Could Private-Label Products Transform Retail?

Summary

Podcast Summary: Could Private-Label Products Transform Retail?

Podcast Information

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: Could Private-Label Products Transform Retail?
• Release Date: December 12, 2024
• Description: Short, thoughtful, and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.

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Introduction

In the December 12, 2024 episode of Thoughts on the Market, Simeon Gutman, Morgan Stanley's U.S. Hardlines, Broadlines, and Food Retail Analyst, delves into the transformative rise of private-label products in the retail sector. Gutman explores how this shift is poised to redefine the grocery and discount retail landscapes, driven by evolving consumer behaviors and strategic investments by retailers.

The Surge of Private-Label Products

Accelerated Growth Projections

Gutman opens the discussion by highlighting a significant trend: private-label sales are projected to escalate by 40%, reaching an impressive $462 billion by 2030 (00:00). He emphasizes that this growth isn't a fleeting trend but indicative of a potential "super cycle" resulting from changes in consumer shopping habits catalyzed by the COVID-19 pandemic.

Impact of Mega Platforms

The analyst points out that the rise of mega platforms is instrumental in capturing a larger share of consumer spending. These platforms are not only innovating at an unprecedented rate but are also enhancing the appeal and quality of private-label offerings, making them formidable competitors to established national brands.

Macro Drivers Influencing the Shift

Post-COVID Consumer Behavior

Gutman discusses the macroeconomic factors shaping this trend, noting that while inflation is moderating, food prices remain 30 to 34% above 2018 levels (00:00). This economic pressure has led consumers to allocate more of their budgets to food at home rather than dining out, creating a fertile ground for private-label products to thrive.

Willingness to Substitute

He observes that consumers are increasingly willing to substitute higher-priced national brands with more affordable private-label alternatives, especially in essential categories like groceries. This substitution behavior presents a significant growth opportunity for retailers expanding their private-label portfolios.

Changing Consumer Perceptions and Behavior

Quality and Innovation

Gutman asserts that the success of private labels hinges on their ability to offer not just cost savings but also superior quality and innovation. He cites examples such as healthier ingredient options ("no more seed oils"), organic offerings, and premium products like frozen lobster ravioli and mushroom and truffle pizza (00:00). These innovations are pivotal in altering consumer perceptions, positioning private labels as viable or even preferable alternatives to national brands.

Consumer Acceptance

He notes that the stigma traditionally associated with private-label products is diminishing. Some US retailers operating exclusively with private-label offerings are among the fastest-growing, underscoring the shifting consumer sentiment towards these brands.

Implications for the Retail and Consumer Packaged Goods (CPG) Industries

Opportunities for Growth

Gutman highlights that for grocers and discount retailers with robust private-label programs, this trend represents a significant growth opportunity. Enhanced private-label sales not only drive revenue but also contribute positively to profit margins.

Challenges for National Brands

Conversely, traditional food companies may encounter heightened competition as private labels gain market share. Gutman predicts that national brands could see their gross profit growth decline from 3% historically to about 2% (00:00). While household and personal care categories have been somewhat resilient, ongoing economic pressures and evolving consumer preferences may challenge their market position.

Future Outlook

Reevaluating Brand Loyalty

Looking ahead, Gutman envisions a future where private labels are synonymous with quality and value, potentially diminishing the importance of traditional brand loyalty. Consumers may prioritize product quality and cost-effectiveness over brand names, leading to a realignment of how brands are perceived and valued in the marketplace.

Super Cycle Potential

He reiterates his belief that the private-label market is entering a super cycle, characterized by accelerated growth and transformative impacts on the retail sector. This cycle is expected to reshape market dynamics fundamentally, driven by sustained consumer demand and strategic retailer investments.

Conclusion

Simeon Gutman's analysis presents a compelling case for the transformative potential of private-label products in the retail industry. With projected sales growth, changing consumer behaviors, and strategic innovations, private labels are set to play a pivotal role in shaping the future of grocery and discount retailing.

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Notable Quotes:

• "We estimate private label sales growth will accelerate by 40% to reach $462 billion by 2030." (00:00) – Simeon Gutman
• "Consumers increasingly see private label as viable alternatives to national brands because they often offer better value and innovation." (00:00) – Simeon Gutman
• "We believe the rate of change in private label growth will accelerate substantially over the next few years." (00:00) – Simeon Gutman
• "Traditional brand loyalty becomes less significant compared to product quality and cost effectiveness." (00:00) – Simeon Gutman

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This summary encapsulates the key discussions and insights from the episode, providing a comprehensive overview for those who have not listened to the podcast.

Transcript

[A]

Welcome to Thoughts on the Market. I'm Simeon Gutman, Morgan Stanley's U.S. hardlines, broadlines and Food Retail Analyst. Today we'll talk about a fascinating shift in the retail landscape, the rise of private label products and what this could mean for the future of grocery and discount retailers. It's Thursday, December 12th at 10:00am in New York. Think about your recent trip to your favorite grocery store. As you reach towards the shelves for your preferred brand of mayonnaise, frozen pizza or bread, you may have noticed that more and more shelves are stocked with store brand products, products that not only match the quality of national brands but often exceed it. This isn't just a minor trend. We estimate private label sales growth will accelerate by 40% to reach $462 billion by 2030, an expansion that will redefine market dynamics significantly. In essence, we think the private label grocery market is on the cusp of a super cycle. This super cycle is a byproduct of COVID era shifts in the way the customer shops and how retailers invest into this trend. At the same time, private label groceries reflect the rise of mega platforms which are taking ever greater consumer wallet share and are innovating more than ever before. When you look at macro drivers, US consumers have been navigating a difficult post Covid environment. While inflation is currently moderating, overall food prices remain 30 to 34% above their 2018 levels. Most consumers are spending more on food at home versus food away from home, which is a positive catalyst for private label acceleration. Further, consumers are willing to substitute lower priced goods, especially groceries, and these categories present a growth opportunity for private labels. This is the tipping point that we're talking about high cost, recent innovation, and innovation like we've never seen before. With the rise of these mega platforms, this industry looks like it's ripe for disruption. The market views private label penetration as a slow, gradual and ongoing event, but our work challenges this premise. We believe the rate of change in private label growth will accelerate substantially over the next few years. We think private label products will grow at double the rate of the overall grocery market, bringing private label market penetration from about 19% in 23 to about 23% by 2030. This growth is not just about stocking up the shelves, it's about changing consumer perceptions and behavior. Consumers increasingly see private label as viable alternatives to national brands because they often offer better value and innovation. From healthier ingredients like no more seed oils to organic products that you had no idea they can produce to premium products like frozen lobster ravioli to mushroom and truffle pizza. There are a couple of retailers in the US that are all private label and they are among the fastest growing ones Taking Away the Stigma of what Private Label Products Could Mean so what does this mean for the broader retail and consumer packaged good industries? For grocers and discounters with already strong private label offerings, this shift presents a significant opportunity for growth. It's also accretive to margins. On the flip side, traditional food companies might face increased competition. These companies have historically relied on brand superiority, but as private label gains market share, particularly in food categories, these national brands could see a hit to their gross profit growth, which could fall from 3% historically to about 2%. And while household and personal care categories have seen some resilience against private label encroachment, the ongoing economic pressures and shifts in consumer spending habits could challenge the status quo. Looking ahead, the rise of private labels could lead to a reevaluation of what brands mean to consumers. As private label becomes synonymous with quality and value, we may see a new era in which traditional brand loyalty becomes less significant compared to product quality and cost effectiveness. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.

[B]

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