“Inflationomics” Is Driving Consumers To Store Brands

Last year’s “temporary” spike in inflation is well on its way to becoming this year’s new normal. That’s bad news for the economy as a whole, but good news for the burgeoning private label business.

According to a new survey by First Insight, three out of four consumers say their confidence about spending has been eroded by rising prices and the prospect of more to come.

In spite of robust wage hikes and low unemployment, more than 80% reported that inflation has them shopping by price.

That’s a shift from a year ago when the economy was awash with stimulus money and consumers went on a spree of pent-up demand and so-called “revenge spending.”

Significantly for future consumer behavior, four out of ten surveyed said they are cutting back on name brands.

This is an acceleration of a trend that was already developing. Last year, retailers in the U.S. offered an average of more than 4,500 private label products online, and private label brand penetration was more than 13%, according to retail analytics firm DataWeave.

According to the Private Label Manufacturers Association, private label sales hit a record $199 billion in 2021, a 1% increase from 2020.

As gas and other prices began to soar this year, store brand growth appears to have accelerated, up 6.2% in February from a year ago. Companies that have made private-labeling a focus are reaping the results. Target’s
TGT
private-label business last year was nearly 30% of the company’s $106 billion in sales, giving the retailer a robust profit margin rate of 6.5%.

But putting out a line of private label products does not automatically guarantee success. Quality is still part of the consumer calculation, as Bed Bath & Beyond
BBBY
discovered. In spite of an ambitious private-label strategy, the company reported a staggering 22% decline in sales for the three months ended Feb. 26, with comparable store sales down 12%.

Neil Saunders, managing director of GlobalData Retail, told The Wall Street Journal that the company’s private label efforts have been “nowhere near powerful enough to drive customers in what remains a very crowded and competitive space. The quality of the new brands is, in our opinion, nowhere near as good as it should be.”

It is clear that while the strategy of a company might be spot on such as growing a private label business, the execution needs to be tested and validated by consumers BEFORE it launches or you can run the risk of the results mentioned above.