What is a private label product? A private label product is created by a manufacturer but sold under a retailer’s brand name. The retailer controls product development, sourcing, packaging, and marketing, allowing them to tailor products to consumer demands and improve profit margins while differentiating themselves from competitors.
Key Takeaways:
Private label products offer retailers better profit margins and brand differentiation.
Retailers retain control over product quality, pricing, and marketing.
Private labels are different from generic brands and provide enhanced brand loyalty.
Walk into any supermarket or big box store and you’ll notice products branded with the retailer’s name, lining the shelves beside famous national brands. Whether it’s food, clothing, furniture or healthcare items, these retailer-owned private label products have become impossible to miss.
As a consumer, you’ve likely picked up a private label item or two on your shopping trips without even realizing it. And for retailers, private labels have evolved into a core business strategy with major impact on the bottom line.
But where exactly do these store brands come from? Who makes them? And why have they grown so exponentially in recent years?
I’ll explore what defines private labels, how the process works behind-the-scenes, the key reasons retailers invest in owned brands, and why consumers are now more open to store brands. You’ll also learn about the latest trends shaping private labels across industries and what the future has in store.
Table of Contents
What Is a Private Label?
A private label product is developed by a manufacturer and sold under a retailer’s brand name rather than under the manufacturing company’s name. The retailer handles product development, sourcing, packaging design, marketing, and other strategic functions related to the private label.
In short, while third-party manufacturers produce the actual products, the retailer retains ownership over the brand identity and consumer relationships. This grants retailers greater control over product quality, positioning, profit margins, and differentiation from competitors.
Private label goods are distinct from generic store brands. Generics simply identify the generic product category while private labels invest in brand building. Private brands also differ from white label goods that are sold to multiple wholesalers or retailers under varying brand names.
The concept of private labeling traces back to the late 19th century when retailers began outsourcing production of commodities like tea, coffee, and dry goods. This allowed retailers to offer competitively priced alternatives to popular national brands. Private labels have now evolved into sophisticated brand identities that stimulate loyalty.
How Do Private Label Products Work?
Retailers initiate private label product development by identifying key consumer demands not adequately met by existing brands. They then outsource manufacturing to third-party producers while handling product design and marketing in-house.
The typical private label supply chain includes:
- Retailer: Responsible for product development, sourcing, packaging, pricing, marketing, quality control, and sale to consumers.
- Manufacturer: Produces goods as per retailer’s specifications. Manufacturers already creating national brand products often have excess production capacity to produce private labels.
- Suppliers: Provide raw materials and other product components to manufacturers.
- Third-party logistics (3PL): Warehouses and distributes final products.
- Consumers: Purchase private label products from retailers.
This outsourced production model grants retailers better control over product attributes compared to reselling national brands. Core functions of research, planning, forecasting, and branding all remain in-house. Retailers also leverage their existing distribution infrastructure.
In some cases, retailers may work with specialized private label manufacturers that solely produce goods to be sold under a store brand. However, national brand manufacturers often reserve a portion of production capacity for private labels.
Common Categories of Private Label Products
Store brands once dominated commodity staples like paper towels, sugar, salt, baking ingredients, canned foods, and other basic necessities. While private labels continue thriving in these high-volume, low-cost categories, they have penetrated nearly every retail sector:
Grocery: Food and beverages account for a bulk of private label sales. Popular products include dairy, meat, cereals, snacks, juices, frozen meals, and bakery items.
Health and wellness: Pharmacy retailers and supermarkets offer affordable over-the-counter medicines, vitamins, supplements under private labels.
Cosmetics and personal care: Private label offerings range from skincare, hair care products to dental hygiene, fragrances, and more.
Apparel and accessories: Retail chains develop clothing lines spanning casual wear, underwear, athletic apparel, shoes, jewelry, handbags, and more.
Home furnishings: Private label offerings include household tools, small appliances, dinnerware, linens, storage items, and outdoor furniture.
Electronics: Categories range from batteries, cables, light bulbs to accessories for phones, tablets, and computers. Luxury retailers also have audio devices.
Mass merchandisers like Walmart, Costco, and Target have extensive private label portfolios spanning grocery, apparel, home goods, stationery, auto accessories, and pet products. Specialty retailers like Sephora, Saks Fifth Avenue, and Best Buy have cosmetics, apparel, and electronics private labels.
Emerging Trends in Private Label Products
As consumer preferences evolve, retailers refresh private label strategies to remain competitive. Some notable trends include:
Premiumization: Retailers like Target and Kroger are elevating private label quality with premium ingredients, formulations and packaging. The emphasis is on encouraging brand loyalty rather than competing solely on price.
Eco-friendly positioning: Sustainability is a priority for modern consumers. Retailers are highlighting green credentials of manufacturing processes, sourcing, packaging, and transportation related to private labels. Emphasizing social responsibility also builds brand image.
Specialized lines: Categories like organic, gluten-free, plant-based, non-GMO products cater to specialized dietary needs. Retailers also have natural beauty lines.
Private label services: Retail chains are complementing private label products by offering specialized services. For example, eyeglass retailers provide optometry exams. Auto chains sell branded car insurance or extended warranties alongside private label oils and batteries.
E-commerce private brands: Digital disruption has forced retailers to develop competitive and targeted online offerings. E-commerce allows gathering customer data to personalize marketing.
As retailers expand market share across channels, private labels will be integral for differentiation and consumer loyalty.
Benefits of Private Labeling for Retailers
Private label strategies offer multiple advantages:
Improved profit margins: National brand markup is 15-30% while private label markup averages 35-55% as retailers have greater pricing flexibility. Private labels also improve economies of scale.
