How Private Label Programs Are Changing The Retail Game

Though private labeling is hardly a new concept in the retail industry, the category has been experiencing a major resurgence in recent years. Not only are more and more retail stores investing in expanding their private label options, these in-store brands generated big sales gains in 2018. In addition to helping retailers control pricing and compete with online direct-to-consumer brands, these exclusive programs are also providing new opportunities for them to connect with younger consumers and create a more unique shopping experience. We took a closer look at some of the big retail players that are betting on private labeling to get a clearer picture to how the category is evolving—and, from there, determined some best practices for retailers looking to develop a successful private label program of their own.

The retail industry has seen an uptick in private label sales over the past year. In the final three months of 2018, private label brands in food and drink, toiletries and other consumers goods logged a 4.3% increase in the U.S. — compared to just a 1.2% increase in sales of the 20 largest brands in the same categories, according to Nielsen. And while private label programs have been recently picking up steam in the US, they have been going strong in Europe for quite some time. According to Koen de Jong, managing partner of International Private Label Consult agency, European private label products “have a value share ranging from 17.7% in Italy to 47% in Ireland.” Analysts have speculated that the growth has been slower in the US due to cultural ideologies. “Part of it has to do with America being the heartland of capitalism,” said Bob Hoyler, research analyst at Euromonitor. “Going back generations, families had really strong preferences for particular brands.” But those priorities are shifting stateside, especially among younger consumers. For millennials that grew up amidst the great recession, brand loyalty is less of a given—and the waning popularity of widespread mass media has lessened the impact of traditional advertising efforts. As such, these youthful shoppers have proven to be more willing to purchase in-store brands than older generations.

The effects of that shift can be seen across the retail landscape as more and more stores are investing in the category. In addition to acquiring a number of ecommerce players in recent years, Walmart has been steadily growing its own selection of private label brands, including its Allswell mattress brand. Kroger has also been investing heavily in the category. In 2018 alone, the grocery chain added more than 1,000 of its own branded items to its stock. Sold under the Simple Truth brand name, these new offerings saw sales increase by 15% in 2018—despite making less than stellar gains in its overall sales. Target has also been similarly aggressive when it comes to private labeling. While the retailer had previously focused on brand partnerships (with companies like Casper in its mix), it overhauled much of its product selection over the past year to introduce a number of new in-house brands across a wide range of categories. In doing so, 2018 generated Target’s biggest annual increase in like-for-like sales since 2005—coming in at a 5% boost.

As retail’s reigning juggernaut, it’s no surprise that Amazon’s private label attempts have generated mixed reviews throughout the wider marketplace. According to TJI Research, the online seller increased its selection of in-house brands from 86 at the end of 2017 to a total of 137 in 2018. While some of that increase includes items sold at Whole Foods, it also accounts for new offerings in a variety of product categories like basic household items, clothing and even mattresses. This kind of aggressive approach is par for the course for Amazon, but the jury is still out on whether or not it will be a success. Back in June of 2018, SunTrust Robinson Humphrey projected that Amazon’s private label business could garner $25 billion in revenue by 2022—with SunTrust Analyst Youssef Squali remarking that “Private label is one of the highly underappreciated trends within Amazon, in our view, which over time should give the company a strong…competitive advantage.” But according to a recent report from Joe Kaciukenas, founder of Marketplace Pulse, "Amazon's private label efforts have been given too much credit, both in their ability to disrupt categories and the capability to utilize internal data.” In particular, research from Amazon seller data platform Jungle Scout found that the online seller has struggled to secure meaningful sales success in women’s and girl’s apparel.

Though private label clothing has been a challenge for Amazon, other retailers are finding more opportunity in the category. “Department stores once promised that private label would not take up more than 25 percent of their stores. But now the gloves are off,” Mary Susan Wilberding, a New York–based retail consultant, recently explained to ApparelNews.net. As the popularity of ecommerce and direct-to-consumer brands continues to mount, more and more retailers are adopting private label lines in hopes of gaining greater price security. “Branded people can’t control prices because of online shopping,” Wilberding continued. "Neither can department stores. [Private label] is the only way I can see that [stores] can control online pricing and be consistent with what they sell on the shop floor.”

Traditionally, private labeling has been seen as a low-price option for retailers—and for some retailers, that continues to be the case. Cost-savings has been a major attribute of Amazon’s private label strategy. By mining data from other brands sold on its platform, the online seller has been able to develop a mantle of “close enough” copy-cat products—then peddles them under their own brand name at a lower price point.

But with the entire retail marketplace going through a transition period, some analysts are suggesting that private label’s low-cost reputation is starting to change. According to the market research firm NPD Group, more consumers are proving to be willing to buy these kinds of products at higher price points—and, subsequently, premium private label brands are growing. “This is not just generic, low-priced products,” explained Marshal Cohen, chief industry analyst of The NPD Group. "Sometimes it has the same attributes as branded products.” With these higher-end programs, retailers benefit from offering a unique selection of products for their store floors—creating a more exclusive and exciting shopping experience.

What can retailers do to build successful private label programs of their own?

Focus on developing your own store’s brand.

When deciding which private label products to buy, consumers are often influenced by their understanding of the retail brand, says de Jong. “Price and quality are obvious,” he explained, “but we also see that the perception of the retailer's image is a determining factor: to what extent does the shopper trust the chain?” That image can be shaped by a variety of different factors as well. For the grocery category, de Jon pointed to things like a retailer’s organic, fair trade or sustainability initiatives. But no matter what product category you’re in, it’s important to pin down a set of brand attributes or causes that can be easily communicated to the consumer. When shoppers have a clear understanding of what your store is about, and can see the clear connection between those goals and the private label products, then they’re more willing to buy.

Establish a core product assortment, then cycle in new special offerings.

De Jong highlighted Europe’s discount food sellers as a prime example of a winning private label strategy. “Their core assortment consists of around 1,000 basic products of high quality at really low prices,” he explained. “They supplement this with in/out actions to create surprise and excitement. They generate margins with a festive assortment, organic products, country themes... That works well.” A variation on this approach could be both applicable and beneficial for bedding retailers. By establishing a core assortment of quality basics, you can maintain a sense of consistency that will help reinforce your branding for the consumer. You can then supplement that base with seasonal and limited-time special offerings that will help generate excitement and drive more regular foot traffic.

Invest in your own direct-to-consumer channel.

If your goal is to compete with the online competition, then it’s important to meet those customers where they are already shopping. That doesn’t mean you should switch to a fully ecommerce strategy, of course. By curating a lean private label line-up and building a simple direct-to-consumer strategy around it, retailers have a chance to recapture some of the foot traffic they’ve lost to online shopping. And by coupling that with a more robust in-store selection of products, these entry-level collections can even help redirect those customers back to brick-and-mortar.

Don’t forget the value of the brick-and-mortar experience.

Whether or not you are marketing and selling your private label collections online, it’s still important to consider your brick-and-mortar experience. As we know, most shoppers still prefer to try a mattress in-store before buying—even if they’re starting their search online. As such, consumers should be able to recognize the same core brand attributes across the entire omni-channel journey. Think of your brick-and-mortar experience as an opportunity to build upon and expand your brand perception with creative merchandising, exclusive deals and exceptional customer service.   

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This article originally appeared in Sleep Retailer eNews on March 21, 2019.

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