Private Label Revolution: From Budget Alternatives to Retail Powerhouses

The private label market has witnessed remarkable growth globally, transforming from its initial perception as budget alternatives to becoming a significant force in the retail industry. As retailers and resellers increasingly invest in their own brands, private label products now span across diverse categories such as food and beverages, personal care, household goods, electronics, and more. This expansion has been fueled by consumers' changing perceptions, with private label offerings now being viewed as credible and competitive alternatives to national brands. Retailers strategically use private labels to differentiate themselves and foster customer loyalty.

According to a report by Technavio, the global market for private label food and beverages is expected to experience substantial growth, with an estimated increase of USD 281.15 billion projected from 2022 to 2027, at a compound annual growth rate (CAGR) of 6.39%. In the second quarter of 2022, private label products accounted for 19.4% of the total value sales in the fast-moving consumer goods (FMCG) sector on a global scale. When it comes to market penetration, Europe emerges as the leader in the private label segment, boasting the highest share of FMCG private label sales. In Western Europe, private labels command a significant 36% market share, while in Eastern Europe, they maintain a substantial share of 14.7%. North America closely follows with a 14.4% market share. However, in the regions of Asia Pacific, Africa, and the Middle East, private labels have a more modest presence, capturing a 6.1% share, and in Latin America, their presence is even more limited, at 2.3%. These regional disparities underscore the varying levels of acceptance and popularity of private label products in different parts of the world.

Source: NielsenIQ

On a global scale, private label products have established a strong presence across various categories, with some of the most notable encompassing packaged foods, beverages, personal care essentials, household necessities, and more. This expansive array of private label offerings has garnered recognition for its adeptness in meeting the diverse array of consumers' everyday requirements and preferences. Noteworthy categories that wield substantial influence within the global landscape include tissues and hygiene, as well as basic basket foods, both claiming a prominent 14% market share. Directly following, dairy and alternatives also hold a compelling 13% each, underscoring their resonance with consumers. With 8%, snacks follow suit in capturing a significant portion of the market. Simultaneously, home care and health, each with 6%, contribute to the multifaceted nature of private label choices available to consumers. Beauty and personal care, while somewhat smaller in comparison, still maintain a foothold with a 3% market share within the global market.

Global Private Label Market Share in 2021

Source: EY

Industry Drivers/Opportunities

The global private label market has been driven by several key industry factors contributing to its growth and success. These drivers vary from market demand to retailer strategies and changing consumer perceptions. Also, the COVID-19 pandemic influenced the private label food and beverage market. Consumers' focus on health led to a preference for private label and natural foods. Increased demand for ready-to-eat food during lockdowns also affected the market positively. Some of the significant industry drivers for the global private label market include:

Consumer Demand for Value
One of the primary drivers for private label products is the growing consumer demand for value-oriented offerings. In times of economic uncertainty or when consumers seek budget-friendly options, private label products often provide a more affordable alternative to national brands without compromising quality.

Consumer Demand for Clean Label Products
Clean label products are known for their transparent ingredient lists and lack of artificial additives and preservatives. This trend resonates with the increasing focus on health and wellness among consumers. Brands that adopt clean label characteristics in their products can appeal to consumers who want real, natural ingredients. As people prioritize products aligning with their values and health goals, clean label choices can set brands apart, increasing demand for private labeling clean label products.

Improved Quality and Branding
Retailers have invested significantly in enhancing the quality and branding of their private label products. As a result, private labels are no longer seen as generic or low-quality alternatives; instead, they have become credible and competitive brands in their own right.

Margin Enhancement
Private label products typically yield higher profit margins for retailers compared to national brands. As retailers have more control over pricing and sourcing, they can negotiate better deals with manufacturers, thus improving their overall profitability.

Private Label Expansion in Various Categories
The private label market has expanded beyond traditional sectors like food and beverages to encompass a wide range of categories, including personal care, household products, apparel, and electronics. This diversification has opened up new growth opportunities.

Brand Trust and Loyalty
As the quality and reputation of private label products have improved, consumers have developed more trust and loyalty towards private label brands. Positive experiences with private label products have led to repeat purchases and brand advocacy.

Retailer Investment in Marketing
Retailers have been investing more in marketing and promoting their private label products. Effective advertising and promotional strategies have helped raise awareness and drive consumer interest in private label brands.

Inflation
Rising inflation has heightened consumer price concerns, especially in food and grocery expenses. This has led to a more cautious spending approach and an active search for money-saving options. Around 20% of global consumers turn to private label products as a cost-effective choice, driven by favorable pricing from retailer-owned brands.

Sustainability
Private labels have a significant opportunity in the growing demand for sustainability. By 2030, around half the global population will look for sustainable products, representing potential revenues of USD 1 billion for FMCG products. Private label FMCG brands can fill this gap as major brands struggle to establish trust and credibility in sustainability. Private labels are better positioned to deliver a clear and credible brand narrative that appeals to eco-conscious consumers.

