As inflation continues to strain American consumers’ budgets, private label brands are gaining deeper market penetration, providing a lucrative opportunity for retailers. Private labels, inherently more profitable, are crucial in grocery retail, known for its thin margins. According to the Private Label Manufacturers Association’s 2024 report, the store brands industry hit all-time highs in unit and dollar sales, totaling $236.3 billion in 2023, a 4.7% increase from 2022.
Aldi’s Influence and the Evolution of Private Labels
Aldi’s recent dominance has contributed significantly to the increased acceptance of private-label groceries among Americans. Following Aldi’s acquisition of SEG, the discount grocery giant is set to operate 2,800 stores nationwide. Although Aldi may not be the primary grocer for all, a quarter of Americans shop there regularly, fostering a market environment conducive to the success of new private-label players. Along with Lidl and Trader Joe’s, Aldi has revolutionized the perception of store brands, moving beyond the commodity items to offering higher-quality products.
The growth potential in the trade-up tier of store brands, offering sustainable and organic products, is noteworthy. These products attract a demographic that is both frugal and health-conscious. Walmart’s launch of Bettergoods is a strategic move to penetrate this premium store-brand tier, a space traditionally dominated by Whole Foods and Kroger.
Walmart’s Strategic Positioning with Bettergoods
Walmart’s private label strategy, encompassing Great Value, Sam’s Choice, and now Bettergoods, leverages the company’s pricing advantage. The Bettergoods initiative aims to provide more trade-up options while catering to recession-driven trade-down activities. This move appears to be a response to Target’s launch of its trade-down range, “Target Essentials.” Walmart aims to attract Target’s customer base, particularly younger millennials and Gen-Zers, who form a significant portion of the premium store brand market.
However, convincing consumers to buy premium store brand goods poses a challenge for Walmart, given its reputation for value products. To succeed, Walmart must focus on branding and customer education to attract higher-income, younger customers. Even if this demographic shift does not fully materialize, the Bettergoods initiative is likely to increase the basket size of existing customers.
Competition and Future of Major CPG Companies
Walmart’s strategy involves realistic expectations—siphoning customers from Target, Aldi, and Trader Joe’s is feasible, but capturing Whole Foods customers requires a different model. Competing with top-tier grocers in terms of perceived sustainability, freshness, and sophistication is challenging. Thus, targeting Trader Joe’s market segment, which values unique flavors at affordable prices, seems like a practical goal.
The future of Bettergoods also depends on the responses of major American Consumer Packaged Goods (CPG) companies. Brands like Coke, Pepsi, and Frito-Lay will need to defend their market position against the private label surge by adjusting assortments, optimizing production, reducing prices, modifying pack sizes, or launching new promotions.
Balancing Private Labels and CPG Relationships
Despite Aldi’s rise, CPGs remain integral to American consumption, accounting for 82% of all purchases. These companies often have higher revenues than the retailers they supply, wielding significant market influence. Nevertheless, the fact that private labels only make up a fifth of the market indicates substantial growth potential.
For long-term profitability, Walmart should continue expanding its private label offerings while maintaining robust relationships with CPGs. By complementing rather than solely competing with national brands, retailers can diversify their offerings, enhance margins, and provide customers with a broader range of options.
In conclusion, Walmart’s Bettergoods initiative represents a strategic effort to navigate the evolving grocery market amid inflation. By targeting a diverse customer base and balancing relationships with CPGs, Walmart can potentially boost its market share and profitability in the competitive retail landscape.
