Kusum Elawadi (2:40)

Retailers always look at what is selling in their stores and what isn't. Their goal is going to be to get a private label product that is as close in quality to some of the high demand national brand products and to sell it successfully at a lower price.

Zachary Crockett (2:56)

For the Freakonomics Radio Network, this is the economics of everyday things. I'm Zachary Crockett. Today Store Brand Products when you go shopping at your typical grocery Store, you'll see a lot of the big name brands. Tide detergent, Keebler cookies, Kellogg cereals. But sitting right next to those brands, you're likely to also see the store's own version of the same products. And perhaps nobody understands those private label products better than this woman.

Kusum Elawadi (3:27)

My name is Kusum Elawadi, and I'm a professor of marketing at the Tuck School of Business at Dartmouth College.

Zachary Crockett (3:34)

El Owadi has spent her career studying store brands. She says these products really began to take off in the 1970s, when inflation was straining the economy and shoppers had tighter wallets. In those days, they were called generics.

Kusum Elawadi (3:51)

They were generally kind of acceptable quality, but known to not be anything outstanding. No name at all, very plain packaging. They were really, really attractively priced for price sensitive consumers.

Zachary Crockett (4:05)

If you were buying beans, the generic would just be a giant white or yellow can with beans written on it. In commercials, the stores touted these products as cheaper alternatives to name brands, alternatives that cut out the marketing and advertising and passed the savings on to consumers.

Dean Urstad (4:24)

A new no frills value choice. Just look for the plain yellow and black generic labels and save even more on nutritious food and serviceable household products. So now the choice is yours. Brand names or generics?

Zachary Crockett (4:40)

By the 90s, retail chains ditched the generic packaging and created their own simple branding for their affordably priced products. Today, most of the major retailers have store brands. Sometimes they use the name of the store, like at Trader Joe's. Other times, the retailer might create a brand name of its own, like Kirkland at Costco or Signature select at Albertsons. With rising prices at grocery stores, these more affordable store brands are in high demand. Last year, Americans bought more than $230 billion worth of private label products, and they now account for around one in every five products on store shelves. For US Shoppers, they present a tantalizing value proposition.

Kusum Elawadi (5:26)

You know, I can go and buy a box of Kellogg's cereal and look for coupons or look for a deal in the grocery store and then get it for, you know, like a 20% off or whatever. But I have to search for that. Private label is consistently priced lower than the national branded products. So that's always been the big driver of private label purchases.

Zachary Crockett (5:48)

Retailers have their own incentive for selling store brands. They're a way to build loyalty with customers. And as it turns out, they're a lot more profitable than the name brands.

Kusum Elawadi (5:59)

Typical gross margins for retailers in the grocery industry are around the 20 to 25% point on national branded products. Their Gross margins on private label products are in the 30 to 35% range, sometimes even higher.

Zachary Crockett (6:17)

Despite the names you see on those products, most retailers don't actually make them. I mean, some grocery chains like Safeway and Kroger have their own dairy farms, bakeries and meat processing plants. But for the most part, retailers outsource the manufacturing of these products to other companies and just slap their brand on it. Those Trader Joe's peanut butter cups and tortilla chips, they're not actually made in some magical Trader Joe's factory. Elawadi says that some store brand products are actually made by the same companies that produce the name brand versions of those products. Take for instance Costco. Some of the Kirkland brand coffee blends are made by Starbucks, Kirkland batteries, Duracell and Kirkland diapers. Those come from Kimberly Clark, the company that makes Huggies.

Kusum Elawadi (7:08)

I have my plant running. If I have some excess capacity, why not just also manufacture the private label? After all, someone else is going to do it if we don't.

Zachary Crockett (7:18)

When nationally recognized brands do make private label products, they're usually tight lipped about it.

Kusum Elawadi (7:24)

Obviously it is not in the national brand manufacturer's interest to loudly proclaim that they also supply private label. Right? The consumer is then thinking, well, why am I paying 25, 35, 40% more for Heinz ketchup if the private label ketchup was also made by Heinz? So it's a very, very well kept secret.

