Executive Summary

In the 19th century, merchants in the mail-order and wholesale business introduced their own private-label products. The goal was to provide valuable and cheaper alternatives to premium-priced national brands, who significantly marked up their products. In the Mad Men era of the 1950s, national brands built their empires by investing in packaging design, branding, and marketing, which caused the status of private labels to fall. The monotone messaging and aesthetics of private labels didn’t help, nor did their plain names like “Organic Ketchup” or “Great Value.”

When these products sat next to their branded counterparts that featured more creative packaging and had worked for years to get into the hearts of consumers, the picture became even bleaker. Private labels often grow when the economy is struggling, and recede when it is performing. Accordingly, they began to grow again in the late 80’s and 90’s as the recession of the early 90’s took the United States by storm. The category’s growth then halted in the late 1990s as private label products felt severe price pressure and companies lowered prices to compete, which reduced quality. This tarnished private labels’ image even further and reduced sales.

Over the past few years, however, private labels have improved their standing. They are growing at faster rates than name brands—a 4.6% increase from 2015 to 2016 vs. 1.1% increase for national brands. Retailers are infusing private labels with an identity and creating experiences around them, while new players such as Amazon and Buzzfeed are reinventing what private label means today. As a result, the definition of private label is shifting and the lines that divided private label and name brands in the past are increasingly blurry.

This piece looks at:

  • What’s happening with private labels and why does it matter for the larger consumer ecosystem?
  • What does the rise of private labels mean for you and how should you leverage it?
  • What should brands, investors, and real estate developers do to harness the evolution of private labels?

Takeaway

  • Private labels abruptly stopped growing in the early 2000’s after an ascent in the 80’s and 90’s. However, they’ve recently seen a resurgence in popularity as consumers look to fresh options and companies add more complexity and value to these products.
  • Start-ups are increasingly creating products “without the middleman,” successfully marketing some of the benefits of private labels without surrounding themselves with other third-party brands. This approach means creating products with cheaper prices, simpler aesthetics, and fresh ideas.
  • Retailers—and increasingly platforms—are using private label products to increase their revenue streams while giving shoppers more choices and a better shopping experience.

Case Studies

Amazon, Brandless, Buzzfeed, Costco, MeUndies, MoveButter, Sephora, Target, Tide

The Market: What’s happening and why does it matter?

The traditional brand landscape

There are three main players in the brand ecosystem that are worth understanding to determine where private labels are headed: name brands, traditional private labels, and startup private labels.

Name Brands

Name brands—products made by a well-known maker or manufacturer with a consumer-facing identity—are still extremely valuable for the economy: 83% of the products that retailers sell are branded. Their reputation and history provides the consistent quality shoppers need to make a purchasing decision. For example, Tide continues to be the most popular and trusted laundry detergent in the United States. Consumers know what Tide stands for and what its values are, which makes it an easier choice than less-known competitors. This transparency makes it easier for people to understand the messaging and intent behind the brand, unlike murkier private-label competitors whose value and quality is unclear.

Traditional Private Labels

Traditional private labels are products that are packaged or manufactured for sale under the name of a multi-brand retailer. Retailers are increasingly using them as a revenue driver by increasing their sophistication, introducing new and better products into their assortments. Costco rakes in 25% of its revenue from private labels as its Kirkland brand has created a separate identity from the Costco brand. This allows shoppers to frame it as a great brand that they can only find at Costco.

Sephora disrupted the cosmetics industry by changing the way women shopped for beauty in 1998, encouraging them to go from beauty counters at department stores to a more self-service, in-store experience. Women embraced this format—they could now try on multiple brands of makeup at the same time without having to rely on a gatekeeper at the counter. Sephora’s expertise and brand appeal allowed it to create its high-quality Sephora Originals lines along with its namesake private labels. Its latest release is Marc Jacobs Beauty, a line of prestige makeup products with a robust marketing campaign that Sephora helped architect. Its knowledge of makeup combined with its experience selling new and traditional lines to women all over the world has given the retailer the knowhow to successfully launch and sell these new lines at scale.

