Imagine this scenario: The year is 2020. It’s a Monday evening in June, and you’ve had a long day navigating the trials and tribulations of the COVID-19 pandemic. Except for your evening walk to the grocery store, you haven’t left the house in over a week. Today, you decide to buy yourself a sweet treat. Will it be a basic bar of milk chocolate from the store’s own brand or one from your favorite premium brand? You recall the sea salt and caramel flavor is particularly delectable….
In the wake of COVID-19, has private labeling had its day?
What Is Private Labeling?
Private labeling allows retailers across a range of industries to sell products that have been manufactured by third-party vendors under their own brand names. The process includes companies outsourcing various aspects of the supply chain — including the sourcing, manufacturing, and shipping of products.
In the past, private label products were often dismissed as inferior in comparison to big brand names. But their prevalence and popularity among consumers have been on the rise for several years. Private label sales increased by $1.9 billion in 2021, with store brands now accounting for a massive $199 billion worth of sales across all the major retail channels.
Some of the most well-known private label product lines include Costco’s Kirkland range, Walmart’s Great Value range, and Amazon’s AmazonBasics range.
How Does Private Labeling Benefit Business Owners and Manufacturers?
Private labeling presents several benefits to retailers and manufacturers:
Convenience
Private labeling is extremely beneficial to companies that do not have the resources or means to carry out their own manufacturing processes but want to get uniquely branded products into the hands of their customers.
Cost-effective
Private labeling typically has higher profit margins. It’s far cheaper for retailers to manufacture and sell their own products than to buy and resell products from big-name brands.
Consumer Loyalty
When retailers commit to improving the range, sophistication, and quality of their private label offerings, they have the potential to drive increased customer loyalty.
Competitive Edge
Retailers with a well-established private label range can distinguish themselves from their direct competitors that only stock and resell big brand names. These companies are providing their customer with more choices, better prices, and access to an exclusive product range.
What Are the Challenges Associated with Private Labeling?
Private labeling does come with its own set of challenges. For example, vendors typically set minimum order requirements for manufacturing customized products. This is particularly inconvenient for smaller companies that might not have the need, resources, or storage space for large amounts of inventory.
Furthermore, it often takes a significant amount of time for consumers to trust a new product line, let alone choose it over a brand they have long loved and supported.
How Did COVID-19 Impact Private Labeling?
The early stages of the COVID-19 pandemic were private labeling’s time to shine. With some of the nation’s most popular brands struggling to scale-up production to meet shifting consumer demands and the sudden rush to stockpile goods, many shoppers turned to private label products.
In a September 2020 survey, one in five U.S. grocery shoppers admitted to buying more private-label products during the COVID-19 crisis than they had pre-pandemic. More than 45% of respondents said that the cheaper prices of these products was their primary reason for making this choice, with reduced availability of popular national brands cited as the second biggest factor.
But private label products have not fared quite so well as the pandemic persisted. NielsenIQ data reports that 2021 was the first time in a decade that sales growth of national brands outpaced the growth of private labels. Between September 2020 and September 2021, the sales of branded product rose 3.6% to $536 billion, while private label product sales increased by 1.5% to $142 billion.
There are a couple of reasons that might explain this trend. Firstly, many consumers have found themselves with a little extra disposable income thanks to lockdowns, travel restrictions, and social distancing measures. As a result, some of the bored and the housebound have chosen to indulge in more expensive and higher-quality products.
Secondly, private label brands struggled to navigate supply chain disruptions including factory labor shortages and shipping delays. Some suppliers likely prioritized the manufacturing of their own higher-margin products.
What Does the Future Hold for Private Labeling?
As the pandemic subsides, the average consumer is returning to their normal life. They are seeing an end to government relief payments, maybe heading back into the workplace, and reigniting their social life, which means they have less money to spend on premium products. Indeed, NielsenIQ reports that between September and December last year, the percentage of newly budget-conscious consumers doubled.
In addition, inflation in the U.S. has seen food prices rising sharply. November 2021 saw consumer prices jump by 6.8%, which represents the fastest inflation spike the country has seen in 39 years.
These factors, coupled with the rise of e-Commerce, present a unique opportunity for private labeling to regain some momentum — but only if retailers play their cards right.
Rather than relying on the historical benefits of private labeling (i.e. cheaper prices and high availability), companies must employ a proper brand strategy, thinking carefully about how to market their private label brands and their value proposition, while prioritizing the development of a range of high-quality products.
The rise of e-Commerce, for example, is a huge win for retailers looking to grow awareness about their private label products and boost sales. Via their online platforms, companies can draw their customers’ attention to whatever they want, whether it’s certain products, brands, or unique offers.
Retailers that truly invest in their private label products, through strong marketing, a proper brand strategy, and concrete long-term goals can grow a successful brand with a loyal customer base.
Check out the private label manufacturers’ database on Thomas.