Zachary Crockett (7:51)

But most of the store brand products you see on shelves come from dedicated private label manufacturers. These companies specialize in manufacturing certain products in very large volumes. Instead of creating their own brands and marketing their products to consumers, most of them prefer to stay behind the scenes. To find them, retailers go to trade shows like plma. At last year's event, representatives from Kroger, Family Dollar and Costco roamed the halls looking for capable partners. And there were more than 1600 companies from 60 different countries to pick from.

Kusum Elawadi (8:29)

Our company is based in the south of Italy, Calabria. We do mainly ready meals and frozen vegetables. We are the Ukrainian producer of sunflower

Zachary Crockett (8:38)

oil, soybean oil, rapeseed oil, mayonnaise and tomato sauces.

Kusum Elawadi (8:43)

This is company Flora from Serbia and we do some jams for international products.

Zachary Crockett (8:52)

So how do these retailers decide which products to replicate? And just how close can they get? That's coming up.

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Zachary Crockett (11:39)

Bringing a store brand product to market usually starts like this. A national retailer like Albertsons has category managers who are in charge of specific kinds of goods. They might see that a certain name brand tomato sauce is selling in big numbers, but it's a little expensive, which means there's an opportunity for a more affordably priced store brand version. So they turn to a company like Winland Foods.

Eric Baringaus (12:06)

We're a little bit of a stealth

Zachary Crockett (12:07)

business That's Eric Baringaus. He's the CEO of Winland Foods. That company isn't a household name, but their products are all over the grocery landscape.

Eric Baringaus (12:20)

So we manufacture private label foods for all the major retailers in the world. We make 30 different types of pasta, 20 different types of salad dressings, various sauces, chocolate sauces, strawberry sauces. We make barbecue sauces, pita chips, and the list goes on and on.

Zachary Crockett (12:49)

Retailers ask Wenland Foods to reverse engineer name brand products and create a new version.

Eric Baringaus (12:56)

We have a large R and D facility in Chicago with a large group of food scientists, and we may have customers bring us something that they want us to develop. They may say we'd like an emulation or something better than a certain pasta sauce that is out there.

Zachary Crockett (13:14)

Some emulations require less reverse engineering than others. Under FDA regulations, Peanut butter, for instance, has to be composed of at least 90% roasted peanuts, things like mayonnaise, salt, milk. They're usually pretty similar. Something like pasta sauce requires a little more work, but Winland can get pretty close.

Eric Baringaus (13:38)

If you looked at the ingredient declaration on it, it would be identical to the brand. The nutritional labeling would be identical, and if you were to put it into a consumer test, it's indistinguishable from the brand.

Zachary Crockett (13:52)

Winlund will run what's called a triangle test on the product. They'll set up a blind tasting of three sauce samples, one of them their own formulation, the other two the name brand they're trying to emulate. If testers can't pick out which one is different, Winland knows they've done a good job. But that's the easy part. The bigger challenge is mass producing that new recipe at a significantly lower cost than the national brand.

Kusum Elawadi (14:18)

Private label is a highly competitive business, and unless you can actually sell at a pretty low cost, you're not going to be able to make much margin.

Zachary Crockett (14:28)

Marketing professor Kusum Elawadi says that private label manufacturers don't have much bargaining power when it comes to negotiating with retailers

Kusum Elawadi (14:37)

because nobody knows who the supplier is. The consumer doesn't, so the supplier doesn't have much leverage.

Dean Urstad (14:47)

So when you go into a Kroger, when you go into a Walmart, pick up great value, or you go to Aldi or whoever you might go to, a lot of times, that product is ours.

Zachary Crockett (14:57)

That's Dean Urstad. He's the vice president of sales at Seneca, one of the largest private label manufacturers of canned vegetables. We met him at the trade show while standing in front of a giant wall of his company's corn. He says that because the margins are so slim, private label firms often have to get creative to keep production costs down. Sometimes that means offering a slightly different product than the name brands. Take for instance canned peas, the real

Dean Urstad (15:29)

small ones, they're called petit peas. And you run them separately for store brands because they're about the only ones that really want that where national brand, they just blend them all together, you know, in the whole scheme of things. So there's little nuances within the product.

