SKU’d Thoughts 36: How are private labels are impacting the retail space?
Last week I saw a tweet about how Amazon is knocking off Allbirds, the DTC self-proclaimed world’s most comfortable shoes, and how “there are no rules anymore — if you build a product that works, Amazon or Facebook will copy it”. This tweet has since gotten close to 700 retweets and sparked a debate about “copying”. This got me thinking about private labels and how they are impacting the retail space.
Shopify encyclopedia defines private label as a product that is manufactured by a third-party manufacturer and sold under a retailer’s brand name. Some popular examples are Costco’s Kirkland Signature, Target’s Archer Farms, Walmart’s Great Value, and Amazon’s Amazon Essentials.
Retailers can decide to launch their own brands to compete with national branded items (ex. General Mills, Frito-Lays, Ralph Lauren, etc.) for several reasons including: declining margins, competitors successfully growing private label brands (Target reported second-quarter sales growth of 3.4%), and protection against Amazon’s increase of share in various categories (Amazon has 559 exclusive and private-label lines).
Whatever the reason, private labels have been outpacing national brands over the last half-decade. According to a Private Label Manufacturers Association study, private label brands’ volume of products rose 33.2% over the past five years, while national brands rose less than 1% and sales of private labels rose 41% over the same period, compared to 7.4% for national brands.
As I have previously written, in CPG and retail, you are onto something if consumers fork over their hard-earned cash and the data proves that consumers find private label to be just as good as nationally branded goods. Private label brands provide consumers with more options within categories and are more often than not priced cheaper than their national branded counterparts. So it makes sense that retailers easily win over consumers in staple item categories like toilet paper, bottled water, etc. The price pressure from private labels has pushed national brands to react in order to stay competitive which in turn benefits consumers. During my days at Kraft Foods, private labels and national brands were manufactured at the same contract manufacturers and that hasn’t changed so there is parity with quality, at least within the food and beverage space.
Back to Amazon and Allbirds. This is not the first time the e-commerce giant has been accused of knocking off brands. Just like other retailers, Amazon got into the private label business to grow its bottom line. According to a Gardner L2 report, Amazon’s introduction of multiple exclusives and private label brands is to cater to the majority of Amazon customers who prefer small brands. My take is if a $95 pair of Allbirds is truly the world’s most comfortable shoes, it shouldn’t be concerned with a $45 copycat. Consumers will vote with their wallets and we’ll see if the Allbirds can sustain its $50 premium.
Cross posted on Medium