Other retailers that have created sought-after private labels with sophisticated marketing campaigns or trending products. Macy’s does it with its Material Girl brand and Whole Foods has its 365 private-label brand. The latter has created immense brand value for Whole Foods and gives shoppers a reason to come into the store. Amazon, after its recent acquisition of Whole Foods, is putting a significant emphasis on 365.

Start-up private labels

While name brands and private labels have existed for a long time, startups are entering the space with two distinct approaches: 1) They are choosing to only sell private labels, rather than selling both private labels and name brands; and 2) They are elevating traditional commodities to a new level that is typically reserved for name-brand products.

Private label only

While most private labels were sold alongside other name brands, new startups are unbundling these prior arrangements to only sell private labels. This concept was popularized offline with companies such as Trader Joe’s. As it moves online, companies like Movebutter, for example, have similar strategies. Movebutter is a new private label start-up that calls itself the “supermarket of the future,” which proclaims “When you shop with Movebutter, you pay for good food, not a Super Bowl ad and an expensive physical store.” The design of its products, the simplicity of its site, and the information its gives shoppers—which includes how consumers are saving money and where the company sources its food—promotes this mantra. Similarly, the new company Brandless heralds itself as a high-quality supermarket that sells each item for just $3 and calls itself BrandTax free. Both of these brands only sell their own products.

Infusing commodities with value

At the same time, other brands like Away, MeUndies, and Casper are building brands in product categories that were traditionally fragmented and commodity-driven. Many start-ups use the reduction in overhead and marketing costs that is typically afforded to private label as marketing fodder for a brand that “cuts out the middleman,” a phrase typically reserved for private-label products. These brands are showing how the private label business model and aesthetics have regained their cool and are considered a big growth opportunity. Happy Socks and MeUndies are trying to de-commoditize socks and underwear respectively, coming out with proclaimed-as-superior product experiences, which feature soft fabrics and big brand personalities that bring in a discerning mass-market consumer.

MeUndies sells its products creatively by featuring themed bundles and boxes as well as a monthly underwear subscription service for a discount. According to the CEO of MeUndies, Bryan Lalezarian, younger consumers don’t buy new underwear very often. Its subscription option creates a fun experience for an otherwise monotone chore by sending a new pair of themed underwear every month that helps it on its quest of creating a new behavior among millennials. Other than this, its relentless focus on the product ups its brand equity—consumers rightly feel that the specialized brand creates a superior product.

MeUndies is also starting to create partnerships for its capsule collections. It recently partnered with restaurateur Eddie Huang to create a new design called “Pandamonium,” which was used alongside his image for billboards and other ads. This and other initiatives is working to infuse the brand with more of an identity and personality, creating affinity and loyalty. With 56% of shoppers saying they typically buy their preferred brand regardless of price, MeUndies and its contemporaries are betting that people still hold name brands near and dear to their hearts.

From mass-market to niche private labels

As startups continue raiding the space, bigger companies are responding by creating private labels for more than the mass-market shopper. Instead, they are using private labels to reach different niches who demand a more personalized and exciting shopping experience yet are still price conscious.

Target focuses on simple products and private label

Target is seeing promising results with some of its private brands such as Cat & Jack, a new children’s brand that had over $1 billion dollars in first-year sales. It focuses on products that feature bright colors, whimsical graphics, and clever slogans on large in-store displays.

Even with these big successes, it has revamped its entire private label strategy and is now creating private label brands for specific niches. Driven by its newly created Design Lab, the retailer plans to launch more than a dozen new private labels between 2017 and 2018. The goal is to fight back against its stagnating apparel sales. Each of Target’s private-label brands focuses on a particular niche it wants to attract. “A New Day” intends to bring in women who are interested in discovering new clothes every month and commands an audience similar to that of Zara. The hope is to create energy, excitement and newness around the retailer.

