Private label foods: 2 things to consider.
By Jonathan DeVito
2 things you should be thinking about.
The rise of private labels as a threat to branded food & beverage products gets a lot of attention, but the trend itself has been building momentum for a while. For instance, John Quelch, a professor at HBS, and David Harding, a partner at Bain & Company addressed manufacturers’ concerns surrounding private labels in an HBR article dating all the way back to 1996. At the time of the article’s publication, grocery private labels generated between $40 and $50bn in sales (PIVITAS estimate). That figure is expected to exceed $200bn in annual sales by 2020.
High growth is also being observed in foodservice.
According to Performance Food Group (PFG), a leading broadline foodservice distributor, private brands held over 42% share across their street (independent restaurant) customers in 2016. This was up from approximately 37% in 2010.
While growth in private labels aren’t new, their journey upstream across new categories and pricing tiers is new. In the past, private labels typically competed by offering competitively priced staple items (see video below). Many of these products experienced upticks in volume that coincided with economic downturns.
The story today is much different. Private brands are now branching out across various organic, ethnic, sustainable, and premium-priced categories. Case in point: compare the Whole Foods 365 private label products pictured below with the products featured in the preceding video.
The battle between branded products and private labels probably isn’t going to cool down anytime soon, but manufacturers on both sides should keep two key points in mind as the situation evolves:
»The ability to build meaningful and emotional bonds with consumers will be a key differentiator in retail: Private labels have historically competed by balancing features, quality, and competitive pricing. Authenticity and purpose-driven relationships with consumers have often taken a back seat. This is an important caveat because in today’s environment consumers are increasingly drawn to products that resonate with them on the basis of standing for something. In fact, many consumers are willing to pay more for these products. As the future unfolds, competing on features and price may not be enough. “Soft” emotional attributes will increasingly be required to compete. In this regard, branded products may have a leg up because they are often backed stories, history, and iconic consumer recognition. However, private labels are becoming more sophisticated in their ability to connect with consumers and branded manufacturers would be wise not to rest on their laurels.
»In foodservice, product innovation will be the way forward: B2B purchasing is usually driven by economic and rational decision making as opposed to emotional factors. Private labels are well-positioned in foodservice because identity and associated nostalgia offers brand-names limited defensibility. Branded manufacturers will need to achieve differentiation through product innovation, better features, and superior performance relative to price. However, the risk for brand-name players is that this may turn into a cat and mouse game with private labels chasing branded products across new categories and product tiers. Also, R&D spending levels in food & beverage manufacturing tend to trail other industries. It remains to be seen whether or not branded manufacturers will have the desire to aggressively pursue product development to stay ahead of the pack.
Let’s talk about these points and what manufacturers should consider moving forward.
Retail: meaningful connections and brand affinities.
Growth in private label has historically been fueled by the fact that these products can mimic successful brands and compete with them by offering acceptable quality at competitive prices.
The catch is that private labels haven’t typically relied on factors such as purpose and authenticity to build meaningful relationships with consumers. This is important because consumers are increasingly attracted to products that are perceived to actually stand for something. For example, Milward Brown, a market research firm, found that brands feature a meaningful (emotional or affinity-based) difference command a 13% premium over alternatives.
Moving forward, the ability of brands to resonate with consumers, often on the basis of authenticity and/or purpose, will be a central point of differentiation. Simply offering the right balance of attributes and attractive pricing may not be enough. Branded manufacturers may even have a leg up over private label in this regard because many already enjoy iconic recognition and longstanding relationships with consumers.
A good example of a manufacturer that has leveraged authenticity and purpose to drive growth and differentiate itself is Chobani. Chobani has built itself on having a connection to real and ethnically authentic foods. As Hamdi Ulukaya, founder and CEO of Chobani, stated in an interview with CBS News, “[Chobani means] shepherd. It’s a very beautiful word. It represents peace. And it meant a lot to me because… I come from a life with shepherds and mountains and all that stuff.”
Within a relatively short timeframe, the company has absorbed 34% of the US yogurt market, overtaking Yoplait as the number one player. As for price, according to prices posted on retailer websites, Chobani frequently commands a 30% +/- premium over private label Greek yogurt products.
It should also be noted that private labels are starting to develop more sophisticated brand identities. For example, Simple Truth, a Kroger brand featuring numerous sustainable, organic, and clean label products offers affordable food that can still be “enjoyed the way nature intended”. The success of Simple truth is evidenced by the fact that it was only introduced in 2012 and now generates approximately $2bn a year. Further reading can be found here.
The battle is moving upstream. Brands, whether they are private labels or brand-names, will increasingly have to find ways to make genuine connections with consumers and defend these relationships. Branded manufacturers may have a head start, but private labels are eager to catch up.
Foodservice: product innovation.
Foodservice buying behavior tends to be driven by rational decision making where operators focus on features versus price. In other words, tangible and economic factors are more important than emotional factors.
Private labels have an advantage in this environment. They can replicate products and offer them at lower prices while branded competitors are less able to rely on emotional bonds with customers as a point of defense. This isn’t to say that brand or product identity are entirely irrelevant, but these factors are typically less important in foodservice and play different roles than they do in retail. In various PIVITAS studies, we’ve found that there is a subset of operators that question whether not private labels actually deliver sufficient quality and performance. While nostalgia probably isn’t a primary differentiator, better branding may help to convince hold-out operators that private labels are credible substitutes for brand-name products.
The real way forward in foodservice will be to outpace competitors via innovation and product development. This may mean that branded products will have to find new growth categories, retreat from other categories, and/or replace existing offerings with more competitive versions.
This entails difficult decisions and risks.
Branded manufacturers will have to tread lightly and be careful not to turn this into a cat and mouse game where private labels “chase” branded products into new categories.
It also remains to be seen as to whether or not branded manufacturers will have the appetite- no pun intended- to outpace competitors via new product development. Although an imperfect benchmark for “innovation” food & beverage manufacturers tend to invest less in R&D than businesses across other industries. For example, food & beverage manufacturers included in the Stategy& Innovation 1,000 report spend around the equivalent of 3% of revenues on R&D compared with an average of about 5% across companies from all other industries highlighted in the study.
For now, private labels may have a distinct advantage in many foodservice categories. Reinvention and innovation offers a way forward for brand-names, but future actions will need to be carefully considered and backed by a willingness to evolve.
Tying it all together.
As branded products and private labels continue to compete for market share the factors separating the wheat from the chaff will be very different in retail versus foodservice.
In retail, many of the winners in retail will be those that tout authenticity and purpose to drive growth and build meaningful, defensible bonds with consumers.
Foodservice will be a battle over product innovation. Exploring new markets and building the right product portfolio will be what keeps leading manufacturers ahead of the pack.
Players on both sides of the aisle should keep these two points in mind as they seek to defend their positions, create new products, and navigate the road ahead.
About the author:
Jonathan DeVito is the Founder of PIVITAS. He works with a diverse group of clients to help them develop actionable product and pricing strategies.