Driven By E-Commerce and Changing Consumer Preferences, Private Label Sourcing Spikes 158%

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While some private label brands once suffered the stigma of being considered budget, lower-quality options, the private label market has absolutely exploded in recent years. Today’s marketplace features diverse high-performing private label foods and beverages, housewares, health and beauty products, cosmetics, and more products.

Although private label products are still generally considered to be lower-cost alternatives to top brands, consumers now see private-label brands as high-quality and on par with more mainstream brand options; in many cases, private label brands are providing fierce competition against these established brands.

In fact, during an interview with CNBC in February 2019, Warren Buffett discussed how private label brands are growing in popularity at an exponential rate, saying, “We’ve learned that over the last few years, the struggle between the retailers and the brands has shifted toward the retailers.”

As such, it’s unsurprising that major retailers such as Target, Amazon, and Walmart have already started taking advantage of this lucrative trend.

What Are Private Label Products?

Instead of being branded with the manufacturer’s name and trademarks, private label products are packaged and sold under either the retailer's name or a brand name trademarked by the retailer.

Target, for example, has several trademarked private label lines representing a wide range of product categories, including women’s apparel (Universal Thread), housewares (Made by Design), consumer electronics (Heyday), and personal care items (Smartly).

Tracking the Trends in Private Labeling

Thomas' data analysts noticed the massive spike in private label sourcing year over year, later highlighting it in a 2019 Thomas Index Report. In the video, Thomas CEO and President Tony Uphoff noted that “sourcing activity in this category is up 158% year over year.”

To demonstrate how this growth is disrupting the traditional retail market, Uphoff compared the 2018 sales performances of Costco’s Kirkland brand against the sales performances of Kraft Heinz. Although Kraft Heinz is a “household name consumer brand with 100 years of history and a massive advertising budget,” its 2018 sales of $26 billion was wildly surpassed by Kirkland, which generated $39 billion in sales that same year.

According to ThomasNet.com sourcing data, other private label categories are also on the rise, including cosmetics, which is up 47.9% year over year, and nutraceuticals, up 34% over its historical average. As of July 2019, overarching private label manufacturing is up 34.5% month over month.

Beyond sourcing activity data from Thomas, several other sources have reported the evidence of private label’s growth:

• In 2018 at Groceryshop, a conference event for grocery and consumer packaged goods professionals, global consulting firm Kantar consulting reported that 85% of US shoppers purchase private-label products according to their data.
• 85% of shoppers trust private brands as much as national brands, according to a report aggregated by private brand development firm Daymon. 
• Citing a “complete reversal in growth trajectory compared to manufacturer branded items,” data analytics company Nielsen predicted in 2017 that dollar share for private label products could reach 25.7% by 2027.
• According to data from eMarketer Pro, a market research company, the top three most popular private label product categories among millennial consumers are:
  • Over-the-counter healthcare (chosen by 74% of respondents)
  • Paper products (chosen by 72% of respondents)
  • Shelf-stable packaged foods (chosen by 72% of respondents)
• According to Frozen & Refrigerated Buyer magazine, a typical grocery cart may contain up to 25% private label products; for millennial shoppers, this number is 32%.

The Driving Forces Behind Private Label’s Popularity

In the recent Thomas Index Report discussing private label products, Uphoff pointed out that “budget-conscious consumers are no longer the only target for private label brands” and that “millennial consumers are embracing these products as sustainable, quality options.”

Shelagh Dolan, head of content at Business Insider Intelligence, echoed this perspective when speaking to Thomas during a recent interview.

“One thing that’s really driving it is the explosive growth of E-Commerce," Dolan explained. "People, especially millennials and Gen Xers, are increasingly ordering all of their household essentials online through things like Prime Pantry, same-day grocery delivery, or Instacart.”

Some brands, such as Target's Smartly brand, target their audiences in other unique ways and provide value to potential customers through often-overlooked features.

“The majority of these [Smartly] products are priced under $2,” Dolan explained. “They’re sold in smaller quantities,” which is especially appealing to consumers who “can’t fit a 12-pack roll of paper towels in their small New York apartment.”

Not only is Smartly providing value in terms of lower costs, but it’s also providing an exclusive experiential value by catering to a very specific but generally omitted aspect of consumers’ lifestyles.

“What private labeling allows Target to do is keep itself from being out-priced by competitors,” said Dolan. “It also can help build customer loyalty by providing them with brands that they can’t get anywhere else.”

Dolan also mentioned that another “key reason that consumers are willing to shop private label is that it gives them a broader selection – 32% of consumers say that they browse on different sites because they want a better selection of products.”

Martin Mottesi, CEO of Come Alive Organics, a contract food manufacturer and formulator that offers private labeling as part of their manufacturing services, agrees that the power of variety is a huge driving force for private labeling opportunities. “Our business, as a medium-sized company, has exponentially grown very rapidly as we’ve now seen consumers want differentiation [in] their products,” he says.

This creates both challenges and opportunities for manufacturers. “Consumers require more than one choice... and as contract manufacturers, we have to be prepared to meet those demands,” Mottesi told Thomas.

“The companies that are the most nimble and flexible are the ones that are successful,” he said. “Manufacturers have to set up scalable operations, but they also have to be nimble in such a way where it meets the demand as it’s needed. So our infrastructure and supply chain has to be able to bend and to be flexible with those needs; otherwise, we would miss out on those opportunities.” 

The Future of Private Labeling

As for the future, Mottesi sees this upward trajectory continuing, with more large retailers capitalizing on the trend. “We’re seeing this at a macro level where all manufacturers, whether they’re big or small, are looking to fragment the demand that the consumers are requiring in order to meet those needs,” he said.

“I think we’ll continue seeing large businesses turning to private labeling," Dolan agreed. "Whether it’s through strategic partnership, acquisitions, or spinning out completely new businesses as a means to expand product selection, they’re going be doing it particularly with E-Commerce shoppers in mind.”

Image Credit: David Tonelson / Shutterstock