Terms like “private label, privately owned, generic and direct-to-consumer brands” are popular buzzwords among both retailers and consumers. Yet their roots go back over a century. What’s new is that their meaning in the retail price/value paradigm has been transformed over recent decades. What’s perplexing is whether the major Consumer Package Goods (CPG) brands have been playing into private label brands’ hands by flexing their “elastic pricing powers” only to end up losing market share.
Costco, Sam’s Club, HEB, Walmart, Dollar Tree, Lowe’s and Kroger all experience more than a quarter of their overall sales volume coming from private label products.
A Brief History
When most Americans still resided in rural farming towns, they depended on the local general store for their daily consumables. Everything else could not be found in either the Sears and Roebuck or Montgomery Ward catalogs. Besides produce, meats and canned goods these establishments also sold generic dry goods including bulk items like sugar, flour, coffee, and tobacco.
Private brands are nearly as old as the pioneering 19th-century grocery chains. First National Stores (Finast) is the first U.S. grocery chain launched in 1853, followed closely by The Great Atlantic and Pacific Tea Company (A&P) in 1859. Both had their roots in the Northeast, and each introduced private label brands by the 1920s. But in the country’s heartland, Kroger launched in Cincinnati, Ohio in 1883, and was one of the first U.S. grocery chains to introduce its own branded products in 1904. Roundy’s took root in 1872 in Milwaukee, WI, and The National Tea company opened its first store in Chicago in 1899. Both introduced private-label products in the early 1900s when they came to the realization that their customers would have more trust in goods bearing their own brand names.
The turning point in private label came in 1984 when Loblaws in Canada launched President’s Choice as the first quality store brand. They also licensed it here in the U.S. to other retailers including D’Agostino’s. A&P then followed by launching its Master’s Choice brand. What then ensued were other retailers — most notably Trader Joe’s and ALDI who followed suit with higher quality store brands.
Fast forward to today where Walmart, Target, and Whole Foods 365 have all increased their assortment of store brands toa higher quality level. Just recently Amazon launched Amazon Saver their new private-label food line.
Inequality On Aisle Five
Regardless of the major grocery chains’ private label brands’ customer acceptance, they existed in the shadows of the big CPGs. The advertising, promotional, and distribution muscle power behind the Heinz, Hunt’s, Kellogg’s and Kraft’s of the CPG world put them in the driver’s seat and into the grocery cart.
This power of scale has only been amplified through the massive multinational consolidation taking place among the superbrands like Procter & Gamble, Unilever, Nestle, PepsiCo, Tyson Foods, Anheuser-Busch InBev, and others who hold the pricing power levers in the industry.
And while the 21st-century store has evolved considerably, some things have not. There has always been a ginormous gap between the grocers and GPG’s profit potential. Grocers measure margins in pennies, while multinational CPG brands exist in a completely different margin cosmos.
This inequity was only magnified during the pandemic and post-pan periods which saw multinational CPG brands rake in record profits. Some economists have argued that large food and consumer goods companies took advantage of pandemic-era disruptions. Economist Isabella Weber at the University of Massachusetts in Amherst called it “seller’s inflation.” Others refer to it as “greedflation.” Meanwhile, on the sell-side, both grocery retailers and consumers paid dearly due to inflation-fed price hikes, out-of-stocks and withering margins.
Squeeze Play
The grocery industry’s response to imposed massive price increases was bipolar, to say the least. Tone-deaf CPG brands continued their quarterly earnings tropes of controlling price elasticity to hold or boost profits. Meanwhile, most grocery chains felt an obligation to become “shock absorbers” for their loyal customer base resulting in even greater margin cuts.
Once costs plateaued, many major retailers like Walmart and Target offered customer relief with additional price cuts. This was in marked contrast to the CPG’s distress redress embodied in shrinkflation and cutting the size of package content. This cynical marketing strategy only enraged customers.
