Consumers can’t get enough of private label

TOP TAKEAWAYS

The grocery sector is likely to weather economic weakness heading into the new year as consumers focus more spending on essentials and as retailers meet their customers’ demands for value, according to a report from Colliers.

The real estate firm’s Winter 2022 Retail Report highlights many of the steps retail grocers have been taking as consumers have felt the pressures of rising prices and become more cautious in their shopping.

Consumers will increasingly switch to private label and trade down to less expensive brands and products if inflation persists, the report found. Citing research from a GlobalData consumer panel, the report noted that 61.3% of consumers said they planned to switch to private label if prices keep rising, and 61% said they would buy cheaper brands or products. In addition, more than half (53%) said they would use coupons more.

Other changes in behavior included:

Related:Podcast: How inflation is affecting pricing strategy

The trend toward increased private label consumption is seen as continuing into the coming years. After a surge in private label growth this year, Colliers predicts that the growth rate will slow in the next few years, but private label will continue to grow as a share of overall sales.

After posting 15.9% growth in sales this year, and reaching 18.9% of total sales, private label sales will grow another 9.3% in 2023, reaching 19.9% of sales, and continue to grow between 6.1% and 6.8% for the next three years, reaching 21.6% of total sales in 2026, according to the report, citing GlobalData analysis and data.

About 78% of Americans currently purchase in-store brand products, the report found. In addition, 61% are buying more private-label pantry items, and 58% are buying more private-label household merchandise.

The increasing penetration of private label comes pressure grown on traditional, middle-market grocers that are being squeeze by value-oriented formats on one end and premium players on the other, according to the report.

The popularity of value players, such as Aldi, has been increasing across all income brackets, the report found. While 71.4% of low-income consumers reported shopping a value stores in 2008, that number jumped to 86.3% in 2021. Even larger increases were reported among middle-income and high-income consumers, according to GlobalData research. 

Related:Here are the categories driving grocery price inflation

Nearly half of middle-income shoppers (48.2%) reported shopping at value stores in 2021, vs. 19.6% in 2008, while 17.6% of high-income shoppers shopped value stores in 2021, up from 4.5% in 2008.

Citing data from Placer.ai, Colliers reported that foot traffic across most of Aldi’s 2,200 U.S. stores increased about 10.5% in the past year, as the retailer reported double-digit sales gains.

MEASURING VALUE

Interestingly, the report also detailed the importance of quality to consumers, which is a part of their value calculation when they shop for groceries.

“Customers will still pay extra for high-quality products and look to purchase from brands they can feel good about,” the report said.

For example, when asked what “good value for money” means to them across different types of products, 45% said high-quality products/ingredients were important when shopping for dairy products, while 30% cited low prices. A similar pattern followed for other product categories, including bakery/cereals/morning goods and alcoholic beverages.

In some categories, such as savory snacks and non-alcoholic beverages, the importance of low price was closer to quality in terms of what “good value for money” means.

The report also looked at the rise of ecommerce in the grocery sector, and cited data from Spryker Systems predicting that by 2024, nearly a quarter of consumers (22%) will buy most or all of their groceries online.

That trend comes at a cost to supermarket operators however, the report found, noting that average margins for in-store grocery purchases are about 3.6% of sales, compared with 2.9% for online ordering with store pickup, and a loss of 3.8% for home delivery.

“Online orders are particularly damaging to margins in the food and grocery sector, which is already a low-margin category,” the report said. “Retailers prefer customers to pick up multi-channel orders to avoid shipping costs, particularly in margin-sensitive categories like grocery.”

In addition, the report cited the popularity of “autopilot” purchasing, in which regularly purchased items such as paper towels, dishwasher tablets and laundry detergent can be delivered on a set schedule from subscription companies such as Coterie Market, Public Goods, and Grove Collaborative.

The percentage of customers who have used subscription services for grocery has increased from 11.8% in 2021 to 12.4% in 2022, according to the report.

“Online buying options and the convenience of subscription services have made consumers less likely to visit the center aisles of traditional grocery stores,” the report stated.

As a result, grocery shopping trip lengths are down, despite in-store traffic up 2% over the past year (while still 11% lower than pre-pandemic levels in 2019), according to report, citing data from VideoMining Grocery Shopper Insights, GSI Tracker.

In response to these trends, some operators have been rethinking their store environments and experimenting with open, smaller formats in some locations, said Anjee Solanki, national director, retail services and practice groups, Colliers. Other grocers have explored layout shifts to emphasize fresh, perimeter departments.
 
“Today, attention is on developing smaller, more suitable locations that provide consumer convenience with more weekly visits,” she said. “Smaller stores also provide customers with a more local, personal shopping experience and retailers with lower overhead costs that transfer savings to lower prices.”