The Increasing Growth Of Retailer Brands

Retailer Brand (or Private Label) share is growing across almost all developed countries. Indeed, latest data from NielsenIQ shows that globally Retailer Brands saw 50% higher value growth in the last year, with Retailer Brands gaining share in all regions.

In Europe, Retailer Brand value share grew +1.2ppts to 37% of the grocery market in 2022. NielsenIQ saw increased share for Retailer Brands in 16 out of the 17 countries covered, the only exception was Switzerland (where the share was already over 50%).

Retailer Brand share is around half this level in the USA, but again this has risen rapidly in the last few years. In the first 3 months of this year, Retailer Brand sales in the US grew 10.3%, nearly twice that of national brands (which grew 5.6%), with their share increasing from 18.5% to 19.1%.

This week, Kantar announced continuing strong share gains for Retailer Brands in the UK, with sales in the last 4 weeks up 13% vs only 4% for national brands.

Why is Retailer Brand share growing?

  • Cost-of-living – as inflation bites on household income, shoppers are downtrading to cheaper options which often means moving spend to Retailer Brands.
  • Discounters – Aldi and Lidl are winning in this value environment. Retailer Brand holds a high share in both retailers, over 90% in Aldi.
  • Differentiation – Retailer Brand is a key way for retailers to differentiate their offering away from just offering the lowest price.
  • Profitability – Retailer Brands are more profitable for retailers, particularly on a gross margin basis.
  • Scope – retailers are expanding their own brand offerings across categories. They now operate in many smaller premium sectors including organic, natural and plant-based.
  • Tiering – Retailer Brands are also increasingly sophisticated in price tiering, operating across value, mid-market and premium positionings.
  • Price elasticity – overall Retailer Brand price elasticity is lower than national brands, mainly due to less opportunity to down trade.
  • Understanding – consumer proximity and loyalty card data mean retailers often know much more about shopper attitudes & needs than national brands. Retail consumer insights and fast-to-market operating models often allows them to pre-empt category innovation.
  • Perception – recent studies show 60% of shoppers believe that these products are as good as national brands when it comes to quality, innovation, sustainability and trust, and a quarter believe that store brands are ‘even better’ than national brands.

As Retailer Brand share grows, driven by all the reasons above, brand loyalty will diminish in many segments as consumers increasingly question the premium they are paying for national brands. In the UK RB market share rarely drops much once it has been established. A recession seems to push British shoppers to buy more private labels and once they discover the quality can be the same, they retain the habit.

What does this mean for the CPG marketplace?

  • Co-manufacturing and specialist Retailer Brand suppliers are growing, increasing scale within country and across regions.
  • More branded manufacturers will look to supply Retailer Brands, often establishing meaningful sales and profit streams. But branded and Retailer Brand businesses need to be carefully managed with clear strategy, objectives, resource, and capacity management.
  • Retailer Brand growth means share decline and space restrictions for national brands, brands will need to compete more intensively for precious retail real estate.
  • The biggest threat will be felt by secondary brands as retailers look to cut ranges. The biggest brands will likely continue to grow given their scale together with physical and mental awareness advantages.
  • Retailer Brand category participation varies widely across categories, with low shares in heavily advertised categories like chocolate confectionery and spirits. These low share categories have strong incumbent brands with high perceived differentiation.
  • Innovation has been seen as a keyway for brands to mitigate the Retailer Brand threat, but retailer consumer understanding and space restrictions are likely to impact brand’s ability to effectively innovate.

What does it mean for investors?

  • Co-manufacturing targets are becoming more attractive for investors, investors who in the past have steered clear of food manufacturers focused on Retailer Brand because of perceived lower contract security will reappraise these opportunities.
  • Contract security can be materially improved if Retailer Brand suppliers take the relationship with retailers beyond the purely transactional; embedding themselves in the retailers’ innovation programmes and category management as well as ticking the boxes of cost competitiveness, quality and service.
  • Brand scale and category leadership positions plus proven long-term marketing investment will become more important to investors.
  • Lower multiples will be expected for brands in generic categories with little differentiation and brand equity. Greater need to understand the threat to secondary brands, including category incrementality and power with retailers.
  • Increasing importance of functional capabilities within businesses, including category leadership (working with retailers to mutually develop the category) and portfolio / revenue management.
  • Quality and role of innovation becomes more important, innovation will be more pressurised as shelf space is constrained with increasing need to prove NPD grows the category.
  • It is increasingly important to look at the total retail market, in many countries discounters are not included in EPOS data, and they are the ones that are winning.
  • As FSA has previously stated, in this market environment clear commercial strategy and distinctive and incremental brand development and engagement become even more important.

In this high inflationary environment, we have already seen national brands losing significant volume sales due to shoppers’ reaction to exceptional price increases. The Retailer Brand threat further exacerbates this decline putting additional pressure on brand loyalty and penetration.

Please get in touch with us to discuss the impact of these changes in the global CPG marketplace, how to mitigate the threat to national brands or maximise the opportunity for Retailer Brand suppliers.