Knowingly, or not, CPG brands were trading short-term profits for long-term sustainability and suffered the unintended consequences of accelerating the preference for private-label products. And we continue to witness customers doubling down on trading down.
The CPG market share loss has become owned brands’ gains. Further, the convergence of changing attitudes around the price/value paradigm, along with heightened sensitivity around shared brand values, suggests a further deterioration of CPG market share could be in store. Put simply, this is a trust issue. And breach of trust is a death knell.
Store brands are also a generational thing. For the parents of boomers, buying store brands (and using coupons) was looked down upon as they signaled that “you couldn’t afford” the name brands. Today, especially with Gen Z and millennials, there is no stigma attached.
The Rise of Generics
Another cost-saving alternative began to emerge in the late 20th century: generic brands also referred to as “no label” goods. These gained popularity in the United States during the late 1970s and early 1980s during a period marked by high inflation.
Around 1977, generics appeared in supermarket chains including Chicago-based Jewel, and Canada’s Loblaw. Their austere, ordinary black-and-white packaging bore oversized type fonts, not unlike Western movies’ most-wanted posters. These generic labels screamed no-frills prices with simple Corn Flakes, Mayonnaise, and Peanut Butter descriptions with little additional copy. They stood out juxtaposed with the CPGs’ “Mad Men” era’s over-the-top design, which of course received top billing in the stores.
But those black and white and yellow and black labels were slapped on products that were of lesser quality than the store’s normal private label. For example, the store-brand canned peas would be green in clear water, the generics would be brown peas in cloudy water. That’s why the generics were a flash and didn’t stay on the shelves. People still had to eat, and the quality was so bad that even having a great price wasn’t enough.
Yet today the minimalist graphic treatment broadcasting authenticity and trust is what draws today’s customers to the latest and greatest high-demand direct-to-consumer brands in everything from cosmetics to home goods.
Clear Results
The levels of success that top-tier retailers have enjoyed through owned brands have been nothing short of legendary. According to Numerator’s most recent Private Label Brands Tracker, private label items accounted for a leading 33.1 percent of sales in the club channel (e.g., Costco, Sam’s Club), followed by office 30.3 percent, mass (e.g., Target, Walmart) 28 percent, home improvement 26.8 percent, and pet 25.5 percent. In fact, Walmart sells five of the top 10 private label brands by household penetration.
Walmart brands had over 50 percent U.S. household penetration in the past year and was the only retailer to exceed that watermark. Among 20 of the largest U.S. retailers, Aldi and Trader Joe’s rely most heavily on private label products, with their owned brands accounting for 80 percent and 69 percent, respectively, of their overall sales volume.
Costco, Sam’s Club, HEB, Walmart, Dollar Tree, Lowe’s and Kroger all experience more than a quarter of their overall sales volume coming from private label products. In contrast, only three percent of Amazon’s sales volume is attributable to private labels.
Costco’s Kirkland brand exists in a category all its own, having generated $56 billion by the end of its 2024 fiscal year. In other words, the Kirkland brand generates more annual revenue than either Nike or Coke. With Kirkland’s over 550 items, their super-loyal consumers are responsible for nearly 30 percent of the entire private label market.
What’s Your Brand Stand?
The rise in popularity of private labels, owned brands, generics, even direct-to-consumer brands cannot be taken out of context of the larger, complex discussion of retail’s 21st -century evolution. Nor does it spell the demise of legacy brands.
That said, the “big-is-good” mindset, once considered to be a differentiator and advantage to the leading CPG brands, is now anathema to next gen thinking. The values of these coveted demographics, millennials and Gen Zs, better align with today’s smaller specialized brands built on authenticity, originality, transparency, and personalization.
Other trends detrimental to many major CPG brands are the rapid growth and unique tastes of multiethnic communities, an increased emphasis on regionalization and the rise of direct-to-consumer brands. These trends tend to favor small startups and young entrepreneurs pursuing new niches, often built around “tribes” of loyal followers. The winning hand for all these business types is their ability to prosper without having to build massive scale as the big CPGs.
