What is the optimal share of private label brands vs national brands? 35-40% according to an analysis of two Dutch and two U.S. retail chains.
Private label is in the center of much of the action in the packaged goods industry around the world both online and offline. But there is still a lot of uncertainty on the optimal share of own brands. In this post will look into how retailers can use private labels to increase customers' value.
A study on US consumer packaged goods indicated that the gross margin for private label brand is on average 30% higher compared with national brands. However, increasing the private label share can be dangerous as consumers can feel constrained in their choice.
For example, the U.K. chain J. Sainsbury increased the private label share well above >60%. However, they had to scale back their EMV ambitions as the share of wallet started to decline. Similarly, US firms Sears and A&P both had to reduce their historically high private label shares as store traffic, revenues, and profit got hurt.
To get more facts on the table let’s look at the data from two Dutch grocery retail chains (Albert van Heijn and C1000), a U.S. grocery retail chain and a US pharmacy.
The private label share has a significant impact on customer behavioural loyalty and customer value. A higher private label share will increase the retail chain’s share of wallet, share of items purchased, and share of shopping trips as well as the customer topline and margin value, but only to a certain limit.
The relation between private label share and customer value is ∩-shaped. The optimal share of private labels is 35-40%, any more or any less will hurt both the top line and bottom line.
The optimal private label share varies significantly across categories.
How can you act on this information as a a category or CRM manager? First and foremost it is important to selectively promote private label brands, and position private label brands, to keep the optimal level across customer segments. If the private label share is too low, it will hurt your margins, the same if the share is too high.
For example, Tesco, the U.K. retailer, has a well-diversified portfolio of private label brands to fulfil the needs of distinct segments. This helps them to not exceed the optimal private label share among private label heavy customers. Another strategy pursued by Target, a U.S. retailer, is to fill the private label brands with more emotions and imagery to encourage customers to buy them in categories where light private label customers consumers are currently reluctant to buy private label.
Happy private labelling! / the Formulate team