The Real Threat of Private Labels
A recent report from Cadent Consulting Group, Sea Change for Private Label, predicts $64 billion in sales will be transferred from national brands to private labels in the coming decade. That’s a significant shift that is being driven by the growth of large retailers like Amazon, Target, Walmart, and Macy’s investing heavily in their own private labels. While many brands think Amazon is their biggest threat, we looked at the data to find the real threat of private labels isn’t so clear.
The Appeal of Private Labels
For decades, retailers have sold products under their private label brands. Some, like Trader Joes, have made it their entire business. Private labels serve two functions for retailers. First, by making the products themselves, retailers are able to better control the margins on their cost of goods sold, helping to improve their profitability. This can be a game-changer in an industry, like grocery, where margins run in the one- to three-percent range.
The second reason private labels are so appealing to retailers is that it gives customers a cheaper priced option. And for a product like canned corn, for example, switching costs for a customer is low since the raw ingredients are essentially the same for a national brand as they are for a private label. And because people purchase food frequently, customers are more open to trying something new.
Private Labels Online
We were curious to understand how private labels impact online sales so we looked at four eCommerce giants: Amazon, Walmart, Macy’s, and Target to better understand the threat each poses to national brands.
As we’ve written before, Amazon has been pushing their private label business in the last few years, growing their AmazonBasics and dozens of other private label brands that cover most product categories. We looked at 78 of their private labels and found that 88 percent of all of these conversions were from AmazonBasics products, with more than half in the electronics category alone.
While Amazon private labels cover other categories, the success of each varies. It’s women’s fashion brand, Lark & Ro, for example, brought in just $1 million in revenue for the first half of 2017 while Macy’s private labels accounted for 25% of all their online conversions last year. And there are similar stories playing out at Target and Walmart, where both have developed their own brands that play to their strengths and drive significant conversions.
Walmart, Macy’s, and Target’s private label conversions have a more equal distribution — none of their private labels takes more than 31 percent of their total private label sales. Each of tends to drive the most sales in the private labels categories that play to their strengths.
Walmart is strongest with their Mainstays and Better Homes and Gardens labels in the Home and Furniture categories, as well as Great Value in the Food category.
Macy’s leading labels are Style & Co, INC International Concepts, Charter Club, and Karen Scott all in Women’s Clothing.
Target’s most successful labels are Mossimo Supply Co. and Cat & Jack, in Sports Fitness & Outdoors and Women’s Clothing, as well as Threshhold in Home.
While Amazon leads all across these four eCommerce sites in terms of total transactions from private labels, they still only account for just over one half of one percent of all purchases on the site. Conversely, Macy’s used private labels to drive 24 percent of their online purchases in the last 15 months. Walmart saw a surprising 7.8 percent of their purchases from private labels, and Target saw 3.4 percent.
The Real Threat of Private Labels
The real threat of private labels depends on the niche in which you operate. Highly commoditized products with short buying cycles have more to fear from retailer’s brands than highly differentiated products that are purchased infrequently.
Yet every brand marketer, regardless of category, should be threatened by the exclusive data that private labels have access to. Private labels can only be purchased on sites that live behind walled gardens, which empower these retailers with better data than what they share or sell back to brands. This data can become a source of competitive advantage for retailers, making it more difficult for national brands to compete against.
With such a large and growing share of consumer dollars across eCommerce marketplaces, brands that have banked exclusively on Amazon may want to rethink their strategy and focus across multiple marketplaces when combating private labels. And as these private labels continue to take market share, national brands will need to continue to find new ways to look outside their own walled gardens to understand and influence consumer behavior.