Why CPG Brands Can’t Afford to Ignore Private Labels Online

For the last decade, private labels have been the biggest “snake in the grass” threat for CPG brands. Today, private label popularity has amplified to levels unseen in the history of the U.S. market, with no signs of slowing down. Experts predict that private label dollar share could hit 25.7% by 2027, which sets the stage for more than 50% growth from the approximately 17% dollar share today.

While there are many underlying factors behind private label sales growth, less perceived differentiation from branded products might be the most alarming. This is especially true when combined with the migration towards online grocery shopping. Most consumers search for CPG products online using generic, attribute-based keywords rather than searching for specific brands. This increases the likelihood of them choosing private label products, particularly now that retailers like Amazon have reportedly started boosting their own items in search results. CPG brands simply can’t afford to ignore this perfect storm of threats.

Private Label Online Growth

According to Nielsen, CPG private label now accounts for 3% of online dollar sales, up from 1.3% two years ago. Certain categories, such as aluminum foil and baby wipes, are feeling the effects more than others. For example, private label accounted for just 10 percent of online aluminum foil sales two years ago, a figure that has since grown to a whopping 27 percent.

While the above chart doesn’t include “difficult to sell online” categories such as food and beverage, it does indicate the potential for aggressive future growth in these segments. This potential is compounded by the fact that Amazon, the biggest online retailer, is only getting started with its private label offerings, especially in the food and beverage category. According to an April 2019 report by Numerator, only 1 percent of the retailer’s CPG sales currently come from private label products. Moreover, less than 2 percent of Amazon’s private label products are in the food and beverage category. This year, however, the company has begun to dramatically grow its private label offerings, thanks in large part to its Accelerator Program.

While Amazon’s aggressive private label plan is impressive, it isn’t the only retailer throwing major weight towards building its own brands online:

  • Costco: Not only has the club retailer been focused on growing its own website sales, but it has also started selling some its most popular Kirkland private label products on Amazon.
  • Kroger: The leading pure-play grocer launched over 200 new private label items in the first quarter of 2019 alone, while growing digital sales over 40%.
  • Target: The popular mass retailer has drastically transformed its business digitally, and it has also overhauled its private label CPG lineups and consolidated them under the Good & Gather brand.

What Should CPG Brands Do?

The proliferation of private label brands and the accompanying increase in competition across digital retailers likely seems daunting. Here are three ways your CPG brand can win against private labels online.

Take Control of Customer Relationships

Historically, CPG brands would create several large advertising campaigns each year that would run through mass media. The purpose of these campaigns was to build demand through widespread brand exposure. To complement that demand driver, brands would deploy various sales conversion strategies with their retail partners. This business model worked perfectly for decades.

Today, however, having a direct relationship with customers is critical to CPG brands’ success. Brands must stop “playing telephone” by allowing their retail partners to own the relationships with customers. With the proliferation of digital and social media marketing platforms, brands should take advantage of this opportunity to speak directly to their customers and build their own relationships with them.

Once brands establish these direct relationships, customers will naturally seek to strengthen the bond. A common way they do this is through commerce. CPG brands should develop their own direct-to-consumer e-commerce websites to fulfill that customer desire. Doing so essentially removes competitive threats from the equation, allowing customers to view your products in a more controlled environment with fewer distractions.

Innovate Innovation

Innovation has always been the equalizer to competitive threats from private label brands. Since many private labels are simply a collection of “me too” products modeled after popular brand name offerings, major CPGs have been able to stay ahead by focusing on innovative product development. But this strategy might not work forever.

Manufacturing barriers to entry have come crashing down, meaning retailers can quickly create new products. As a result, many of them are shifting their product development strategy away from just creating imitations to instead creating innovative products of their own, which limits the competitive advantage of big-name CPGs. A major example of this can be seen with the aforementioned Good & Gather brand from Target, which includes “trend-forward” food and beverage items such as Avocado Toast kits.

This shift challenges legacy CPG brands to think about innovation in a new way. Yes, it is integral to have an amazing product, but that is only the entry fee to compete. Everything beyond the product that is unique to the brand should be the biggest focus of innovation. Today, CPG brands need to consider a concept called “innovate innovation.” This is a strategy that focuses on delivering maximum value to customers through exclusive experiences that can’t easily be replicated in the market. Companies that add value to the online shopping experience and help customers overcome hurdles will be rewarded with a competitive advantage over private labels. L’Oreal, for example, created a Makeup Genius app that uses technology to help make buying new beauty products easier.

Optimize Product Content

Optimizing your product content for search is arguably one of the most effective ways to control your destiny against private labels online. According to OneSpace data, a majority of customers search for CPG products online using generic, attribute-based keywords rather than searching for specific brands. In the Trash Bags category, for example, almost 90 percent of searches are unbranded. The roughly 10 percent of branded queries are significantly comprised of private label brands: 1 percent of searches are for Great Value (Walmart), 0.7 percent are for Kirkland (Costco), and 0.5 percent are for Member’s Mark (Sam’s Club).

With retailers like Amazon reportedly giving a boost to their own products in search results, it’s crucial for brands to secure search visibility and customer loyalty now before more private labels enter the e-commerce market. Doing so requires consistently optimizing your product content in order to both capture a larger share of traffic from unbranded queries and increase your share of branded search.

OneSpace Can Help

OneSpace helps CPG brands centralize, optimize and publish product content that wins top position on the digital shelf. By combining e-commerce search data and content optimization tools with software for content storage and syndication, OneSpace’s Product Merchandising Platform helps brands increase organic search visibility and conversions across multiple online retailers at scale. Contact us to see how we can help.

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