Platforms expand into private label

Amazon

While private labels and name brands are the two oldest players in the brand landscape, the internet has created a new entrant: the platform-driven private label. With years of experience in the ecommerce space, Amazon has started creating and selling all types of private-label brands on its site. It currently has 29 different private labels. The company has already seen success with AmazonBasics, which competes with its vendors for sales of products like simple home goods, computer accessories, pet supplies, and more. With all of the data and user experience control that Amazon has on its site, its brands are doing well, outselling its competitors in multiple categories. Notably, AmazonBasics has taken one-third of online battery sales and baby wipes from its Amazon Elements line account for 16% of the market share, just behind name-brand items Huggies and Pampers.

Amazon is starting to expand into even more categories like lingerie, cosmetics, women’s apparel and furniture. It has created dozens of niche brands such as The Fix, Ella Moon, Paris Sunday, Arabella, and more. It sells these items alongside name-brand items without indicating that they are Amazon brands. Customers who are looking for fashion items and don’t necessarily prefer specific brand names can opt to purchase these products based on price and style alone. With an unprecedented amount of data on its sites, it has the ability to create products based on holes in the market and to play on trends that are performing well on the site. Over time, Amazon’s private label brands stand to improve as the company tests out different products and continues to optimize them.

BuzzFeed

Media companies are also starting to create private labels themselves. Buzzfeed attracts 2.3 billion video views a month and has turned the overhead food video into a phenomenon. The company is now leveraging its intellectual property to create private label products in a similar way to what companies like Disney and Universal Studios have done in the past. Buzzfeed has a commerce division called Buzzfeed Product Labs whose sole purpose is to create products that align with the Buzzfeed brand, which is shareable, quirky and far-reaching, among other things.

Product Labs started off by creating Homesick candles (candles that remind people of their home state), the Fondoodler (a cheese gun), a customizable cookbook, and—in summer 2017—the Tasty One Top, a smart appliance meant to help customers seamlessly cook meals in connection with the Tasty app. The popularity of Buzzfeed’s main brand is helping these products succeed and find an audience. With Buzzfeed articles and videos getting billions of views every month, adding the Buzzfeed philosophy and name to its own products has the potential to be very lucrative.

What does the rise of private labels mean for you and how should you leverage it?

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Companies

Building brand equity

Private label brand equity is rising as these products are no longer considered stale alternatives to national brands. They are becoming powerhouses, featuring sophisticated marketing tactics, added value, premium lines, partnerships, and whole start-ups around them.

  • How can you freshen up any commodity or stale items you sell by building sought after brands around them? How can you infuse these products with value to make them more appealing to your customers?
  • How can improving or rethinking private labels help you drive the right type of growth? What competitive whitespace can these private labels fill where customers are looking for extra value and want a brand they can trust?
  • Can you partner with other brands to increase the brand equity of the commodities or other traditional items you sell? For each product category, what qualities make brands successful and can you offer some of these as a private label?
  • How can you improve the aesthetics of your private label products? Does it make sense to create premium private labels to fill holes or take advantage of a trend? What if you treated them like named-brand? What would change?

Leveraging intellectual property

Media companies’ Intellectual property is increasingly a valuable foundation and marketing channel for for private labels with context and value around them.

  • What intellectual property, customers, or data can you leverage to ideate new private label products and increase the chances that your private labels find an eager audience? How could your content strategies support these efforts?
  • If you are a private label manufacturer, how can you partner with media companies and create programs that help them create brands around them? How can you give these companies the infrastructure they need to thrive?
  • With YouTube stars and channels redefining media, how can private label companies take advantage of the high-demand for their merch without the manufacturing burden it normally requires? Who could you partner with to assume this responsibility?

Evolving product assortments

Private labels are evolving as competitive retailers recreate their assortments for better private labels and startups create private label hybrids that take commodity products and infuse them with value.

