While the US economic growth situation remains below that of a vibrant recovery, in the food and beverage marketplace, we continue to see exceptional growth in premium products and services. In matters of food and drink, America has largely returned to its pre-recession trade-up behaviors (and some never stopped at all). In fact, the market-share growth of premium food and beverage brands continues to increase steadily and relentlessly, in step with changing consumer desires.
But what about premiumization and the world of private label food and beverage? When the recession hit in 2008, there was a highly predictable spike in private label sales. Many wondered if it was temporary or if it augured the beginning of a new age when established brands would weaken permanently in the face of Kirkland Signature, Kroger’s Private Selection, Safeway Select and even more exotic control labels that some consumers don’t always realize are store-controlled.
Two years ago, to explore the role culture and private label, we examined the long-term growth trends and structure of the private label food marketplace. At the time, we found distinct patterns based on permutations of market share and growth. Recently, we revisited those performance segments and how their performance relates to the quiet hope that private label is now ready to premiumize. If so, why are certain categories exhibiting this phenomenon while others aren’t and how much of this can be attributed to premiumization of product quality?
What we have found should be inspiring to food retailers in general but very concerning to CPG companies, which should be very careful not to assume that, in historically brand-dominated categories, private label is still not a competitive issue. In a market where every half point of market share for a name brand has huge financial consequences, private label has to be analyzed as closely as new premium brands.
In our 2014 analysis of private label we uncovered a distinct market structure to the private label food and beverage universe based on four key performance segments in which a private label product competes: Growth Engines, Roots, Battleground and Branded Fortress. Each segment is based on how PL functions in its proximate merchandising category and how the latter operates in contemporary food culture:
- Growth engines: Private label sales in these categories are continuing to excel and dominate due to the power of store brands in the fresh perimeter (e.g. chilled pizza, prepared salads) and private label’s uncanny ability to excel in culturally younger categories/segments where historical habits related to brand preference are quite young and less stable at the individual level (e.g., K-Cups, bottled water). Bottled Water is the only beverage category operating in this advantaged position.
- Roots: Private label sales in these categories are losing ground due to the resurgence of strong legacy brand innovation and marketing (e.g., Heinz in ketchup, Quaker and Special K Nourish launches in hot cereal, Barilla gluten free and Pronto pasta products,). Milk, seltzer and kefir are the only beverage categories in this segment.
- Battleground: Private label sales in these categories are gaining ground due to the faltering of brands in processed ready-to-eat categories like (e.g., shelf-stable canned pasta and canned meat).
- Branded fortress: Private label sales in these categories are generally losing ground as strong brands continue to fend off store-label knockoffs (e.g., Oreo in sandwich cookies). The vast majority of beverage categories live here. Private label is notoriously difficult to grow in most soft and hot drink categories.
Our analysis of categories in these performance segments finds that overall, private label food and beverage has gained an average of $0.48/unit of pricing power just in the past six years. This has helped private label close the price gap with established brands and drive overall dollar volume toward store brands. This further shows how a significant percentage of legacy name brands are weakening, not strengthening, during the post-recession recovery. Underneath this finding is the equally surprising fact that private label food and beverage is actually selling fewer units overall since 2009. So, private label revenue and share growth has been based to a large extent on selling higher-priced premium goods (w/some exceptions, like coffee).
The implications for retailers and CPG food producers are broadly encompassing and impactful and include the following:
For retailers, with regard to growth of premium private label, our analysis shows that retailers should aggressively invest in private label innovation within younger, fast-growing categories to capture their fair dollar share of trade down among heavy category users and to enable private label to establish itself on more equal footing with brands in modern food culture. Retailers have a good opportunity to retain share and premiumize offerings in the fresh perimeter growth categories where, outside of Lunchables, brands are neither dominant nor relied on.
For CPG companies, just because brands dominate your category, that does not mean private label can’t steal share from your brand in today’s food culture. Companies with flat, slipping or struggling late-stage brands in brand-dominated sectors should examine whether or not private label is a source of problems and address this competitive threat as much as the threat from emerging premium brands. CPG manufacturers should take note of the speed at which private label is absorbing premium product attributes, for this can be used to gauge the long-term pricing power of those attributes. Once an attribute such as Greek yogurt has reached the private label programs of ALDI and dollar stores, it is probably time to dip back into the trends well in your category for new sources of innovation. In Greek yogurt, this happened in 2011, almost five years ago.
For in-depth analysis download your free 2016 copy: The Premiumization of Private Label
As CEO of The Hartman Group, Demeritt drives the vision, strategy, operations and results-oriented culture for the company’s associates as The Hartman Group furthers its offerings of tactical thinking, consumer and market intelligence, cultural competency and innovative intellectual capital to a global marketplace.
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