private label vs brand category champion

This article is taken from the March edition of our thought leadership series; “An Innovation CEO’s View of the CPG Industry”, written by Catalyx CEO & Founder Guy White.

We recently discussed how unprecedented FMCG pricing was a collective own goal that will lead to dramatic trade down, reduction in consumption frequency, and re-adjustment to a private label controlled high-street. Diving deeper, some brands now have a serious issue on their hands.

Following the recent consumer price hikes it is no surprise that private label goods are booming. These are exploding to over 40% market share in Europe and 22% globally according to Kantar, with much of the growth coming from above-average income earners – the backbone to branded consumer goods. 

Private label’s appeal amid price hikes

It’s certainly true historically when it comes to private label that what goes up doesn’t come back down. All previous private label growth periods have stuck, even when economy picks up. If retailers are making better margins from these products, that can start to make the future very uncertain for the branded players.

At the same time, if consumers are consciously or subconsciously making choices to use or consume less often to save money, even if they are loyal to branded players, growth will drop. This, in turn, will create a double whammy of headwinds that spell difficult times for brands caught in this position.

But this is a dramatic over-simplification of what is happening, and will continue to happen.

First of all, we know that private label gets stronger where private label is already strong. And these tend to be in more price elastic categories where brands haven’t been able to innovate sufficiently to justify their price premium. But there are plenty of categories where this isn’t the case. Not many people brush their teeth with private label toothpaste, or remove body hair with a bargain basement razor.

Secondly, retailers need forward thinking, branded players with the internal capabilities and depth of experience to innovate. With innovation comes value creation and category penetration growth, which resets consumer expectations. Look at how spice kits or microwavable rice or prechopped garlic have totally re-invented both the product and price expectation for their respective categories.

So… what does this mean for CPG brands?

For those that have the consumer-centricity, R&D backbone, risk appetite and executional excellence to innovate, this will be a boon time. In times of relative hardship consumers are far more open to making a change – trying something new.

It’s those left in the middle that will suffer. And they will suffer badly. As retailers push margin-accretive private label onto more shelf space, they are simplifying categories to support navigation in front-of-house and logistics in back-of-house. While retaining the category brand champions that drive innovation and long-term value growth and every now and then introducing NPD with exciting disruptive offers – those on neither end of the spectrum will be overlooked.

This has always been the case, but the last 12 months have accelerated it. Ultimately, volume growth is the only option available to sustainably meet growth expectations, meaning developing consumer-centric product, pack and commercial innovation is right back in the dead centre of the spotlight.

It is the only way to win in this market. And it will remain that way for the foreseeable future.

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