Private label continues to be a winning growth strategy for retailers. Per Nielsen, private-label brands in the U.S. grew three times faster than national brands towards the end of 2017. Treehouse Foods, a leading private-label manufacturer, has doubled its revenues from $3 billion to over $6 billion in just four years. Amazon.com's private-label business is set to generate $7.5 billion this year, and more than triple by 2022, per SunTrust Robinson Humphrey. Costco’s Kirkland Signature private-label brand is already generating $30 billion in sales.
Given that private label provides much higher margins than national brands, the growth of the category is likely to continue for many years. However, it's most likely the opening act as retailers take private label to new levels by adopting more sophisticated strategies.
The first strategy is to flip private label’s pricing on its head away from just the entry level price tier to a premium price strategy. This was successfully adopted by Safeway’s private-label brands, which have proven very successful in organic foods and super-premium deli meat. Safeway hired top talent from premier consumer packaged goods brands like Frito Lay, who knew how to build brands but also knew how to innovate faster than national brands. Given the challenges that big CPG companies are facing, it’s likely that the talent drain to leading retailers will continue.
The second strategy is to leverage private label’s margin and flexibility to drive new business models, like subscription commerce and services. Subscription business models are a CFOs dream given the consistent cash flow and greater forecasting certainty they provide. The incremental profitability of private label enables retailers like Amazon to offer even deeper discounts if a customer signs up for subscribe and save, creating a virtuous cycle of profitability and cash flow. Similarly, Best Buy is hiring hundreds of sales people to go into consumers’ homes as part of a free service where they offer technology needs to any home. These in-home advisors are paid a salary and not a commission to avoid creating a high-pressure sales environment. And while they recommend a wide range of brands, the ability to offer private label gives Best Buy more margin flexibility to offer this service to see if it will scale.
Both of these strategies fit into a broader plan for winning "superconsumers." Within food and beverage, my research has shown that 15 percent of a retailer's customers drive 50 percent to 65 percent of private-label sales, and 40 percent to 55 percent of total retail sales. These private-label superconsumers aren't just motivated by price, but by emotion and many unmet needs as well. These aren't consumers who are seeking products purely by the lowest price; they're more interested in innovation and premium products. Their love for the retailer makes them especially receptive to subscriptions and services. Superconsumers are the tip of the spear for innovation and the canary in the coal mine for any issues or red flags.
These superconsumers are a way for a retailer's chief marketing officer, chief merchant and chief financial officer to align and agree. And more often than not, having organizational alignment and all the cross-functional oars row in the same direction is as valuable as any strategy.
Eddie Yoon is the founder of EDDIEWOULDGROW, a think tank and advisory firm on growth. He is the author of the acclaimed book, Superconsumers: A Simple, Speedy, and Sustainable Path to Superior Growth, published by Harvard Business School Press.