There’s a reshaping of consumer purchasing habits playing out in food grocery to the advantage of private label, leaving branded manufacturers with a tough nut to crack to recapture shopper loyalty.
Price and affordability have driven an increasing appetite for retailer own-label brands during the current inflation cycle dating back to 2022. And, until consumers see some solid evidence that the cost of their shopping basket is coming down, those considerations are likely to remain top of mind.
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Nonetheless, the future challenges run deeper for branded food producers, which have pushed up prices – some would say excessively – to their detriment as volumes were lost and the price gaps with private label widened.
At the same time, the quality of own-label food products has improved, begging the question of why should consumers pay more for a brand when they can find similar or equal quality in private label? Sure, that is no doubt determined category by category but the general picture is the same.
The benefits of premium private label
Now consider the premium proposition. It’s a factor some industry experts argue is likely working to the advantage of own label – position a premium product on shelf at a price point that sits below the branded option.
“Premium private label might actually be the story for the next 18 months. The consumer might go up a bit in price but not to the full extent of a brand,” suggests Cyrille Filott, a global strategist for consumer foods, packaging and logistics at Netherlands-based Rabobank.
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By GlobalData“The theme for the next couple of years will be bridging that price gap. Will we see the brands coming back to fill that gap with new brands or reinvigorated brands, or coming in at lower price points?”
Filott says European growth in retail own label has outpaced branded food products in the last decade, helped by the likes of the discounters Aldi and Lidl but also Mercadona in Spain and it’s a trend that is likely to continue.
“It’s been a phenomenal success story,” he contends. “A consumer that a branded company loses to private label, to get that one consumer back is not straightforward, partly because of the price gap and also the quality difference is less than it used to be.”
Private-label premium ranges in grocers are no longer just stamped with the supermarket’s own brand name but have individual identities that create brand awareness and a sense of familiarity. And even, perhaps, boost perceptions around quality and value.
Sainsbury’s Taste the Difference and Morrisons’ The Best, for example, which Anna Del Mar at AlixPartners argues not only “rival branded products in taste and presentation” but also provide a “strategic lever” for food chains.
“As private label becomes more profitable, retailers are also making smarter decisions about shelf space, using premium lines to elevate perceptions of value ranges without compromising on quality,” the senior partner for consumer goods at the consultancy says.
“The dual appeal of both quality and affordability is ultimately reshaping consumer habits and expectations.”
Recent market-share gains by own-label foods over branded counterparts are likely to continue, especially given the margins they offer retailers, Del Mar adds.
“While branded products still play a role in category growth and attracting shoppers, some retailers, like M&S, have shown that a high-quality private label-only model can be commercially successful.
“The trend suggests private labels will remain a core part of the grocery landscape.”
Food price effect
There are also the dual questions of whether branded food manufacturers have effectively priced themselves out to the advantage of private label and whether branded retail food prices will ever return to pre-inflation cycle levels.
Such a prospect seems doubtful, especially as long as inflation remains elevated. And in the case of the UK for instance, it has long been advocated that consumers don’t pay enough for their food to the detriment of farmers, and, producer’s margins and profits.
Clive Black at Shore Capital observes that the “key ignition” point for the flock to private label in the UK, and no doubt other parts of Europe, too, was the start of the Ukraine war and the surge in energy prices. But inflation had already reared its head as a result of supply shortages during the pandemic.
Food and soft drinks inflation peaked in the UK at 19.2% in March 2023, a level not seen in more than 45 years, for example. While it has since retreated, it’s on an upward path again.
The most-recent figures from the Office for National Statistics showed inflation for the category accelerated for a fourth straight month in July to reach an annualised rate of 4.9%, the fastest pace since February of last year.
“We saw that surge of inflation in 2022 and what was quite interesting then was how people traded down from proprietary brands into private label,” the Shore Capital director says.
“But that was augmented by the determination of proprietary brand owners to cost recover, so they actually stimulated the drive into private label by widening the gap in price between proprietary brands and own-label goods.”
Store brands
Demand for private-label foods in the UK could also now be cemented by the rise in labour and operating costs, stimulated by government policy to increase the minimum wage and employer national insurance contributions, along with higher business rates and sticky energy inflation.
