Cat & Jack, a popular kids' private brand at Target, brings in a reported $3 billion a year. It is the largest kids' brand in the country, according to the company, and a true private-brand success story, having been launched in 2016. Across retail sectors, the companies we work with are keen to seize on private-brand opportunities, and it's true that the rewards can be substantial.
Private brands have captured significant market share across various sectors, and their expansion shows no signs of slowing down. Furthermore, private brands are no longer just cheaper alternatives to national brands. Retailers like Trader Joe's and Walmart have enhanced their grocery private-brand offerings with innovative flavors and branding, creating a more elevated aesthetic.
However, the path to success is far from simple. Efforts to expand private brands can derail retailers that fail to understand the nuances of their categories and what their shoppers are looking for.
With January being marked as Store Brands Month, we are focusing on how companies can reassess their approach to growth in this area. Navigating this process effectively—avoiding potential pitfalls—could be the key to thriving in a complex and ever-evolving brand landscape.
Pitfall 1: Failing to align private-brand strategy with the merchandising strategy
In a perfect world, private brands support the overall company vision and merchandising strategy, be it through driving new customers, increasing basket size, or driving higher margin dollars. In reality, retailers don't always define the strategic intent of private brands, as well as not fully integrating private brands into the merchandising strategy.
This causes a misalignment of strategy between the private brand team and merchandising teams. Even if the product development team creates exceptional products, private brands can lack the necessary go-to-market support if they don't have strategic alignments—such as defining the role of the portfolio within the category and setting appropriate price points. This misalignment can result in lower adoption rates and wasted resources for the organization. More importantly, it can cause SKU duplication and overlapping assortments that cause customer confusion and ultimately impact the overall productivity of the assortment.
A more effective approach is for the merchandising team to integrate private brands into the category strategy development process from the get-go. Merchants should assess the category's pricing architecture, understand the competitive landscape, and define the strategic role of private brands within the assortment. Beyond margin growth, private brands can play a strategic role in boosting customer loyalty and expanding the shopper basket. Clearly defining the strategic roles of private brands and developing targeted strategies can help maximize their value to the company. Additionally, factors such as innovation from national brands, brand loyalty, product complexity, and the availability of qualified vendors must be considered when determining where and how to grow private brands.
Pitfall 2: Underestimate the power of branding and lacking sufficient consumer insights to inform product innovation and brand proposition
Brand management is a core capability for CPG companies, but it is often overlooked by retailers as they grow their private brands. There is a quote variably attributed to different CEOs that "Even if our factories were destroyed, we could rebuild the business because our brands are our true assets." This underscores the immense value of branding to a multi-billion-dollar company.
CPG companies typically operate around their brands. They manage P&L by brand, design their organizations around brands, plan media spending for brands, and create KPI tracking focused on brands. This approach stems from their understanding that a strong, well-recognized brand with high consumer loyalty is their most powerful leverage on the negotiation table with retailers and wholesalers.
However, brand building is a relatively novel concept for many retailers, who typically manage their businesses by category. Brand building is often seen as a long-term investment that erodes margins, and retailers often lack the right expertise within their organizations. As a result, retailers often either launch all products under a single store brand or introduce multiple brands without clear consumer positioning. Consequently, these private brands fail to resonate effectively with consumers and, at best, only provide a margin advantage, rather than foster customer loyalty that is needed to drive traffic and sales over time.
Brand strategy is a blend of art and science. What many retailers don't realize is that they actually possess the most valuable asset for brand building—something CPG companies can only dream of—millions of records of transaction data. With this data and advanced analytical tools, retailers can identify micro-consumer segments and uncover their passions and barriers—not just from what they say in surveys, but from how they actually behave in-store. This deep insight can serve as the guiding principle for building the brands' value proposition, visual identity, and marketing collateral.
Moreover, deep consumer insights will empower retailers to launch successful products. With existing purchase behavior data, retailers can bypass some of the costly and time-consuming traditional research methods. Instead, they can quickly identify emerging product trends and conduct rapid test-and-learn experiments on their platforms to verify consumer purchase intent for private brand products.
Pitfall 3: Incorrect pricing and promotions, with excessive discounts undermining the margin advantage of private brands over national brands
Often, when private brands fail to achieve a margin advantage over national brands, it's not due to sourcing issues, but rather the result of incorrect pricing and promotional strategies.