  • What is the optimal mix of private label vs. name brands for your company? What is the target percentage of private label products to name brands that you should sell?
  • How can you use a mix of exclusives, private labels, and start-up brands to differentiate yourself from the competition?

Investors

Figuring out what you’re investing in

Potential investment and portfolio companies need to specifically understand where they fall between private labels, national brands, or a private-label startup hybrids that aim to get rid of the middleman.

  • Are companies that claim to take the middleman out of a specific product actually innovating or is there a better way they can create value? Is this approach structurally defensible or is it just marketing?
  • How can the brands you’re investing in leverage private labels’ growth through either creating new branded commodities or using simpler messaging that transparently shows the consumer the value the brand is providing?
  • How will these products be branded and messaged to communicate value but also affordability? In a world with endless choice, how will they stand out?

Using private label to fill market holes

Private label isn’t sleepy like it used to be. These products are growing faster than national brands and filling in holes by becoming premium private labels, value private labels, or private labels that focus on natural or organic products.

  • Where is there an opportunity to create a more premium or high value version of an everyday good? Why does this whole exist?
  • Are there any trends in the consumer landscape that larger brands are passing over for one reason or the other? Which startups can you invest in that are plugging in these holes?

Leveraging loyal audiences

There are opportunities for private labels everywhere as platform companies, media industries, and artists are creating products people crave.

  • How can the companies you are looking at leverage their loyal audiences or communities they have to create an innovative private-label product that already has a built-in audience? This could be a tech company getting into ecommerce or a product company getting into media.
  • How should you evaluate companies that are facilitating the creation of private label products for media companies, celebrities, and other pop-culture phenomena? Will more of this infrastructure need to exist as influence grows and centralizes?
  • How much does scale and reach matter today? Are these existing attributes to build businesses around or can they be built from scratch?

Real Estate Investors

Driving foot traffic in the new economy

People are no longer drawn to retail just because they carry well-known national brands but are also looking for fresh ideas, innovative experiences, and cool products they can get from unbranded private labels and startups.

  • How can you better evaluate e-commerce first companies when they don’t sell well-known national brands? Do they have something else to offer like an innovative product, a loyal fan base, or a smart business model?
  • How can you increase your immediate foot traffic and long-term growth by bringing in more sought-after private label and private label hybrid companies into your mall? What brands help make your real estate a destination?
  • How can you create more unbranded experiences in your malls that will bring consumers back for more? Who can you partner with to create these experiences and possibly sell private-label products in tandem? How could your brand benefit from this setup?

Marketing private label stores

Private label stores have different needs compared to well-known national brands. In order to serve and evaluate these companies you should provide them with personalized resources and use a different playbook to broker deals with them.

  • How can you create marketing campaigns that feature the private labels and e-commerce first companies you carry? How can you use this to make a splash and bring new, diverse people to shop at your stores?
  • Private labels and start-ups like to tell stories and show off their products to lure in shoppers, which may be different from national brands, which rely on their recognizable brand names. How can you facilitate these different needs with your store sizes, display windows, and other architectural features and brand deals?
  • How should you change your optimum store assortment? Are there any old restrictive deals you have with brands that you can change now that the consumer tide is changing?

Going Forward

Purchasing private label products is no longer correlated with economic hardship. Young shoppers are looking for products that provide added value and feature fresh concepts, while also being price competitive. If private labels provide these fresh ideas, increased variety, and premium experiences, they’ll capture attention and have a chance to thrive in the new consumer economy. Additionally, newer platform companies like Buzzfeed and Amazon can go the way of Disney and start utilizing their intellectual property, data, and customers to create a market for products that they know people want.

With private labels growing at faster rates than name brands and retailers putting additional focus on them, it’s clear that private labels will only grow in importance over the coming years. This will continue threatening the market share of national brands and create a new and higher standard for private labels. At the same time, the distinction between branded and unbranded products is only getting greyer.