Of course, those factors also apply to both camps but will be a “real headwind for big people operators” in the industry, Black suggests, namely large branded food manufacturers.
“From 2022-23, we saw Aldi and Lidl, and equally M&S, regain some trading momentum after a quite challenging pandemic. Those three businesses account for about 23-24% of the UK food market, and they’re 95% private label,” he says.
Away from the discounters, Black also argues the “fastest-growing area of private label for the last couple of years has been premium” with the likes of the Tesco Finest and Sainsbury’s Taste the Difference ranges.
And as the cost of eating out in bars and restaurants remains elevated, consumers are seeking premium grocery products such as ready meals to replicate that dining experience in the home.
“In aggregate, that is also boosting private-label participation because the vast majority of those goods are private label, not proprietary brands,” Black argues.
Branded food manufacturers are going to face an uphill task to rein in the price differential with own label and it’s likely going to take more than just pricing and promotional measures to recover, or at least, hold on to market share.
Waging a “promotion battle” rather than cutting prices is a strategy “that can only run for so long”, Black says.
Balance in choice
Nevertheless, the Food and Drink Federation in the UK suggests it’s a question of balance and choice for consumers, where affordability and loyalty will continue to play a part in private label and branded purchasing decisions.
“Price-conscious consumers will always want the option of a private-label product, but also many British shoppers buy brands they know and love, or look for exciting new products to try,” Caroline Keohane, head of Industry growth at the industry body, says.
“One driver behind a rise in private label market share will be explained by an increase in consumers shopping at discount grocery stores, which have seen a combined 5.3% rise in market share compared to five years ago.”
Keohane also suggests it’s the branded manufacturers that tend to lead the field in innovation alongside entrepreneurial businesses and challenger brands.
“It’s these brands, start-ups, and scale-ups that drive the high volume of innovation and exciting new product development that we’re used to seeing in the UK. These are the companies most likely to push boundaries or test consumer appetite for new flavours, ingredients or products, with own-brand labels then following these trends,” she argues.
Del Mar at AlixPartners shares that view but still with a caveat around pricing.
“To maintain market share, brands will need to rethink pricing strategies or enhance perceived value through taste, packaging, or other differentiators,” she says.
“While branded products remain popular, they risk losing credibility if recommended retail prices climb to unsustainable levels – especially when premium supermarket own-label products offer comparable quality at lower prices.”
Challenge for brands
Once such fix for branded manufacturers is shrinkflation but as Rabobank’s Filott infers that strategy has its drawbacks, and consumers are now well aware of that game plan, often with some resentment and push back.
Changing ingredients or coming out with new options or flavours is another course of action, Filott says, but adds the crucial barrier is erasing the historical pre-inflation reference price point in some way. That’s the challenge.
On the other side of the coin, own-label manufacturers have become more savvy, adept and in-tune with consumer and market dynamics.
“Private-label producers have grown to a certain size that they can innovate and close the gap from a quality point of view,” Filott says.
“There are branded companies doing private label as well but for me, that’s not necessarily a winning strategy. Private-label companies are starting to establish brands because they are now so big that they can actually invest behind building a brand which fits in the middle of the price range.”
It seems there’s no quick fix for branded operators, however, particularly those playing in the legacy brands arena where loyalty is not a done deal, especially when Gen Z are not so dispositioned toward such brand loyalty.
Recent developments in the US packaged foods market are a case in point. The dividing up of Kraft Heinz, for example, and the earlier split of Kellogg Co. into two companies that are destined to fall into the hands of Ferrero and Mars.
“Brands absolutely need to reshape the portfolio to access the profit pools where they have the ‘right to win’ – especially where Gen Z isn’t as big a market as in other demographics,” Del Mar says.
She proposes three inherent “winning strategies” that are in play: “a ruthless and objective streamlining of brand portfolios; continuous innovation…which is what keeps customers loyal to brands; and a sharp focus on cost reduction and margin improvement”.
But equally for own label, Del Mar adds: “To secure long-term customer loyalty, private-label products need to be authentically embedded within the retailer’s overall brand proposition. Retailers can build on lessons learned from branded products – particularly around how innovation and novelty drive sales.”
