The Rise of Private Labels and How Emerging Brands Can Compete

The consumer packaged goods (CPG) industry is undergoing a transformation driven by the rise of private label products. These store-branded items now challenge national brands in quality and value, featuring improved products and on-brand packaging. As major retailers lead this shift and economic pressures reshape consumer behavior, understanding this trend is crucial for emerging brands.

The Growth and Drivers of Private Labeling

The private label market is experiencing remarkable growth, driven by economic factors and changing consumer preferences. Private-label brand sales in the U.S. surged by 6% year-over-year, reaching $217 billion in sales and 25.5% market share in 2023. 

Key factors fueling this surge in popularity include:

1. Consumer Budget Constraints: Economic uncertainty drives shoppers towards private brand products.
2. Retailers' Motivation: Higher profit margins incentivize retailers to develop and promote their own brands.
3. Inflation and Rising Food Prices: Consumers seek more affordable options as grocery costs climb. In fact, smaller format grocery stores lead in CPG private-label share:

The growth extends across retail categories, with the beauty industry seeing a 10% increase in private branding in 2023. Beauty private labels grew their unit share by 0.3 points, general merchandise by 0.6 points, and home goods by one point.

Consumer sentiment towards private label products has shifted positively. An FMI survey found that 54% of consumers anticipate buying more from private-label brands, compared to 26% for name-brand items. Millennials and Gen Xers without children comprise 36% of private-label food and beverage sales, while households with kids account for another 35%.

As economic pressures persist and retailers continue to innovate their private label offerings, the trend towards store brands shows no signs of slowing. This shift presents both challenges and opportunities for national brands and emerging players in the CPG industry, necessitating strategic adaptation to this evolving retail landscape.

Private Label Brands: Strategies for Success

Walmart's bettergoods - A New Chapter in Private Branding

Walmart's recently launched bettergoods line marks a significant evolution in their private label strategy, described as their "largest private brand food launch in 20 years and the fastest food private brand Walmart has brought to market." The line offers products across various categories, with prices ranging from under $5 to $15.

Bettergoods is positioned on three distinct category pillars: culinary experiences, plant-based and made-without (like without gluten free, or without artificial flavors, colorings or added sugars). This strategy aims to capture a different shopper demographic compared to Walmart's existing Great Value brand.

Walmart launches bettergoods in 2024, making elevated culinary experiences accessible for all

Early insights reveal that bettergoods ice cream shoppers are 67% more likely to be Gen Z compared to Great Value shoppers, with 78% of consumers planning to repurchase. Bettergoods appears to be incremental to Walmart's portfolio- its ice cream shoppers are 13% less likely to purchase Great Value ice cream in the past year compared to other brands.

Walmart's private label products captured nearly 6% of total grocery spending in the year ending Q1 2024, amounting to over $47 billion. With 63% of shoppers indicating a willingness to purchase additional food items from the brand, bettergoods demonstrates strong potential and could significantly impact both established name brands and rival retailers.

Target's Private Brand Success

Target leads in the private label space with over 45 owned brands across various categories. This robust portfolio of private brands contributes more than $30 billion in sales annually, underscoring the significant role of private labeling in Target's overall strategy.

Target's success stems from creating affordable products with premium designs, appealing to savvy shoppers. Their private brands feature visually appealing packaging that rivals boutique products, using sleek typography and carefully chosen colors.

Target's Good & Gather food brand launched in 2019 with 650+ items

The retailer continues to innovate and expand its private label offerings. In February 2024, Target launched Dealworthy, a value-oriented brand with most items priced under $10, spanning categories from apparel to home goods. Additionally, Target announced the expansion of its popular Up&Up brand, further strengthening its presence in everyday essentials.

Target’s new Dealworthy brand, launched in 2024, is targeting budget-conscious consumers

This multi-faceted approach to private labeling, from budget-friendly options to more premium lines, has built strong brand loyalty among consumers, particularly style-conscious Millennials and Gen Z shoppers. Target's commitment to design-forward strategies and diverse price points across its private brand portfolio positions it strongly in the competitive retail landscape.

Navigating the Changing Landscape: Strategies for Emerging Brands

The rise of private labels has reshaped the CPG competitive landscape, presenting both challenges and opportunities for brands of all sizes. As private branding gains momentum, emerging brands must adapt and innovate to thrive. While private labeling poses a threat to emerging brands, it also creates opportunities. Some retailers are more open to partnering with innovative, nimble brands to develop exclusive products or enhance their private label offerings.

Nordstrom's collaboration with 11 Honoré, a direct-to-consumer clothing brand

In this dynamic environment, emerging brands should consider the following strategies:

1. Differentiation through Innovation and Brand Storytelling: Develop unique products or compelling narratives that resonate with consumers. For instance, focusing on sustainability or ethical production can carve out a niche less vulnerable to private label competition.
2. Strategic Pricing Approaches: Carefully position your brand either as a premium alternative to private labels or find ways to compete on cost without sacrificing quality. This may involve rethinking your product lineup or exploring new production efficiencies.
3. Exploring Partnerships with Retailers: Consider collaborating with retailers on private label products. This approach allows brands to benefit from the trend rather than solely competing against it, as seen in Nordstrom's partnership with 11 Honoré for plus-size clothing.
4. Leveraging E-Commerce and D2C Channels: Strengthen direct-to-consumer sales to build customer relationships and reduce dependence on traditional retail channels. This strategy also allows for more agile responses to market changes.
5. Efficient Inventory Management: Optimize inventory levels to remain responsive to market fluctuations. This may require implementing advanced forecasting tools and exploring flexible financing options.
6. Investing in Marketing and Brand Building: Increase marketing efforts to stand out against private labels. This might include influencer partnerships, content marketing, or experiential campaigns that highlight your brand's unique value proposition.

Financing Strategies to Compete and Grow

As emerging brands implement strategies to compete in the private label landscape, securing the right financing becomes crucial. Strategic financial management can provide the resources needed to outmaneuver private label competition:

1. Non-Dilutive Financing Options: For emerging brands, preserving equity while accessing growth capital is vital. Non-dilutive financing solutions, such as those offered by Lunr Capital, can provide necessary funds without compromising ownership.
2. Flexible Funding for Marketing and Inventory: To support increased marketing spend and maintain optimal inventory levels, brands often need flexible financing options. This is where innovative financial partners like Lunr Capital can play a crucial role, offering tailored solutions that align with a brand's growth strategy.

By leveraging these financing strategies, brands can position themselves to capitalize on future market trends. As private-label sales continue to grow (reaching $216.8 billion in 2023), the market is evolving with factors like e-commerce expansion, increasing demand for sustainable products, and changing brand-retailer relationships shaping its future. In this dynamic environment, brands with strong financial backing will be better equipped to adapt and thrive.

Embracing Opportunities in a Changing Market

The rise of private labels represents a significant shift in the CPG landscape. For emerging consumer brands, success in this new environment requires a combination of strategic product differentiation, smart pricing, and careful financial management.

By leveraging innovative financing solutions, such as those offered by Lunr Capital, brands can access the resources they need to compete effectively against private labels without sacrificing ownership or control. As the market continues to evolve, brands that can adapt quickly, tell compelling stories, and manage their finances strategically will be best positioned to thrive in the competitive world of CPG retail.