For some investors, the phrase "premium private-label brands" is a contradiction in terms. Calling an item a private-label good was at one point a polite alternative to the word "generic," which in some cases was used interchangeably with the term "cheap."
That's changed over the years as retailers figured out how to better handle their in-house brands, and consumers realized buying a house brand didn't necessarily mean settling for less. A Coresight Research report from this month, however, says we may be at the tipping point at which private label consumer packaged goods are more important to retailers than those supplied by third parties such as Procter & Gamble.
If that is indeed the case -- and all signs point in that direction -- then that leaves grocers like Kroger (NYSE:KR) and Costco (NASDAQ:COST) well positioned for the future. Ditto for Target (NYSE:TGT).
Maximum disruption is here
It's gone largely unnoticed, but 2018 was a big one for the nation's private-label business. Last year's 5.8% sales growth of so-called white-label goods marks a clear acceleration from 2015's 2.2% growth. That far outpaced the growth of more familiar brands of consumer packaged goods as well.
Unsurprisingly, the major makers of those consumer-packaged goods like the aforementioned Procter & Gamble and Unilever (NYSE: UN) are now being forced to respond to the undeniable threat. P&G, for instance, acquired feminine care brand This is L. in February as a means of differentiating itself from its own bigger names like Always and Tampax.
It's that type of response that leads Coresight Research to suggest the disruption is now very real.
Coresight's findings are underscored by complementary data from Food Navigator USA, too, which noted earlier in July that 81% of consumers now purchase a house brand every time they make a shopping trip. More than 50% of shoppers report they frequent a particular retailer specifically to buy their private brand, adds Food Navigator USA. That data supports another finding from Coresight's report "Private Label to Drive Disruption in CPG." That is, the premium and near-premium caliber of private-label consumer goods is now taking share away from the value-oriented sliver of the white-label market.
Winners of the private-label movement
For the record, Costco is the undisputed king of private labels. Its Kirkland-branded goods represent the entirety of its in-house selection of packaged goods and generated $40 billion worth of revenue for the club-based retailer last year. Kirkland account for roughly one-fourth of Costco's total business now. However, that leaves only modest room for additional growth on this front.
The two retailers that are best positioned to capitalize on their large distribution networks and connection with customers -- now that they've figured out the winning private-label formula -- are Kroger and Target.
For Kroger, that means an ongoing expansion of its Simple Truth brand, which already drives $2 billion of annual sales for the grocer. Last year, it began testing Simple Truth "shops within a store." It also began offering Simple Truth branded goods in Walgreens stores last year, clearly crossing the wholesaler/retailer line.
Target's private-label business isn't as clear-cut, which is a good thing -- the brick-and-mortar retailer doesn't necessarily want its in-house brands to stand out when sharing shelf space with goods sourced by external suppliers. To that end, many consumers and investors will be surprised to learn that Target exclusives like Archer Farms snack foods, Sutton & Dodge steaks, Smartly home consumables, and even Cat & Jack children's clothing are all brands owned and operated by Target itself.
The company appears to have already been aware of the data recently provided by Coresight and Food Navigator USA, though. In September, it began a staged rollout of a new in-house brand called Good & Gather, which executive vice president of food and beverage Stephanie Lundquist said at the time would eventually become Target's biggest private-label brand.
Doing something useful with the data is the key
It's data that ultimately helped companies like Target and Kroger create their own brands from scratch -- something that's only become feasible in recent years.
In that light, both companies borrowed a page from the playbook of Amazon.com, which has built an enormous private-label business of its own by looking at data from its shoppers' spending habits. And like Amazon, Coresight's report notes that being the point of sale "gives retailers a powerful database they can analyse to better understand customers, something CPG [consumer packaged goods] brands cannot match."
This helps brick-and-mortar stores to capitalize on the most attractive aspect of in-house brands, which, according to CB Insights, is considerably stronger profit margins. Whereas grocers may only turn 1% of their sales of third-party goods into a profit, stores can realize profit margins of between 25% and 30% on sales of their house-brand goods.
The winners of this shift are going to be the organizations starting to move rapidly along the learning curve and retailers with deep reach and scale. That puts Kroger and Target at the top of a short list. Costco is already there but with not as much upside left to tap.