Innovation
Innovation holds significant importance in the retail industry, especially during disruptions like the pandemic. Private labels go beyond price and promotion differentiation, encompassing aspects like range, quality, ingredients, and packaging. Private label manufacturers can excel in challenging markets, while retailers can utilize these strategies for distinction. The potential of innovative packaging to reduce environmental impact, combined with increasing disposable incomes, heightened consumer awareness, and expanding retail markets, presents extensive opportunities for private labels.

These industry drivers have collectively fueled the growth of the global private label market and are likely to continue shaping its trajectory in the future. As consumers seek value, retailers innovate, and brand trust grows, private label products are poised to remain a significant force in the retail industry.

Restraints

Private label restraints encompass limitations or regulations that manufacturers place upon the distributors or retailers selling their private label products. In order to uphold quality, manage pricing, and safeguard their brand reputation, manufacturers may establish a range of constraints on the entities involved in selling their private label merchandise. Several prevalent forms of these restraints encompass:

Minimum Purchase Requirements
Manufacturers often set minimum purchase requirements for retailers regarding their private label products. These requirements ensure the partnership's profitability by necessitating retailers to order a specific minimum quantity. This approach streamlines production, reduces costs, and maintains steady product availability for retailers, fostering a mutually beneficial relationship.

Pricing Restrictions
Manufacturers commonly apply pricing restrictions to their private label products, including minimum and maximum limits. These restrictions aim to sustain competitiveness and match the product's market position. Minimum prices prevent undervaluing, while maximum prices prevent excessive pricing. This strategy secures a balanced alignment between market attractiveness and profitability for both manufacturers and retailers.

Distribution Restrictions
Manufacturers often enforce distribution limitations on private label products to control where they are sold. This approach achieves two goals: averting retailer price conflicts and preserving a sense of exclusivity. This selective distribution prevents harmful price rivalry and nurtures a distinct identity, safeguarding the product's value and market positioning.

Supply Chain Requirements
Supply chain requisites are integral in manufacturer-retailer collaborations for private label products, delineating protocols for storage, handling, and transport. These mandates uphold product quality and uniformity, showcasing manufacturers' dedication to stringent standards across the supply chain. This cooperative strategy heightens customer contentment, nurtures trust, and solidifies the brand's image of dependability.

Exclusivity Clauses
Exclusivity clauses in manufacturer-retailer agreements for private label products mandate that retailers exclusively sell the manufacturer's items, avoiding competition. This strategy decreases competition, amplifies brand visibility, and nurtures loyalty, benefiting manufacturers and potentially giving retailers a unique selling proposition. However, striking a balance is vital to avoid limiting product diversity and flexibility.

Quality Control
Quality control holds immense importance for manufacturers of private label products, as they institute rigorous standards to ensure consistent excellence. This practice is vital in upholding the manufacturer's brand reputation by ensuring that the private label items meet anticipated quality levels. This commitment fosters customer loyalty and trust, safeguarding the brand's image from potential harm stemming from quality concerns.

Packaging and Branding
Packaging and branding guidelines set by manufacturers for private label products ensure a consistent presentation that reinforces brand identity and builds consumer trust. These guidelines cover packaging design, labeling, and overall branding, contributing to familiarity, professionalism, and quality assurance. By adhering to these standards, manufacturers create a cohesive image for their product range, fostering customer recognition, loyalty, and confidence in their offerings.

Advertising and Promotion
Manufacturers frequently set advertising and promotional directives for retailers selling their private label products, guaranteeing a uniform brand representation. These rules sustain brand coherence, prevent inconsistencies, and preserve the image of exclusivity and excellence. Despite curtailing certain creative liberties, these guidelines ultimately reinforce brand reliability and consumer familiarity, bolstering the manufacturer's standing for stability and superiority within the market.

While some restraints can be beneficial for both the manufacturer and the retailer, in some cases, these restraints could be viewed as anti-competitive practices that hinder fair competition in the market. Laws and regulations related to private label restraints can vary from region to region, so it's essential for manufacturers, distributors, and retailers to ensure they are operating within legal boundaries while establishing agreements regarding private label products.

Private Labels Evolving in Modern Retail

In essence, the global private label market has transcended its origins as budget alternatives to become a formidable and transformative presence within the retail landscape. As consumers' preferences shift and economic factors come into play, private labels have evolved into credible and competitive choices, reshaping the industry's dynamics. Through innovation, strategic investments, and alignment with changing market trends, private labels have not only found their place alongside established brands but have also carved out a unique niche by offering value, quality, and diversity. However, as the market continues to expand, finding the delicate equilibrium between fostering growth and ensuring fairness through constraints will be pivotal in sustaining the enduring success and credibility of private label products.

For a detailed analysis of the private label industry, read the reports for the private label industry in the Americas, Africa, Asia, and Europe on Tridge's website.