As inflation tightens household budgets, shoppers are making more deliberate choices at the grocery store. This presents a golden opportunity for supermarkets and grocers: shifting their focus from low-margin national brands to higher-margin private-label products. Once viewed as a budget-friendly alternative, these store-brand items have evolved into a strategic asset for differentiation, customer loyalty, and profitability. This article explores why private labels are crucial for grocers and how they can unlock their full potential.
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Pricing Differentiation in Action
Most grocers are missing the opportunity in private labels because they aren’t creating enough differentiation with price.
For example, a 7.5oz box of Kraft Macaroni and Cheese will have a margin of 15% and be offered at $1.19. A similar private-label brand will have a 40% margin at a price of $0.99. Most grocers would look at this and say, “40% margin! Great!”
But this isn’t necessarily great. Private-label market shares are generally <20% versus national brands because grocers haven’t created enough compelling differentiation between national and private-label brands using pricing.
What if you could take the price of that private-label mac and cheese down to $0.89 or even $0.79? You would have margins of 30% or 20%, respectively. This is still significantly more profit than Kraft’s 15%. The question is, would you make up the difference in volume and wind up with more profit at the end of the day?
This is where AI-based pricing tools like Puzl can play a key role in helping grocers understand how aggressive they can be with private-label margins. With Puzl, you can model different scenarios to find the optimal margin/price at which you drive much more volume in private-label sales while still outperforming on gross profit dollars.
Strategies for Building a Powerful Private-Label Program
The current private-label paradigm is, at best, sub-optimal. As Aldi and Trader Joe’s have shown, increasingly consumers are willing to forgo brands for value. What would such a rethink look like for an everyday independent grocer?
It all starts with targeting. Grocers must right-size their private-label pricing to target store-wide 40% private-label shares, not the underperforming sub-20% shares they have today.
To do this, grocers need to:
Commit to a private-label-first strategy. Gone are the days when national brands should, by default, dominate. Grocers need to be chasing absolute gross dollar profit, and, simply put, the low margins on national brands make that difficult.
Use AI tools like Puzl to get to the most competitive price possible on private labels while still delivering superior gross-dollar profit.
Rethink in-store merchandising. National brands shouldn’t, by default, get premium placement. If store brands deliver vastly more profit, they should get the premium placement.
Combine private-label margin optimization with strategic promotions. This can drive even more value than private-label products alone. Offering targeted promotions on private-label items can boost customer interest and sales volume. For more details on effectively using promotional pricing to protect margins and boost traffic, check out this guide on grocery promotional pricing.
Focus on quality products and quality design. The perception of quality, both with the product and on-pack, is paramount. Invest time in sourcing store brands that rival or surpass national brands.
Diversify product lines. Expand private-label offerings across categories, from everyday staples to specialty items, to cater to diverse customer needs.
Introduce premium private-label options. Launch premium private-label lines to attract higher-spending customers seeking unique or gourmet products.
Over time, this approach can significantly shift price image perceptions, particularly for independent grocers, and give them the ability to stay competitive with the likes of Walmart and Aldi, and others.
The Role of Technology in Private-Label Success
Advanced technology is revolutionizing how grocers manage and market private-label products. By leveraging tools like AI and data analytics, grocers can:
Predict Demand Accurately: Demand forecasting helps grocers maintain optimal inventory levels, avoiding overstock and stockouts.
Personalize Recommendations: AI-powered tools can suggest private-label alternatives tailored to shopper preferences, boosting adoption rates.
Analyze Competitive Pricing: Tools can benchmark private-label prices against national brands and competitors, ensuring grocers stay competitive.
Optimize Placement: Heat maps and shopper behavior analysis can identify ideal shelf placements for private-label items, maximizing visibility and sales.
Conclusion
Private labels are no longer just an alternative to national brands—they are a strategic weapon for grocers navigating today’s market challenges. By focusing on quality, optimizing pricing, and leveraging AI tools like Puzl, supermarkets can transform private labels into powerful drivers of growth, profitability, and customer loyalty.
Over time, these efforts can significantly shift price perceptions, especially for independent grocers, enabling them to compete effectively against retail giants like Walmart and Aldi. Grocers ready to embrace this strategy can unlock the full potential of private labels and lead their stores to long-term success.
Private Label Strategy FAQs
1. What is a private label strategy, and why is it important for grocers?
A private label strategy refers to a retailer’s approach to creating and promoting their own branded products instead of relying solely on national brands. This strategy helps grocers increase profitability by offering products at competitive prices while maintaining higher profit margins. It also strengthens customer loyalty and enhances market differentiation.