Stronger competitive edge: Unique and high-quality private labels fortify brand identity and foster customer loyalty. Consumers perceive store brands as delivering value for money.
Greater control and flexibility: Retailers choose manufacturing partners to meet cost and quality needs. They control packaging, ingredients, design and innovation rather than relying on national brands.
Risk mitigation: Reliance on a few national brands poses supply chain risks. A diversified portfolio of private labels across price tiers provides a buffer against market fluctuations.
Market expansion: Private labels allow entry into new product categories or untapped consumer segments without acquiring an entirely new brand. Retail giant Walmart earns about $60 billion annually from its private labels.
For retailers, investing in owned brands aligns with long-term growth strategies by attracting value and premium shoppers.
Challenges Faced By Private Label Brands
However, private labeling has inherent challenges:
Initial research and development costs for product design and testing can involve significant upfront investment, especially for higher-quality goods.
Production and inventory risks mean retailers take on greater liability compared to simply reselling national brands. Global supply chain disruptions also increase vulnerabilities.
Perceptions of lower quality can affect consumer trust, highlighting the need for smart branding strategies.
Smaller marketing budgets than national brands who spend billions on advertising makes it harder for consumer awareness. Retailers primarily rely on in-store positioning.
Legal and regulatory pressures range from product quality standards set by bodies like the FDA or FTC to intellectual property infringement issues. Strict compliance guidelines protect consumer safety but increase costs.
By leveraging core strengths around distribution, logistics and existing brand equity, retailers can overcome these operational hurdles.
How Consumers View Private Label Brands
Historically, private labels were considered basic, budget options. However, improved quality, innovative products and effective branding have enhanced consumer perception.
Surveys indicate about 80% of shoppers have knowingly purchased private label items. Close to 60% believe they offer good value for money. Interestingly, 50% did not even realize a product was private label at the time of purchase.
While price remains the incentive for trial, factors like taste, freshness, safety, and nutrition influence repurchase rates. Trust also depends hugely on product category.
For example, consumer confidence in private label over-the-counter medications, dairy products and baked goods has increased significantly while hesitation persists in categories like luxury cosmetics that rely strongly on brand identity.
As retailers address this perception gap through transparent communication and consistency, private brands are poised for exponential market growth.
Private Label Market Share Across Industries
In the US, store brand sales grew 4.6% in 2021 amounting to 21.4% market share. In unit terms, private labels constitute 28% of total CPG volume.
Europe has even higher private label penetration at approximately 40%. Countries like Switzerland, Spain, Germany, Belgium and UK lead in penetration rates across grocery, personal care and other key industries.
At a category level, private label market share growth from 2019 to 2021 includes:
– Beverages: +16%
– Bakery: +6%
– Dairy: +5%
– Snacks: +5%
– Personal care: +3%
Key factors fueling adoption are evolving consumer attitudes, focus on cost savings and some categories like paper products already having private label market dominance.
As retailers enhance supply chain resilience and production transparency, private brands can capture even higher market share.
Predictions for Private Label Trends
Private labels are projected to grow annually at 2-5% over the next few years. However, their trajectory will ultimately depend on wider market volatility, consumer sentiment changes and retailer strategies.
Market analysts predict:
- E-commerce private labels will boom as retailers leverage data analytics to personalize online offerings. Digital shelf placement also makes new brands easily discoverable.
- Direct-to-consumer (D2C) private label brands without brick-and-mortar retail presence will gain popularity. Digitally native vertical brands (DNVBs) like Casper, Glossier and Allbirds inspire this trend.
- Premium private brands will become more common across categories like electronics, apparel, personal care and alcohol. Consumers increasingly believe premium private labels match name brand quality.
- Sustainable positioning will be a huge differentiator and influence sourcing, packaging and production decisions for private label brands.
- Specialized lines catering to dietary preferences, ingredients, religious considerations and other niche demands will allow deeper market segmentation.
With their strong supply chain foundations and customer proximity, retailers are well-poised to unlock private label growth opportunities.
Wrapping Up What is a Private Label Product
I hope you’ve got a clear handle on what private label products are – and what they are quickly becoming.
We’ve covered a lot of ground – from the behind-the-scenes manufacturing process to potential pitfalls and future opportunities. Most importantly, you now understand why more shoppers like you and me are trying and loving store brands.
Private labels have cemented themselves as part of the retail landscape today. And they’ll likely continue growing in reach and quality.
But their future does depend on ensuring transparency around production ethics and priorities beyond pricing – things I as a consumer care about too.
I’m curious if you had any lingering questions I didn’t address or new thoughts on private brands after learning all this. Feel free to reach out! I don’t claim to be an expert but I’m always happy to continue the conversation.
Either way, thanks for sticking with me on this info-packed yet eye-opening guide to the world of private labels!
FAQs About Private Label Products
What is a private label?
A private label product is manufactured by a third-party producer but sold under a retailer’s brand name rather than the manufacturer’s. The retailer handles product development, design, sourcing, marketing and more while outsourcing production.
How do private label products work?
Retailers identify consumer demands not met by existing brands. They outsource manufacturing to producers but retain control over branding, packaging design, pricing, promotions and sales. The retailer leverages its distribution network and retail stores to sell the private label products to consumers.
What are the benefits of private label products for retailers?
Key benefits include improved profit margins, stronger competitive edge from unique offerings, greater control over quality and design, risk mitigation through portfolio diversification and opportunities to expand into new markets or product categories.
What are the disadvantages of private labels?
Challenges range from high upfront R&D costs, production and inventory risks, establishing trust and brand awareness given smaller marketing budgets compared to national brands and stricter legal compliance