Why Private Label Products Will Be the Savior of Retail

We live in a tough time for retailers. Mall visits have declined substantially over the past decade; they dropped 50% from 2010 to 2013 and have continued to fall since. Major retailers are liquidating, which creates empty spaces within malls, making them even less attractive to visit. At least one estimate suggests that 25% of today’s malls will close within the next decade. Outside of shopping centers, customers are steadily shifting their spending from material goods to experiences. The future doesn’t look great for those in the business of selling tangible things.

But there’s still hope. Private label products — often referred to as store brand or generic goods — will be an important tool in stemming the proclaimed “death of retail.” The value of strong private label brands can’t be overstated. Consider Sears — the struggling department store that has been closing stores at an alarming rate and whose own CEO publicly announced having “substantial doubts” that the company could survive. As Sears falters, its home-grown brands remain valuable. The company was able to sell off its Craftsman brand to tool maker Stanley Black & Decker for roughly $900 million, buying time for the company to try to turn its financials around.

Others are seeing the value of private label too. Brandless, which has dubbed itself the “Procter & Gamble for millennials,” has raised $50 million in venture funding by selling only private label goods. Every item the company sells is unbranded and costs $3. Even Amazon, which has been heavily blamed for retail’s hard times, sold $450 million in private label goods in 2017, most of it through its AmazonBasics line.

So why is it that after years of scoffing at private label we’ll now come around? Three trends hint at why private label is suddenly poised to be a big deal.

Perceptions of quality are evolving. With the volume of data that companies have on customers, we’ve come to realize that they know enough about us to give us what we want. In the same way that we now trust Netflix to move past its role as a digital delivery channel and actually create its own original content, we have faith in retailers to deliver good private label products. According to a recent survey, over 70% of consumers believe that private label products are “just as good in quality” as those from national brands. For millennials, that number jumps to 83%.

Store brand products are no longer viewed as low-quality knock-offs of national brands. In a lot of cases, those in-house brands are quite highly regarded. When Consumer Reports evaluated 15 widely available brands of bacon to find the one that tasted best, its winner wasn’t a national brand like Hormel or Oscar Mayer. The winner? Kirkland Signature — Costco’s store brand. And Costco shoppers swear by a whole range of Kirkland products from paper towels to alcohol. Store brands just aren’t what they used to be.

Millennials and Gen Z are driving sales. Right now, millennials are the largest demographic for retailers, and Gen Z is going to be even larger. Gen Z already accounts for as much as $143 billion in direct spending, and it’s expected to become the largest generation of consumers by 2020. And consumers in these younger generations simply don’t shop like their parents. In fact, 77% of millennials say that they don’t want to buy the same products their parents did. While P&G’s Olay brand is currently one of the top 10 cosmetics brands in the world — generating more than $4 billion in annual sales — it struggled in the 1990s. It wasn’t until 2000, when the brand changed its name (from Oil of Olay to just Olay) and distinguished itself from what consumers’ parents had purchased, that the brand returned to prominence.

Beyond wanting to be unique, millennials simply care less about brand names overall, and they are more open than their parents to trying new products off the shelf. According to recent Nielsen data, 68% of millennials were willing to consider alternative products when making purchasing decisions, compared to just 54% of their older counterparts. As a result, private label products are gaining market share against national brands, and that rate of growth is expected to accelerate.

Retailers need to adapt. The final reason that private label will take off is that it needs to. Retailers can no longer afford to treat private label as such a small part of their strategy. Private label products allow stores to offer their customers lower prices, which can help drive much needed traffic. Even at lower prices, store brands offer much better margins, making them a huge financial win. And because in-house brands can’t be found elsewhere, they limit a customer’s ability to conduct direct price comparisons (and, say, ultimately just buy the item on Amazon). Similarly, because the products can’t be found elsewhere, they help ensure that customers are loyal to your stores.

For years, store brands have been marginalized by consumers and retailers alike. But now, both sides are changing their tunes. Consumers find private label products to be high-quality items that offer them a smart way to save money. Retailers see them as a way to improve their financial performance and create consistent store traffic. As both sides place more and more value on private label, it may well prove that the reports of the “death of retail” have been greatly exaggerated.

Dave Farber is a strategy and innovation consultant at New Markets Advisors. He helps companies understand customer needs, build innovation capabilities, and develop plans for growth. He is a co-author of the award-winning book Jobs to be Done: A Roadmap for Customer-Centered Innovation.