Zachary Crockett (15:46)

Many companies we talked to said they had to make concessions on their products to make the costs work. Here's Harry Overle, the CEO of Flagstone Foods. They make trail mixes for major retailers.

Harry Overle (16:00)

There is a bit of a science in terms of ratio of almonds, peanuts, raisins and chocolate covered candies is the most common one. So yeah, there's a bit of a science to that. And then if you get really fancy, you know, you throw some cashews in there. If you go the other way to say, hey, I'm really trying to give a value product, no almonds. So it's all peanuts, raisins and M and M type products.

Zachary Crockett (16:21)

Once these products are on the shelf, retailers have to make sure they're priced far enough below the name brand to entice shoppers.

Kusum Elawadi (16:29)

The consumer still today thinks of private label as an acceptable quality but reliably lower priced product. So if your private label product gets priced too close to well known national brands, the consumer's gonna say, well, why should I buy this? I'll just buy the national branded product.

Zachary Crockett (16:47)

National brands often don't take kindly to the retailers that make store brand versions of their products.

Kusum Elawadi (16:54)

It's with good reason. I mean, retailers will often have little signs there saying try our product. Compare with the national brand. Buy it for 40% less.

Zachary Crockett (17:07)

For consumers, this competition is more than welcome. Since the pandemic, some big brands have increased pricing on their products by percentages in the double digits while reaping record setting prices profits. A McKinsey survey found that nearly eight in 10 grocery shoppers are now trading down to save money. And when they trade down, they're putting a lot more store brands in their carts. Of course, private label products aren't just cheaper imitations of name brands. As retailers look to reduce dependence on national brands, they're also in the market for new stuff, stuff that can only be found at their stores.

Private Label Manufacturer Representative (17:48)

So my dream outcome is maybe hitting on two to three good US or international retailers and working with them on an innovative gadget or tool.

Zachary Crockett (18:01)

Private label program That's Ryan Boyle, vice president of sales at a company called Kitchen Innovations at plma. His booth had all kinds of weird gadgets on display. Garlic presses, potato mashers, tongs with rubber hands, and a cheese grater that kind of looked like a little medieval torture device.

Private Label Manufacturer Representative (18:22)

We're trying to add some uniqueness, some creativity, as well as focusing on the design aspect, which sometimes is missing as well. With private label, like researching colors and pantones and things like that, where, you know, outside of the norm that you'd see traditionally on a private label shelf, we want to show that we can be the ones who are innovative for you. We can work alongside you and we can present you with innovation for your own private label and your own brand.

Zachary Crockett (18:52)

Just down the hall from Kitchen Innovations, we found another entrepreneur who shared a similar philosophy.

Samantha Bird (18:58)

I'm Samantha Bird. I'm one of the co owners of Lady Bird Cosmetics. I'm a third generation owner of the company.

Zachary Crockett (19:04)

Lady Bird Cosmetics makes private label beauty products for retailers and celebrities who want to create their own makeup lines. The company's clients don't just want imitations of existing products.

Samantha Bird (19:17)

There's the second type of customer who wants to do everything custom. They have a dream, they have a vision, and they work one on one with our lab to create exactly what they want.

Zachary Crockett (19:28)

Whether they're tasked with making a can of corn or a new color of lipstick. There's one thing private label companies often can't do. Take credit for their work. After the development, the planning and the manufacturing is done, their goods become a part of the retailer's identity. And for shoppers like you and me, the origin of any given store brand, product remains a mystery.

Samantha Bird (19:54)

It's really cool to walk into some of these stores that I personally love shopping in and see things on the shelf. And I know it's ours, but it pains me to not be able to post it to our Instagram. People always like, oh, who do you manufacture for when they find out that we do this? And I'm like, I'm sure that you've seen them, I'm sure you've used them, but I can't tell you. But I know that you like our stuff.

Zachary Crockett (20:20)

For the economics of everyday things, I'm Zachary Crockett. This episode was produced by Sarah Lilly and mixed by Jeremy Johnston. We had additional help from Daniel Moritz Rapson. Parmella Creamery is the leader in vegan cheese. Can we call you the cheese marketing officer? You can call me the cheese marketing officer.

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