient and affordable household goods.
The rapid, high-profile growth of these startups has pushed companies like Procter & Gamble and Unilever to respond — which may help them get ahead of the trend towards private-label goods.
Major CPG brands have struggled to innovate. Average R&D spend was just 2% in 2017, compared with 5.4% for the household goods and durable products companies and 13% for emerging tech companies.
Companies like Procter & Gamble often repackage or make small adjustments to existing products like Tide purclean™ (a new plant-based detergent option) or Pampers® Pure Protection (diapers without chlorine bleach, fragrances, or parabens).
While CPG giants have been successful at executing their existing business models for decades, they are slow to spot and adapt to new consumer preferences, such as online purchasing, elevated customer experience, and rapid delivery.
Some are integrating cutting-edge techniques into their strategies through acquisition.
Unilever acquires Dollar Shave Club
Unilever bought Dollar Shave Club (DSC) in 2016 instead of creating its own line of razors, capturing 16% of domestic units in the US market. It’s now the second largest player in the space after Gillette, a P&G brand.
But Unilever gained more than just a competitive edge in men’s grooming.
The purchase of DSC marked its first major foray into digitally native vertical brands (DNVBs). A DNVB has both a physical product and an e-commerce channel. Other well known DNVB brands include mattress company Casper and online furniture seller Article.
By looking toward DNVB companies that have quickly differentiated themselves and built up a loyal user user base, CPG giants are more likely to succeed against retailers with private-label goods. For example, Kroger recently unveiled a private-label men’s shaving line called Bromley’s For Men.
Amazon drives private-label battery sales
Established companies like Unilever with large portfolios are still vulnerable to the rise of startups with popular proprietary brands, but they’re far safer than companies like Energizer® that are dominated by a single product.
Private-label batteries accounted for 13% of all battery sales in 2016, inching closer to Energizer (26%) and Duracell (40%). This private-label share will likely grow, driven especially by Amazon.
One of Amazon’s best selling items is batteries, and the company holds 90% of online sales. AmazonBasics batteries are cheaper than top competitor brands. Since they’re just one of Amazon’s millions of products, the company is less vulnerable to swings in the prices of raw materials like zinc and electrolytic manganese dioxide (EMD) used in battery manufacturing.
As online sales of batteries are projected to increase from 5% today to 17% by 2025 according to UBS, Amazon has the potential to fully overturn incumbents.
Cosmetics: L’Oréal leads the way with research and digital change
The global cosmetics products market was valued at over $532B in 2017, and it’s expected to increase at a CAGR of 7.14% to hit $805.61B by 2023.
But established retailers in the space have been slower to develop successful private labels than those in household goods, food, and beverages.
Private-label makeup lines, for example, represent less than 3% of the global market.
But change is coming.
With low barriers to entry in the beauty industry, new lines are springing up quickly and attracting more health- and socially-conscious customers with a focus on natural and cruelty-free products.
Walmart and Target rolled out their own beauty lines, aiming to attract more upscale customers. In drugstores like CVS and Rite Aid, cosmetics make up a decent portion of the product mix.
In July 2018, Avon sold its last US factory to a contract manufacturer that will make private-label products for Walgreens.
Drug and general merchandise sales, including beauty products, make up 12.1% of CVS Health’s value (left chart) and 19.2% of Rite Aid’s (right chart).
Though gaining popularity with consumers for high-end cosmetics is hard, initial costs are actually pretty low. Companies can use tried-and-true product formulas and shades instead of starting from square one, eliminating research and development costs.
Urban Outfitters, for example, recently released its in-house makeup and skincare line ohii to compete with Sephora and Ulta.
All ohii products are under $25 and optimized for Instagram with photogenic names and colors.
For beauty incumbents, embracing change through innovative private-label lines and digital updates are critical strategies for survival in a rapidly transforming industry.
L’Oréal, for example, has continued to invest in the research (3% of sales on average) and promotion (30% of sales on average) of its internal product lines. This has helped the company maintain its popularity in both mass market and luxury channels, and sustain strong relationships with its retailers.
