For decades, consumer packaged goods (CPG) companies have enjoyed a dominant position, with well-established national brands shaping consumer preferences and driving category growth. However, this long-standing equilibrium is being disrupted by a formidable competitor: private-label brands. As consumers become more cost-conscious and perceptions of private-label quality improve, major retailers are seizing the opportunity to promote their own labels aggressively. According to Circana's CPG Private Brands Update report, private label sales in the U.S. alone grew to more than $217 billion in 2023, capturing nearly one-fifth of the total CPG market. This growth trajectory poses a significant threat to incumbent CPG players, forcing them to rethink their strategies and respond decisively.
The Private-Label Value Proposition
The appeal of private labels is multifaceted, underpinned by favorable economic conditions, evolving consumer mindsets, and retailer prowess in elevating their store brands.
- Economic Tailwinds: In the aftermath of the global financial crisis and amid stagnant wage growth, consumers have become increasingly price sensitive. Private labels offer a compelling value proposition, typically pricing their products 20 to 30 percent below comparable national brands.
- Perception Shift: Once seen as low-quality alternatives, private labels have successfully shed this stigma. Retailers have invested in enhancing product formulations, packaging, and branding, effectively narrowing the perceived quality gap with national brands.
- Retailer Muscle: With their extensive distribution networks and prime shelf space, major retailers wield significant influence over the customer experience. They leverage this advantage to promote their private labels prominently, both in-store and through digital channels.
Facing the Private-Label Challenge
As private labels continue to gain traction, CPG companies find themselves at an inflection point. They can no longer afford to ignore this competitive threat or rely solely on traditional tactics. Instead, they must adopt a comprehensive strategy spanning multiple fronts:
- Strategic Pricing: While outright price wars with private labels may seem tempting, they often lead to eroded margins and diminished brand equity. A more prudent approach involves surgical price adjustments, focusing on defending key value segments while maintaining premium positioning for differentiated products. Procter & Gamble (P&G) has demonstrated this through strategically introducing lower-priced options in their family care business, maintaining their market share despite the growth of private labels.
- Innovation and Differentiation: To counter private-label encroachment, CPG companies must double down on innovation, developing unique product features, formulations, and value-added services that private labels cannot easily replicate. Kellogg's continuous innovation in both products and processes helps it differentiate itself from private labels and maintain consumer interest.
- Brand Building and Loyalty: In a crowded marketplace, strong brand equity remains a critical differentiator. CPG companies should invest in reinforcing their brand narratives, leveraging digital marketing, influencer partnerships, and experiential activations to foster deeper emotional connections with consumers. Unilever's investment in digital marketing, influencer partnerships, and experiences for brands like Dove exemplifies successful brand building that strengthens loyalty and emotional connections.
- Portfolio Optimization: Some CPG companies may find it advantageous to acquire or launch their own private labels, allowing them to participate in this growing segment directly. Nestlé has effectively optimized its portfolio through strategic acquisitions of innovative brands and launching premium private label products to participate in the private label space while managing cannibalization risks.
- Collaborative Relationships: While private labels pose a threat, they also present an opportunity for mutually beneficial collaboration. Coca-Cola's collaborative efforts to develop co-branded product lines demonstrate how such partnerships can leverage the strengths of both parties to compete effectively against private labels.
The Path Forward
As the private-label landscape continues to evolve, CPG companies must remain vigilant and adaptable. Those that fail to respond effectively risk ceding significant market share and profitability to these emerging competitors. Conversely, companies that embrace a holistic strategy – combining strategic pricing, innovation, brand building, portfolio optimization, and collaborative partnerships – will be better positioned to defend their market positions and unlock new growth opportunities.
Ultimately, the private-label challenge serves as a catalyst for CPG companies to reevaluate their value propositions, sharpen their competitive edges, and redefine their relationships with consumers and retailers alike. Those that navigate this transformation successfully will emerge as the champions of the new CPG landscape.
Kosuri madhuri , Management Consultant, MathCo
