The perception of private label or store brand products in the grocery industry has changed over the years. Many shoppers think of private labels as items that sit next to national brands on the grocery shelf but cost less. IGA President and CEO John Ross views them as “anything that you manufacture or sell to your shoppers that’s unique to your store.”
This can include cookies made in the store bakery, deli salads made by staff, the ready-to-heat and ready-to-eat meals, cut fruit or produce bowls.
“Literally anything that you do inside of the store that’s unique to your store is a private label,” Ross said.
In the early days of private label, those were the items shoppers bought “under duress,” Ross said.
“If you couldn’t afford the main name brand, you stepped down into a lower quality, that less expensive product. You had to make this value judgment.
“You pay less for the paper towel, but they don’t pick up anything. They’re terrible, and you feel like you’re making compromises. Sometimes those compromises were good, and sometimes they weren’t. But no one walked into the store in the early days of private label presuming that the quality was going to match the quality of name brands.”
Over time, that perception changed as the specifications of private label products improved. Ross said retailers demanded better quality because they wanted to be proud of the products that had their name on the label.
The second phase, which Ross noted the industry has been in for 20 years, was national brand equivalent. In that model, retailers go to the packer and say for a certain volume, they want to match the quality of the name brand. In return, the retailers will sell it for a lower cost because they will take on all the marketing responsibilities.
“By taking the cost out of marketing and netting it down in the cost of the product, the retailer used the power of their shelves as the marketing vehicle and let the customer make a rational decision at shelf,” Ross said.
During this phase, there were many people trading down into private label, but they were often surprised by the quality.
“You see this migration in shopper thinking away from shopping under duress to making a purposeful and smart choice. A couple of recessions and some tight economic times created private label sampling over the last few decades.
“And that private label sampling, every time it’s happened you can see the private label industry reap the benefits, as millions of shoppers tried things they wouldn’t have tried in better times, found them great and stuck with them on a loyal basis.”
According to Ross, the industry also has seen the third phase of private label over the last decade, as well. This involved private label manufacturers and retailers beginning to create differentiated experiences, products that are unique to their franchise.
“Shoppers not only save money, but they’re also getting something they might not be able to get someplace else,” he said.
Ross noted this is the more exciting of all the phases because it allows packers and retailers to be creative.
“It allows them to take the insights of their shoppers and the taste profiles they’re looking for and the snacking products they love, and they create a truly differentiated product.”
Supply chain challenges
Supply chain shortages brought about by the COVID-19 pandemic affected private label as well as national brands. While there has been improvement in the supply chain, some issues remain.
During the early days of the pandemic, shoppers were buying whatever was in stock because there weren’t many choices. Ross said many tried private label products for the first time when their go-to national brands were not available.
Now, inventory levels have improved due to a period of product rationalization, he said, adding that “we’re nowhere near where we need to be … we’ve still got a lot of work to do in order to restore the supply chain to the level of demand.”
That demand is “through the roof,” Ross said, adding that if retailers had all the products they need, sales would be 20-30 percent greater. The priority in the short run is ensuring access to product and to packers that are “excited about supplying our channel.” However, that mission gets in the way of embracing innovation.
“We’d love to be exploring shopper taste and preference trends. But you can’t do any of those things if you find that the packer community … has been making discriminatory choices about who they’re willing and able to serve.”
Those choices have been bad news for regional and independent brands, Ross said.
When resources become scarce, suppliers make rational choices for efficiency, he said. “The most efficient thing you can do in your plant is to run a large quantity of a common item. The people who benefit from that most are companies like Walmart.”
While manufacturers are prioritizing their largest accounts, they are discriminating against smaller customers.
“Rationally, I don’t fault them for that. I understand the mathematics of it,” Ross said. “But the consequence was that when you favor your largest accounts – or maybe those largest accounts put in buying requirements that force you to favor them – you end up discriminating against loyal but smaller accounts, discriminating even to the point where you start firing them.
“We’ve had hundreds of suppliers over the last four years let us know that they were no longer going to pack our product because their supply chain was committed to bigger accounts.”
Ross said that has not been limited to IGA but also has affected other regional retailers who have their own brands.
As supply chains continue to stabilize, he said he believes that “mathematically it will end up bringing some justice to the system.”
“You don’t want to wake up one day as a manufacturer and find that only three clients represent 90 percent of your sales. In the long term, that’s going to make you weak … it can be very dangerous. If that retailer decides to pull their volume and go with a competitor, you may have to shut down factories.”
Ross said secondary and tertiary packers now supplying IGA and other brands are learning how to serve the grocery industry.
“We’ll get out of this with far more interesting and varied suppliers. And that’s going to be a good thing for consumers because innovation rarely happens in the largest space,” he said.
While smaller retailers may not have the same supply base they had in the past, the new base will be more varied. It will consist of younger, hungrier companies that are more likely to invest in innovation.
“In the long run, I think we’re going to come out with a healthier and much more interesting product assortment,” he said.
Private label as branding opportunity
In the fourth phase of private label, Ross said he believes retailers will learn to see the products made in their stores as a branding opportunity and market them as such.
“Thinking about how we market private label products is a combination of reselling things made by others and marketing things we make ourselves so that the consumer ends up saying, ‘I shop that store because they’ve got stuff that nobody else has.’ And as we get better at that, private label as a total percentage of sales is going to grow.”
Read more private label news from The Shelby Report.