Show notes
Our U.S. Retail Analyst Simeon Gutman discusses shoppers’ embrace of a private labels super cycle and how changing consumer behavior could fundamentally change grocery and discount retailers.----- Transcript -----Welcome to Thoughts on the Market. I’m Simeon Gutman, Morgan Stanley’s US Hardlines, Broadlines and Food Retail Analyst. Today, we’ll talk about a fascinating shift in the retail landscape: the rise of private label products and what this could mean for the future of grocery and discount retailers.It’s Thursday, December 12, at 10am in New York.Think about your recent trip to your favorite grocery store. As you reached towards the shelves for your preferred brand of mayonnaise, frozen pizza, or bread, you may have noticed that more and more shelves are stocked with store-brand products. Products that not only match the quality of national brands but often exceed it. This isn't just a minor trend. We estimate private label sales growth will accelerate by 40 per cent to reach $462 billion by 2030. An expansion that will redefine market dynamics significantly.In essence, we think the private label grocery market is on the cusp of a super cycle. This super cycle is a by-product of COVID-era shifts in the way that customers shop and how retailers invest into this trend. At the same time, private label groceries reflect the rise of mega platforms, which are taking ever greater consumer wallet share and are innovating more than ever before.When you look at macro drivers, US consumers have been navigating a difficult post-COVID environment. While inflation is currently moderating, overall food prices remain 30-34 per cent above their 2018 levels. Most consumers are spending more on food at home vs. food away from home, which is a positive catalyst for private label acceleration. Further, consumers are willing to substitute lower priced goods, especially groceries, and these categories present a growth opportunity for private labels. This is the tipping point that we’re talking about. High costs, recent innovation, and innovation like we’ve never seen before – with the rise of these mega platforms, this industry looks like it’s ripe for disruption.The market views private label penetration as a slow, gradual, and ongoing event. But our work challenges this premise. We believe the rate of change in private label growth will accelerate substantially over the next few years. We think private label products will grow at double the rate of the overall grocery market bringing private label market penetration from about 19 per cent in 2023 to about 23 per cent by 2030.This growth is not just about stocking up the shelves. It's about changing consumer perceptions and behavior. Consumers increasingly see private labels as viable alternatives to national brands because they often offer better value and innovation. From healthier ingredients, like no more seed oils, to organic products that you had no idea they can produce, to premium products like frozen lobster ravioli to mushroom and truffle pizza. There are a couple of retailers in the US that are all private label and they are among the fastest growing ones, taking away the stigma of what private label products could mean.So what does this mean for the broader retail and consumer packaged good industries? For grocers and discounters with already strong private label offerings, this shift presents a significant opportunity for growth. It’s also accretive to margins. On the flip side, traditional food companies might face increased competition. These companies have historically relied on brand superiority. But as private label gains market share – particularly in food categories – these national brands could see a hit to their gross profit growth, which could fall from 3 per cent historically to about 2 per cent. And while household and personal care categories have seen some resilience against private label encroachment, the ongoing economic pressures and shifts in consumer spending habits could challenge the status quo.Looking ahead, the rise of private labels could lead to a reevaluation of what brands mean to consumers. As private label becomes synonymous with quality and value, we may see a new era in which traditional brand loyalty becomes less significant compared to product quality and cost-effectiveness.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.