L’Oréal has also embraced the rapid rise of AR-based beauty tools with its acquisition of ModiFace, which provides photo-realistic makeup simulation, lighting adaption, and other product views.
The acquisition allowed the company to add options like personalized lipstick views via a live video or photo to its 34 international brands, helping increase user engagement and boost online sales.
Clothing: how retailers are attempting to escape the industry apocalypse by introducing store brands
It’s easier to enter a new space when current players are in distress — a lesson that private-label apparel startups are quickly learning today.
Leaders in the $1.4T apparel category that were unstoppable even a few years ago have fallen into decline.
The convenience of e-commerce, coupled with the 2008-2009 Recession, hit brick-and-mortar companies hard as their once-loyal followers drifted away from major labels.
Generally, apparel offers the highest margins in retail. When customers spend less on clothing, entire businesses like Target and Walmart can suffer disproportionate losses.
On the flip side, if retailers can bring in more sales with private labels, it can give their bottom lines an extra boost.
Target launches two new private-label lines
To this end, Target recently terminated its longstanding relationship with Hanesbrands’ Champion line and launched two of its own private-label clothing lines focused on shoppers age 18-29: Wild Fable for women and Original Use for men.
Both lines build on the success of Target’s Cat & Jack kids’ line, which has delivered double-digit results since its 2016 launch and generated more than $2B in sales in 2017. Target plans to launch another twelve private-label clothing brands by 2019.
Apparel and accessories make up 20% of Target’s sales. Increasing these margins could make the difference between staying afloat and falling prey to the retail apocalypse that is gripping J.C. Penney, Macy’s, Abercrombie & Fitch, and others.
Walmart is trying a similar method, rolling out Time and Tru for women, plus-size line Terra & Sky, children’s brand Wonder Nation, and men’s brand, George in February 2018.
Despite these items being some of the least expensive on the market, customers aren’t totally pleased. Walmart’s score with the American Customer Satisfaction Index (ACSI), which is based on the quality of products and services, dropped from 72 to 71 in 2017, landing them at the bottom of a list of 18 department and discount retailers.
Amazon continues its private-label push
Target and Walmart are under increasing pressure to find success with these in-house apparel brands. Amazon has pushed hard into the space in the past year with more than 60 of its own clothing, shoes, and jewelry brands.
Amazon isn’t new to fashion, having quietly been making inroads since 2006.
This year, driven by its push into private labels that began in 2015, it is expected to become the second-largest seller of apparel and footwear in the US, outperforming T.J. Maxx and Macy’s.
While the majority of established brands are projected to remain stagnant or decline over the next five years, Amazon is poised to capture customers at an increasing rate.
Struggling retailers will continue to develop generic clothing lines to boost overall sales in a tough environment, but Amazon’s could seriously limit competitors’ progress.
New criteria for success in a new marketplace
The most successful CPG companies (P&G, Unilever, Nestlé, General Mills, Coke, and Pepsi) gained global traction and took root in the homes and hearts of consumers in the twentieth century through heavy investment in advertising and a powerful network of relationships with retailers.
With the rise of the internet, fewer customers frequent retail locations today, eliminating a critical pillar of CPG success. Companies like Amazon that can more easily bypass other retailers and rely on their own resources for manufacturing and delivery are able to offer products cheaply at a time when consumers are aiming to pare down extraneous expenses.
Although the six major CPG segments are seeing change happen at varying rates and in different ways, common criteria for success have emerged:
- Consolidate manufacturing and distribution for greater quality and price control.
- Invest in a powerful and user-friendly digital platform that can improve customer insights.
- Quickly adapt to new consumer tastes and preferences — even if this conflicts with business-as-usual.
As private labels help drive the success or failure of their respective retailers in the next several years, the space will continue to become more competitive. To stay in the game, companies must quickly learn from emerging best practices while also forging their own paths in order to capture and sustain customers’ interest, appreciation, and dollars.
This report was created with data from CB Insights’ emerging technology insights platform, which offers clarity into emerging tech and new business strategies through tools like:
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