Without promotional funding from vendors, private brands can easily experience margin drain as a result of promotional events. In practice, the merchant teams often plan promotions by category and uses promotional mimicry for private brands—applying similar discounts as national brands to maintain price competitiveness. However, this approach overlooks differences in price elasticity and net margin economics between private and national brands. Private brands will typically need to achieve higher unit uplifts in order to realize positive returns on promotional discounts. As a result, private brand promotions need to be carefully curated to avoid undermining inherent product margin advantages. In addition to building private brand equity, value-based pricing and targeted promotions are effective strategies to address this dilemma. By leveraging transaction data to measure and predict promotional incrementality, retailers can tailor promotions to specific consumer segments, allowing them to drive sales without sacrificing margin.
Another reason for excessive discounts on private brands is the overstocked inventory held by retailers. Without national brands sharing the inventory burden and with imperfect demand forecasts, retailers often resort to extra promotions to clear out private brand inventory, which negatively impacts margins. Better demand forecasting and inventory management are common challenges for both consumer goods companies and retailers. However, leveraging machine learning tools to better understand how different variables affect demand, while partnering more closely with manufacturing partners, could help minimize excess inventory and reduce the need for unnecessary promotions on private brand products.
Pitfall 4: Assuming that growing private-brand sales is a multi-year effort
It's true that growing private brand penetration can be a multi-year effort, especially for retailers who are introducing private brands for the first time or have minimal assortments. Granted, launching new SKUs is indeed a long-term process given development cycles can take anywhere from 6-18 months, depending on the type of product. And retailers who are expanding their assortments typically want to do it in a gradual manner to make sure they are not alienating consumers who have come to expect certain national banded products.
That said, with advances in AI and ML, there are now new tools offered by startup companies as well as established technology players, to speed up the product development process. We have even heard of a global sourcing partner who has cut the time from design to production down to 10 days.
What's more, for retailers with existing portfolios, there are a multitude of levers that could potentially generate incremental sales in the short term and can be implemented within weeks or a few months. These include:
- optimizing pricing and promotions
- enhancing in-store signage
- amplifying private brands' prominence online
- providing better training to store associates on how to talk about private brands and proactively guide shoppers in-store
- improving inventory allocation
These levers may not replace assortment expansion if retailers are looking to significantly drive their private brand sales. Yet, many retailers who pursue assortment expansion as the primary growth lever, without giving full consideration to these other levers, may find that their private brand sales are not reaching their intended target.
Pitfall 5: Expanding private brands in marketplaces without considering margin dilution and operational requirements
Many retailers explore marketplaces and international distribution as strategies to expand their private brand sales beyond their stores or e-commerce platforms. While this approach may seem like a logical way to grow sales by going after new customers outside the four walls, it is often fraught with a different margin profile and execution issues.
The margin for selling private brand products on platforms like Amazon and Walmart is significantly lower due to the fees these platforms charge. It is not uncommon to see retailers who generate a 60-70%contribution margin for in-store private brand sales achieve only 10-20% on Amazon. This means that unless you're driving new customers through the marketplace, you're likely diluting your margin. Retailers can experiment with Amazon to determine if it truly helps acquire new customers or if they're merely substituting a 70% margin with a 15% margin for the same customers already familiar with the brand. The added downside is that these customers may start buying the brand on Amazon at a lower margin, and no longer shop at the retailer's physical stores or website due to the convenience of shopping on Amazon.
Managing products on these platforms might require additional capabilities within the organization. Selling on Amazon or Walmart means directly competing with national brands, often under less favorable conditions. For instance, managing product placement and promotions in a physical store with a limited number of resets is a very different skill set from planning digital traffic and driving conversions on Amazon's platform.
Additionally, even beyond private brands, companies need to consider whether selling on marketplaces is aligned with their brand equity strategy. This is especially critical in categories where brand equity plays a significant role in consumer purchasing decisions. The answer may be a hybrid approach where some brands/products are sold on marketplaces while others are only available at the retailers' stores or online. Finding the right balance and crafting the right strategy requires a defining a strategic intent (e.g., driving new customers) and then implementing a test-and-learn approach that evolves over time.
Making private brands stick
We know that companies see a huge opportunity in private brands. We know that consumers are becoming more and more brand agnostic and go for the brands that best tell a story that resonates with them. We know that consumers can show impressive loyalty to private brands, resulting in market-share gains and higher shareholder value.
However, finding a permanent place in consumers' carts requires retailers take a page from CPG playbooks while leveraging their unique assets and capabilities. This, combined with a nuanced approach that looks at each category's distinct needs to develop the appropriate strategies for private brand growth and optimization, will distinguish those that dabble in private brand and don't see the returns from those that develop a sales and margin-accretive strategy.
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