Branding and Product Innovation Give Private Labels a Boost

Private labels are gaining ground, with nearly two-thirds of consumers identifying in-house creations an appealing alternative to their favorite brands.

With lingering inflation continuing to drive up the cost of many goods globally, consumers are increasingly looking for ways to cut spending without scrimping on quality. And that thriftier mindset has created an ideal marketplace for private label brands, according to data from Ernst & Young (EY).

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EY surveyed more than 22,000 consumers in 28 countries for its EY Future Consumer Index, which found that 69 percent of respondents believe private labels can meet their needs just as well as national brands. And 67 percent of those consumers believe private labels save them money. According to EY partner of retail strategy Nichole Jones, that favorable opinion of in-house brands can be attributed to two major factors.

“We’re seeing consumers really feeling that pinch—they’re feeling the economic pressures and price increases,” she said. “In parallel you’re also starting to see the quality of private label improving. It’s not just the lowest-cost option—you’re seeing private labels with strong branding and great product innovation.”

The investments retailers have made in branding and product seem to be paying off. According to EY’s Future Consumer Index, 57 percent of consumers see private labels as increasingly better products. Jones said retailers are using private brands to be more innovative and fill voids in the marketplace.

“You have a brand that stands on its own that’s serving a specific consumer need, and that is how they start to differentiate,” she said. “Companies are looking at the avenues where they can be innovative, such as focusing on sustainability or inclusive sizing or colors.”

The idea of brand loyalty has started to erode as well, opening the door wider for private labels to gain marketshare. Jones said EY found that 49 percent of consumers agree that brands aren’t important when they make purchase decisions, and she sees that sentiment growing over the next few years.

“With some of the younger generations like Gen Z, there is less affinity towards brands, and they’re starting to see more loyalty with non-branded product,” she said. “With that and the evolution of what’s happening with private brands, there is less importance of brands for certain categories.”

While some retailers such as Target have been wildly successful with private labels, others like Bed Bath & Beyond have struggled. What’s the difference? Jones said incorporating private labels into your product mix shouldn’t be taken lightly, and any brand launch must be backed up with solid consumer data.

“It has to start with consumer-rich insights, and then from there almost doing a portfolio rationalization,” she said. “It becomes more important to look at where you want to invest, be mindful of the investment, and then making sure you are testing and then scaling where you can.”

And retailers must continuously evaluate whether that brand still makes sense for their customer base.

“You may have some that no longer resonate—maybe there’s been a disconnect between what the product assortment looks like and what the consumers are expecting from this brand,” Jones said. “So either you want to evolve or you decide to retire that brand.”

For retailers who can master the art of private labels, the payoff can be huge. Target, for instance, brought in $30 billion in sales in 2022 with more than 50 private labels such as Cat & Jack, A New Day, Knox Rose and Goodfellow & Co.

“The amount of time, money, capital and infrastructure that we’ve built behind Target’s owned brands over the last 30 years would be really difficult to replicate at this scale,” Target’s chief growth officer, Christina Hennington, said earlier this month. “We’ve invested in insights and research that allow us to understand our guests at a deeper level. And we’ve proven over time that we can turn those insights into real, meaningful products that offer the kinds of value our guests have come to expect.”

“The [retailers] that are doing it well are getting better at it,” Jones said. “The private brands sit alongside the national brand, and sometimes the consumer doesn’t even know that it’s a private brand. And the retailer then gets the benefit of the higher margins.”

While private labels see the most success in categories such as food and other consumables, Jones said she sees plenty of growth for these brands in apparel over the next few years. And while high-end fashion will likely stay name-brand focused, she thinks private labels can be an effective strategy for apparel retailers at lower price points.

“I do see opportunity across different sub-sectors of apparel retail,” she said. “You see companies investing, and once they have the right positioning of where they want to play along that spectrum, you’ll start to see that growth.”