Private label could be in store for big growth through 2016: $55 billion to be exact.
Before that happens, the private-label landscape needs to change in several ways, including more emphasis from Wal-Mart; stronger emphasis from a new slate of retailers; and increased consumer acceptance, according to a study from consulting firm McKinsey & Co., released in partnership with the Grocery Manufacturers Association.
“There is potential for a significant shift,” McKinsey associate principal Matt Spanjers said at the Private Label Manufacturers Association's annual show in November. “We believe private-label share is going to grow.”
The $55 billion is what McKinsey calls the “value at stake” — or the potential for shift in dollars from brand manufacturers to retailers if private-label share moves from its current level of 15.2% to 24% by 2016.
Before the industry moves in that direction, more retailers need to step it up and employ strategies similar to those used by what McKinsey calls the “private-label share leaders,” those driving higher levels of dollar share than the rest of the industry.
The research includes input from 73 retailers (including Costco and Wal-Mart) as well as data analysis of nearly 300 Information Resources Inc. categories and 122 Nielsen categories.
While overall private-label dollar share has been flat for years, moving just 0.6% from 14.6% in 1992, a core group of “share leaders” — including Kroger, Safeway and Wegmans — have achieved a 22% private-label dollar share on average.
Such retailers have found ways to price and source private label better than their competitors, according to McKinsey. For instance, take H.E. Butt Grocery Co. With private-label achievements like its H-E-Buddy private-label kids' line, the retailer has maintained a market leadership position despite Wal-Mart's growth in core operating areas. Likewise, Target is growing its private label at two to three points a year as it expands its grocery offerings, the report states. In the snacks category, Target has driven private-label share to 12%, compared to the industry average of 6%. One of the ways it did so was by targeting unique flavors.
Private-label share leaders have even driven private-label dollar share in categories dominated by national brands. For instance, at Wegmans, private-label spaghetti sauce has achieved a 20% share, far exceeding the industry average of 5%.
“These retailers are focusing on private label as a point of differentiation,” Spanjers said. “If other retailers can employ similar strategies, a lot of private-label value can be captured.”
Following the “private-label share leaders” are what McKinsey calls “The Pack,” or retailers like Winn-Dixie and Albertsons that have achieved 15.6% dollar share in private label. Next comes “national-brand share leaders,” or those who focus more on national brands. These retailers, which include A&P and Shaw's, account for a 11.2% private-label dollar share.
The report states that the shift is possible considering what happened in Europe. In the 1990s, when European retailers significantly improved their private-label business, private-label share more than doubled in several markets. And Tesco has increased its share by three percentage points annually.
“In our interviews, current share leaders and private-label ‘up-and-comers’ have shared the aspiration to reach dollar share levels and growth consistent with European leaders,” the report states.
Conversely, if current trends continue, private-label share will be about 16% by 2014 — not much greater than today.
But McKinsey has high hopes that retailers will move toward higher private-label penetration, citing that retailers are getting more sophisticated by rolling out tiered programs, such as Target's Archer Farms and Market Pantry lines.