Propelled by data-driven insights and innovation, private label products hold the potential to differentiate through surprise and delight while building customer loyalty and competitive advantage.

Several years ago, private label and store brands received an unexpected bump. While these products have always held important real estate on grocery store shelves, supply chain shortages prompted more consumers to experiment with things they might not have previously considered. Since the pandemic, nearly 40% of US consumers have tried new products or brands, according to McKinsey & Co. Consulting, New York.

In 2020, private label products saw unprecedented double-digit dollar gains of 19.5%, according to the Private Label Manufacturers Association (PLMA), New York. By the end of 2022, PLMA calculated annual store brand sales increased 40% over a five-year period. These double-digit gains continued through the first quarter of 2023, according to Circana, formerly IRI and NPD, Chicago.

As of Q1 2023, growth of private label is up in dollar sales 10.3% across items and channels, twice the gain of national brands, which grew 5.6%, according to Circana. Double-digit gains in store-brand sales included several fresh departments with bakery at 17%. In bakery, 57% of sales were generated by manufacturer brands in the first quarter of 2023 with sales up 6.1% versus a year ago. Store brands, while lower in sales, increased 17% year-on-year in the first quarter.

With this traction, many believe private labels once again have the potential to achieve great things, but these products currently stand at an important crossroads. Better-stocked shelves mean consumers have ready access and a clear choice between national and store brands. For this reason, retailers will need to step up their private-label game by defining and refining the product’s value proposition. These steps will be necessary to propel private label purchases from a short-term switching behavior to a long-term purchase decision.

Defining essentials

Opportunity is ripe as consumers continue to change their shopping behaviors. They are using multiple tactics to combat food inflation while also trading up to affordable luxuries. The definition of the U.S. shopper also continues to change. Today, households are at their lowest point ever with an average of 2.5 persons per household. Seventy percent of households don’t have children, and 29% have decision makers under the age of 40 years old.

In regard to inflation, 90% of shoppers are concerned about budget increases, according to a survey conducted by The Harris Poll on behalf of Alpha Foods, Glendale, Calif. FMI’s U.S. Grocery Shopper Trends 2023 Food Value Matrix found that 68% of shoppers report spending more on groceries than they did one year ago. Households with children reported the greatest increase in grocery spending year-over-year. Older consumers are most concerned about rising food prices, with 80% of Boomer consumers showing concern in February 2023 versus 69% in October 2022.

With food inflation at 8.5% in April, consumers still perceive food inflation as high. A February Consumer Trends Tracker survey from dunnhumby, London, found consumers perceive at-home inflation to be twice as high as actual inflation. Many consumers remain unsure of the current environment, leaving consumer inflationary expectations virtually unchanged from last year, according to the Survey of Consumer Expectations from the Federal Reserve Bank of New York.

For example, those aged 18-35 talk about inflation as being less severe than those aged 36 and older. Consumers feeling the inflationary pinch will often look for ways to absorb these costs by saving in other areas. A consumer survey conducted by Category Partners, Idaho Falls, Idaho, found that, in fresh bakery, 45% see prices as somewhat higher. 35% see prices as significantly higher and 19% haven’t noticed a change. To compensate, some consumers are shifting from bulk/value items to smaller and lower-ticket items, according to Circana. Because consumer perceptions and economic conditions vary state-by-state and region-by-region these aspects should be considered accordingly when developing private label products.

Making adjustments

As a result of ongoing economic pressures, consumers across multiple demographics seek to create lower-cost, restaurant-like experiences at home. At-home versus away-from-home remains a larger portion of consumer spend, with 80% of meals being prepared at home. The desire for out-of-home quality and taste is likely fueling private label success in these high-growth categories, but this assumes quality is on-par with branded competition, according to Melissa Altobelli, principal, strategic solutions group, Circana.

