Walmart created a big splash a couple of weeks ago by introducing Bettergoods, a private label better-for-you line which the retailer deemed its largest launch in two decades.
So why does the nation’s top grocer need to expand beyond its current private label offering, Great Value? Some in the industry say they believe it is a way for Walmart to better compete against Trader Joe’s and Kroger.
The Bentonville, Ark.-based company, however, is stepping into unchartered territory, at least when it comes to grocery. Great Value and Bettergoods shoppers are not entirely the same demographic. Great Value consumers are after one thing: value. The strategy behind Bettergoods is to attract shoppers in a higher income bracket with quality food, according to John Clear, senior director at global professional services firm Alvarez & Marsal Consumer Retail Group.
It represents a brand-new customer base for Walmart in grocery, and it might not all be smooth sailing.
However, this isn’t Walmart’s first attempt at trying to gain market share with higher-income shoppers. In the retailer’s earnings call earlier this month, Walmart CFO John David Rainey told analysts that the company is seeing a higher engagement with upper-income households.
And in March, Walmart began putting together more elaborate store displays featuring high-end products.
Supermarket News talked with Clear about Walmart’s future and the direction things are heading within private label.
Supermarket News: What kind of message wasWalmart sending with rolling out Bettergoods?
John Clear: I think Walmart is obviously traditionally known as purely a price player. And I think that this is them leveraging their price advantage, particularly in private label, with things like Great Value and Sam’s Choice, in a slightly different direction to kind of pick up on a couple of trends.
One is the trade down that we’re generally seeing across the market between banners, from traditional retail to discount retailers like Aldi and Lidl, and then it’s some context like Walmart. And then also, even within stores, there’s an increasing penetration of private labels. So that kind of trade-down activity is one thing they’re looking at.
And then the other side of it is a kind of general trend that has existed now for a long time, like five to 10 years, of this kind of “better-for-you” range, where I think traditionally players like Whole Foods, probably Kroger’s elevated selection, were stronger than Walmart in this space.
So I think their push is, “Let’s take a segment of the market that we don’t currently address and that customers have expressed an interest in, which is the better-for-you, more sustainable product, and then leverage our already existing private-label capabilities to take advantage of kind of trade down customers.” So those customers who still want better-for-you products may not have as much money as they did a number of years ago, and now Walmart has a really clear option for them.
SN: So who is the customer they’re trying to reach here?
JC: I think generally it’s traditionally a younger customer. It probably starts with the second half of millennials, and then it’s Gen Z, particularly, who are more focused on these kinds of products. And again, I think it’s not just age demographic. It’s also income demographics that they’re targeting that are different here, and that’s not Walmart’s core customer.
I think it’s a bit of a total solutions play. So, to move slightly away from just the image of only being price and commodity and value-focused, to also quality and ingredient and sustainability-focused to bring in that higher income bracket.
SN: And there’s going to be a challenge of pulling in that higher-income shopper, right? It’s not a guarantee.
JC: No, it’s not a guarantee. If you want to grow sales, there are two ways you can do it. One is to increase the average spend, and the second is you increase the number of transactions. And I think this play actually fulfills both of those buckets.
The second one is definitely more challenging. And the biggest challenge that Walmart faces is its traditional heritage of being a purely value-focused retailer. And so they’re going to put themselves into a different competitive field here, which would be against primarily Target that they cross over in a lot of places, and secondarily Kroger, who is already pretty strong in this market because they offer that wider assortment at the higher price point across their banners.
Walmart has a reputation that they’ve built and consolidated over decades. So, trying to change that in a shorter period of time is always a challenge.
So I think in the short term, they’re probably going to see a bump from expanding or increasing average basket and average spend, which may give them kind of the fuel to then go after marketing campaigns and targeted campaigns to bring in customers from those with a banner like Target, Trader Joe’s, and Kroger. That is the difficult part: changing customer behavior and activity. And that’s the part that will take the most time because you need to have people come in and try it and trust you, and that’s taking them away from the brands they already trust.
SN: Let’s talk private label more generally. How has private label evolved over the last few years during this inflationary period?
JC: I mean, the private label side of things is probably driven by a number of factors. So definitely, the inflationary piece is a huge part of it, and customers want to trade down. I also think the growth of more heavily private label and discount players in the market is a second push there. So, I mean, the big news is Aldi, with its acquisition and 800 new stores over the next five years. I mean, you think about that, they will be approaching the largest store count in the country, which means that I think the statistic I heard from them last week is that something in the region of 25% of
Americans are regularly shopping in an Aldi, even though it’s not their primary shop. So if a quarter of households are being exposed to lower-priced, higher-quality private label on a more regular basis, that’s generally going to drive the market. So I think that part of it is definitely going to fuel expansion in private labels.
On the other side, what brands like Aldi, Trader Joe’s, and Lidl have really pushed overall is that private label doesn’t need to only be your trade-down commodity items, which is what traditionally Great Value was. And so they really have the tiering within their assortment to show you can get your standard item, you can get a trade-up option, you can get an organic option all within the private label band, and spend less money. So I think that’s really kind of improving the outside view of what private label can be. So that’s one part of it that’s going to drive it.
And that’s being fueled then by obviously the price increases that have come from CPGs and the general inflationary pressure that’s encouraging customers to trade down to private label even within their standard banners, which is where you see from a result of Walmart and Kroger particularly that private label is gaining penetration within their own stores. So I think they’re seeing the value of it. So that’s just from a customer behavior market trends perspective.
The third point here is really important is, from within a grocery banner, like a Walmart, Target, Kroger, private label generally is more margin accretive than their national branding counterparts. So if you’re in a period where you’re under inflationary pressure and your margins are becoming thinner on the CPG side, then private label becomes a very good route for you to increase your margins and increase the kind of overall bottom line.
I think the CPGs are going to come under more pressure to reduce their pricing, which will probably then slow a little bit the kind of aggressive expansion of private label. Because it’s not like the European market where the European retailers have a bit more power over their CPG counterparts. In the U.S., the CPGs are so large that they can actually drive market dynamics a bit more.
And so the private label growth makes a lot of sense. But I think you’re going to see some pushback from the CPGs to maintain their position over this time period because they can see, obviously if they lose on private label, then their own brand is going to get watered down, they’re going to lose market share, they’re going to lose sales. So that’s a very interesting dynamic to track now as well.
SN: Long term, do you see private label holding its momentum?
JC: I don’t know if it’s going to continue at exactly the same growth space because it was growing from a smaller base. And the most recent data I saw was that 82% of spending still goes to national brands. Private label is still less than 20% of the market. So it shows that there’s a big growth that can still come. I don't think they’re going to see such huge gains over time.
But I expect it to continue to gain traction because if you look at what happened over the last 18 months, there was a theoretically looming recession, and it never really became official, and it’s still not official. But the last two to three have shown that retail is under extreme pressure with the number of shutdowns and liquidations, not just in grocery, but across the board in a parallel of areas. Retail’s under a lot of pressure. Consumers are feeling the pinch just as much as they were last year. That kind of behavior from the consumer side is going to continue. And the quest for margin on the retailer side is going to be really important.
Getting your private label mix right to make sure that you can have the items that are exciting for customers and improve your margins, while also maintaining strong relationships with CPGs because that’s also important to customers, is going to be a very important element of all grocer strategies, we think, as it goes forward in the next one to two years. You must have a strong, robust, logical private-label assortment and strategy that complements your CPG strategy so that you can build yourself for success in the long run.
