2020 changed the CPG retail business forever, leaving a volatile and unpredictable market in its wake. Forward-looking private label R&D and innovation teams strive to remain several steps ahead of shifting consumer preferences—which is far easier said than done, especially now. Because private labels are crucial for grocery retail future growth and value creation, industry analysts have carried out extensive research that reveals what consumers want from private brands in 2021 and beyond. In this blog, I’ve captured the best insight for a winning strategy.
Grocery Private Label Sales Surged in 2020
NielsenIQ’s panel research results show that private label market share was 23% of grocery dollars and a quarter of unit sales in 2020, including private label sales of about $40 billion in club and dollar stores.
According to a PLMA report, supermarkets recognized the most significant increase in private-label dollar sales for 2020, up 13.2% to $73.1 billion, compared to $64.6 billion in 2019. Unit sales also showed strong growth, rising 7.1% from 25.5 billion to 27.3 billion. Meanwhile, unit sales in club and dollar stores topped supermarkets with unit volume growth of 8.2% to 23.9 billion units, with dollar sales climbing 11.7% to $77.8 billion.
Consumer Trends Impacting Private Labels
When it comes to American eating habits, COVID-19 accelerated inevitable trends like plant-centric eating and sustainability. Consumers are better informed and want the food they buy to reflect their unique values and needs. Private label brand owners can capitalize on these trends by introducing products that align with these shifting priorities.
Transparency and Clean Labels: Research by leading food trends firm Innova reveals that six in 10 consumers want to know more about the products they consume. Consumers want more information about where their food comes from, how it’s grown, and who’s behind the brand. They’re seeking locally sourced products, cleaner ingredients, natural flavors and colors, and alternative sweeteners, and they want these preferences reflected on product labels.
Plant-Based: The plant-based food industry has seen significant growth in recent years, and analysts view the increase as more than a fad. Experts predict the plant-based food and beverage market will reach $32.29 billion by 2027, according to Emergen Research’s analysis, due to rising milk allergies, health concerns, and product launches for meat alternatives.
Nutrition: ADM research shows 31% of consumers buy products tailored to their health, and 50% prefer foods and beverages that naturally contain beneficial ingredients. The growing desire to influence health and well-being through what people eat and drink creates new opportunities for nutrient-rich products with functional health benefits to support immune systems, increase mood, and sustain energy.
Sustainability: According to data from the Hartman Group, 65% of consumers want to positively impact the environment, and Euromonitor’s research shows 32% of consumers buy sustainably produced goods. According to ADM, “The growing awareness of our collective impact on the environment has elicited increasing demand for companies to demonstrate their sustainability commitment beyond just the end product to responsible sourcing and operating standards.”
Headwinds Facing Private Label Brand Owners
At this time last year, the country was shutting down, cities were issuing stay-at-home orders, and stores were struggling to keep shelves stocked. Fast forward to today, and while things are more stable with vaccination distribution and more predictable supply chains, private label owners and retailers face significant headwinds from increasing labor shortages to rising oil prices to the weakening U.S. dollar. Teams must keep these issues in mind while defining their NPD and R&D portfolio management strategies.
Labor Shortages: We’re living in an era of food abundance, but with a growing labor shortage facing the food industry, we’re also living in a time of scarcity. Tight labor markets are driving wage increases and impacting production. “The labor shortage—not a surprise to us—is causing most retailers to rethink their food programs,” says Nicole Silver, director of media relations at NPD. “How can they streamline operations and deliver great food at a great price?” This puts additional pressure on R&D departments to place the right bets on which products to develop and how to prioritize reformulations.
Rising Oil Prices: Industry watchers anticipate prices for both energy and fertilizers to increase in 2021 (by 9% and 3%, respectively) after declining in 2020. Food ingredients often travel long distances, and high oil prices inflate shipping costs. And higher fertilizer costs make it more expensive for farmers to operate, increasing the price of commodities. These market conditions add expenses, making it harder to achieve product cost criteria, particularly during a time of increased supply chain disruption.
Weakening U.S. Dollar: The lower value of the U.S. dollar contributes to the recent uptick in food prices. From April to October 2020, the World Bank’s Food Price Index increased 13%. During this period, the U.S. dollar (measured against a broad basket of currencies) depreciated 6%. Research shows agricultural commodities prices rise and fall in unity with the U.S. dollar. This analysis indicates nearly half of the food price index increase since May 2020 is likely due to U.S. dollar movements. Procurement teams will need to work harder to find suppliers with ingredients and items that meet more stringent consumer-driven criteria, while simultaneously meeting cost requirements.
Supply Chain Disruption: Pandemic-related supply chain disruption forced brands to discontinue products faster than they normally would. And experts agree both national and private label brand owners will continue to prune their portfolios this year. “Brands are going to continue with SKU rationalization based on what appeals to the broadest segment of shoppers,” says David Gottlieb, managing director of the Americas at Trax, a digital company providing A.I. retail solutions. Private label owners can also meet these challenges by increasing their supplier pool, giving them more options and better leverage during negotiations.
How Private Label Teams Can Better Meet Consumer Needs
Although 2020 was a historic year for the grocery industry with extraordinary sales volumes, grocery retailers are now under pressure to maintain these levels and, in some cases, exceed them. As grocers and private label owners strive to increase sales and gain market share, it’s creating a natural increase in competition.
In the current environment, one of the biggest mistakes private label owners can make is to accept inefficient product development and reformulation, or put it on hold altogether. A static product portfolio will never outperform a competitor’s proactive one. Because your competition is making progress, it's not an option to stand still or move slowly in NPD and R&D portfolio management.
Static tools that lack versioning mechanisms are no longer an option for teams that want to quickly deliver innovative, high-quality, and cost-effective products to their customers quickly. Supply chain disruption and changing consumer preferences require teams to respond in real-time. The promise of automation is enormous, and nowhere is its ability to transform greater than in grocery private labels.
TraceGains transforms formulas, specifications, compliance documentation, and other product information into digital records that are easy to create, update, and manage. With everything tracked in one place, teams get automatic version control and a complete audit process accessible with a connected device. Learn more about TraceGains networked solutions for retail here.