Most people in the packaging community are aware that the U.S. private label market has outperformed the market for national brands in recent years. That said, while many experts predicted more dramatic growth in years to come, private label growth has slowed to some degree. To that end, where is the private label industry headed? Will we see continued expansion, with more advanced product and packaging development? Will we see the U.S. consumer products market look more like Europe, where private label brands are often just as prominent as their national brand competitors? Or will the status quo continue with private label growth but at a moderate pace? Below we take a close look at these questions as well as some other trends and relevant topics relating to the private label market as a whole.
PRIVATE LABEL IN EUROPE
The European retail industry has historically been fairly consolidated (particularly in the U.K.), with a handful of large conglomerates exerting outsized control over the market. With more power in the hands of retailers, the European private label industry has become a dominant force and a model for other regions of the world. As a point of reference, private label accounts for over 50 percent of consumer product sales in the U.K., while that number is well under 20 percent in the U.S. The European private label market has been a trendsetter for other regions around the world, with extremely high consumer perception and innovative product development, packaging and design. For instance, European retailers pioneered the three-tier private label structure (i.e., value, national brand equivalent and premium tiers) that has become prominent in many retail markets around the world. In addition, European retailers such as Tesco (U.K.), Carrefour (France) and Lidl (Germany) were early to the game in offering private label products in niche categories such as organic, gluten-free and pet food, among others.
PRIVATE LABEL IN THE UNITED STATES
In contrast, the U.S. retail market is relatively fragmented, and in any event private label brands have long been underfunded afterthoughts. Copycat designs predominated in the U.S. private label industry, where retail packaging was intended to mimic the packaging of national brand competition. That said, these trends have changed in recent years. Large retailers such as Walmart, Target and Safeway have made significant investments to create distinctive and diverse private label portfolios, and that movement is trickling down to smaller regional players. U.S. retailers now invest heavily in packaging and design (and even innovation) to set their private label offerings apart, and many large U.S. retailers have adopted the three-tier structure that was pioneered in Europe. The recent recession has spurred dramatic growth in the private label market, and private label sales have grown almost 20 percent over the last three years. That said, private label sales grew only 2.3 percent in 2013, and the dramatic growth seems to have hit a proverbial glass ceiling, according to a recent report by IRI.1 Nevertheless, the recession undoubtedly had dramatic and lasting effects on consumer perceptions and, accordingly, on the budgets of many retailers around the country.
WHAT WILL NOT HAPPEN IN THE U.S. PRIVATE LABEL MARKET
Many experts have looked at the huge private label sales numbers in Europe and drawn parallels to the U.S. market, while identifying tremendous growth potential in the U.S. market. Just a few years ago, many experts predicted that private label market share would grow to 25 percent or even 30 percent and up in certain channels within the next five to 10 years. As it now stands, those numbers seem unrealistic. While we may (or in all likelihood, will) experience modest growth in the coming years, the private label market does not seem primed to explode in the near future as many predicted. Further, while many large U.S. retailers have adopted a three-tier private label structure with fulsome portfolios, many smaller regional retailers are only now starting to experiment with private label products, and outside of the large national retailers, relatively few of the regional players will have diverse portfolios of multi-tier structures.
WHAT WILL HAPPEN IN THE U.S. PRIVATE LABEL MARKET
If there is one certainty, it is that there will be a great deal of change in the U.S. private label market in the coming years. It seems likely that the private label market will experience slow yet steady growth for the foreseeable future. More and more retailers will build tiered, diverse private label structures while bolstering their portfolios in niche categories (organic, natural, gluten-free, deli, etc). The market will continue to evolve from copycat to distinctive branding, design and packaging, and many large retailers will continue to focus on private label product development and innovation — in some cases, we may even see private label brands being first to market with product and design innovation.
Separately, the rise of e-commerce will likely strengthen private label growth in the medium and long term. While only 1 to 5 percent of consumer product sales are currently attributable to online transactions, some are predicting those numbers to exceed 25 percent in the next five to 10 years. What is more, many e-tailers have plans in the works to enter the private label game. For instance, FreshDirect.com recently introduced two private label brands, and Amazon is rumored to be building a private label line of consumer products as well. While these developments will not have an immediate impact on the private label market, it is not unreasonable to expect that e-tail private label sales will become a factor together with the emergence of e-commerce as a viable sales channel.
Another significant trend that will bolster the growth of the U.S. private label market is the continued emergence of deep discount retailers such as Aldi. Deep discounters are very prominent in Europe, and in most cases a majority of their products are private label brands. Aldi has very aggressive growth plans. It intends to open approximately 130 new stores per year (a 62.5 percent increase from its current growth rate) while growing its current stores by 50 percent in five years. Moreover, we will likely see more entrants in this market segment, as Lidl (a large German deep discounter) plans to enter the U.S. market with an aggressive growth strategy starting in 2015.
The U.S. private label market has grown significantly in recent years and will likely see continued (albeit measured) growth. The recession has created seemingly permanent changes in consumer perceptions and spending habits with respect to private label brands. While the growth rates may not be astronomical in the near term, the private label industry is growing and building a very formidable base thanks to changed consumer preferences, retailer focus on brand building, and the emergence of deep discounters, among other factors. Smaller retailers should start to follow the large players’ lead with tiered structures for their private label portfolios and highly differentiated brands in niche categories. They should (and will) forget the copycat era and think in terms of building brand equity with engaging packaging, product innovation and promotional activities around their private label products. Bottom line is that the retail environment will not mirror Europe in the foreseeable future, but private label is building a foundation that will continue the transformation of the industry for years to come.