The CPG Battleground
Nearing a tipping point, innovation will be key.
Private labels’ U.S. market share is at an all-time high, but in order for retailers to build on the momentum of their store brands, they will need to find ways to compete on three core factors: price, customer experience, and brand recognition.
It is important to keep in mind that, despite private labels’ recent growth, their overall market share in the United States remains far lower than store brands’ penetration in Europe. While the economic recovery slowly but surely continues to gain traction, innovation will become the true battleground for private labels and national brands as they continue to compete for market share.
This CPG “tug of war” will lead to varying outcomes in the next few years, depending on the store aisle in question. National brands will continue to dominate some categories while private label will continue to gather steam in others. In some categories where private labels have gained share in recent times, they will be susceptible, and this is the area in which innovation will play the biggest role.
Retailers should pick the spots on the shelves where they hope to gain share and where they can concede to the brand-name CPG companies. National brands are cutting some prices on their premium products and introducing lower-priced “back-to-basics” product alternatives, which means private labels must maintain their low-price reputation while building on other capabilities.
Together with their manufacturing partners, retailers will need to improve their proximity to the marketplace to keep costs down, while looking to increase margins. They must also glean deeper consumer insights—shopper context—by shifting from traditional category management thinking. This requires tapping several data sources such as POS, hand-held, and loyalty cards to provide a holistic view of the consumer, and it will also facilitate innovation around store formats to better promote private label products.
Innovative marketing is becoming increasingly critical because the quality gap between private labels and national brands has closed to such a large extent. In many cases, there is not enough of a discrepancy for consumers to shift back to the national brands simply because the recession is ending, and this has helped retailers build loyalty to their brands. Wegmans is a prime example of this quality, brand loyalty and recognition. Costco is another good example with its Kirkland brand.
At the same time, however, we’re going to see national brands of fast-moving consumer goods put a lot more marketing muscle behind creating more pull-oriented strategies. In addition, these companies are continuing efforts around brand rationalization, sustainability and differentiating some of their products’ features. They are looking at new media channels, such as Procter & Gamble’s announcement that it would begin testing an online retail site.
To combat these efforts by the national brands, retailers should need to use their available data to determine the optimal frequency and channels of contact with their consumers.
Up for the Challenge
More retailers should take a play from Safeway’s book. On the grocer’s official blog, employees contribute the content with tips and “opinions” that often simultaneously promote private label awareness and guide readers directly to specific products. In one recent post by “Kate-Mom,” the full-time Safeway employee shared a trick for “eating better and not breaking the bank” while telling a short story about when and how she served ice cream. The blog entry was entitled, “Portion Control Ice Cream – Safeway Select Ice Cream Cups,” and it includes a picture of Safeway Select-branded ice cream.
Overall, private labels should continue to see overall growth. In its “American Shopper Study,” market research firm BrandSpark International recently surveyed more than 50,000 consumers and found that 66% of respondents believe that private label brands are usually an extremely good value for money. Meanwhile, 56% of Americans have purchased more private label products in the past 12 months, and 59% think private label or store brand products are just as good as national brands, according to the BrandSpark study.
In his best-selling book, Predictably Irrational (HarperCollins Publishers, 2009), Diamond fellow and Duke University professor of behavioral economics Dan Ariely devotes a chapter to the “effect of expectations” on consumer behavior. Consumers’ expectations are deeply influenced by appearance and description, which points to the emphasis retailers will need to keep on both packaging and promotion of their house-brand products.
The battlefield is evolving, as both national brand CPG manufacturers and retailers look toward engaging the shopper with their respective labels in new ways. We’ll see both sides increasingly utilize social media and mobile communications. Each camp will push the other to greater heights, with innovative strategies creating more competitive categories, better pricing and assortment, and higher-quality products—and consumers will be the beneficiaries.
*Doug King, managing partner of Diamond Management & Technology Consultants’ Consumer Packaged Goods practice, has extensive experience helping clients lower their costs while improving their revenue and quality.
*Anbu Mani is a principal in Diamond Management & Technology Consultants’ Consumer Packaged Goods practice who specializes in business and technology strategy and execution.