Better-for-you products continue to drive growth in many bread segments. A recent survey conducted by Circana found that 40% of primary shoppers plan to eat healthier, and low-carb products continue to be in high demand. But the strongest growth rates in bakery private label are in the tortilla, flatbread and naan categories with double-digit growth rates. These multi-functional items appeal to consumers who look to achieve cost savings and create restaurant-like items at home. This could include tortillas to make homemade breakfast burritos (a convenient option for on-the-go eating), pizza using a flatbread crust for a quick lunch or after-school snack, and better-for-you air-fried tortilla chips.

In the buns and rolls category, bulk rolls and dinner rolls are also fueling private label success, accounting for the majority of bread/bun/roll sales. In addition to buns and rolls, private label bagels, croissants, tortillas and flatbreads also show dollar and unit sales growth. For private label breads in particular, Circana is seeing higher share gains in value channels, but gains are smaller in grocery. Value options can further up the ante to provide for the whole family or for sharing with a group. As gatherings become popular again, sharing sizes teamed with value are a winner.

Within the private label sweet baked goods category, sales are up 12% in dollars and flat in units. Private label cookies and donuts showed both dollar and unit growth in the latest 52 weeks. Private label pie dollar sales growth driven by whole pies also showed unit sales growth. Conversely, there was a decline in units sold of individual/snack pies. These indulgent items allow instore bakeries to accommodate the desire to treat oneself as a form of self-care.

More upscale artisan bread products, flatbreads and naan show significant private label growth and remain an underdeveloped part of the category and an option for expansion. Private label offers a number of opportunities to experiment with recipes to diversify among and/or to provide a value option in the better-for-you segment, according to Altobelli.

“Economic uncertainty and inflation continue to fuel private label growth in many categories,” she continued. “Consumers are making several behavior changes to reduce spend during these pressured times – shifting from grocery to value channels like mass/club, shifting from premium brands to value brands, and shifting from national brands to private label.”

Know the audience and its needs

To create a thriving private label brand, manufacturers must understand the geography, demographics, retailer profile, category and shopper when creating products. Currently, purchases of private label tend to skew older, attracting younger Boomers and retirees. But budget-conscious Millennials are also passionate about exploring private label products that push the boundaries of flavor and innovation.

Adventure Bakery, Sanford, Fla., works with smaller companies looking to scale up their products. The woman- and minority-owned business includes a team of seasoned professionals and a network of sister companies to meet the needs of private label manufacturers. This includes custom recipe formulation, R&D, production, packaging, warehousing and fulfillment.

Bakery on Main, Hartford, Ct., is another private label manufacturer ready to move an idea from concept to a consumer-ready product. As a private label partner, the Bakery on Main team includes dedicated food scientists and food safety and R&D experts. This includes assistance with third-party certifications such as USDA Organic, Non GMO Project, Certified Gluten Free, vegan, Paleo Friendly and Kosher to meet the need for specialty products.

Like other grocery items, inflation is also pushing up prices of traditional flour brands. Unit sales of private label flour year-over-year in April 2023 were up almost 9% when compared to April 2022. The growth of private label flour is currently outpacing that of the retail flour category and gaining share from brands at 3.3 percentage points by volume, according to Ardent Mills, Denver. In response, the company launched BakeHaven private label flour targeted at independent, small-chain grocery retailers and convenience stores.

Coming full circle

To generate buzz around private label products and to create a setting where store brands are actively sought out, building customer loyalty is critical. In the grocery and club spaces, Wegman’s, Kroger, Aldi, Trader Joe’s and Costco are well-known for making buzz-worthy private-label products in creative, of-the-moment flavor combinations that push traditional boundaries. Such an approach is key to creating a comprehensive customer experience that’s increasingly seen as the new retail currency, something that’s hard to replicate online.

“Store brands are a powerful retailer component that provides important points of differentiation, competitive advantage and builds consumer loyalty,” said Peggy Davis, president, PLMA.

To create such an environment, thriving private-label brands will need to prioritize agility, bringing new products and new flavors to market quickly. This includes the creation of captivating LTOs and seasonal products designed to surprise and delight. Such an approach, along with the use of competitive value pricing, can help ensure private label products continue to build strong customer loyalty and a profitable model today and in the future.