What is holding store brands back in America?

In 2019, store brand share in the U.S. reached an all-time high of 22.8%, up from 16.2% in 2007. This equates to a transfer of $60 billion from national brands to store brands. To put that in perspective, this equals the total revenues of Kraft Heinz, Campbell Soup, Hershey, and General Mills combined. Yet, compared to Western Europe, where store brands account for nearly 4 out of every 10 euros or pounds spent on consumer packaged goods, America is lagging. Why is that?

One factor is that there are few nationally operating grocery banners in the U.S. (Walmart, Kroger, Target, and hard discounter Aldi being the most prominent), which gives national brands a scale advantage. But my research has shown that there is another, crucially important factor: store brand quality. People want good prices but not so-so quality. What is going on?

To answer this question, I draw upon my consulting and academic experience as well as results from a recent survey conducted by Consumer Reports among over 75,000 members who provided information on 140,000 store visits, covering 96 grocery banners, from mighty Walmart to small, regional chains. Here are the key insights:

1. According to the Consumer Reports survey, average store brand quality on a 5-point scale from 1 (=worse) to 5 (=better) is a measly 3.1. Compare that with European store brands, which routinely score above 4, according to my experience.

2. Store brand quality varies little across chains. In fact, for two-thirds of the banners, store brand quality received a score of 3 (=not bad, not good) in the Consumer Report For brands to be successful, you have to do better than that.

3. It is a truism in brand marketing that the most important function of a brand is that of a guarantee of quality across the entire range. Strong brands deliver consistent quality across all product touchpoints. Whichever Tide product I buy, I get top quality. That is not the case for store brands. Store brands may give good quality in one category (score of 4, perhaps even 5) but poor quality in another. That undermines trust.

4. Store brands often do not get the top management attention they deserve. Compare that with the laser-focused attention on brands in CPG firms. When I talk with store brand suppliers and with store brand buyers, all the talk is about price, price, price. Yes, you have to be competitive, but if the retailer buys on price, that is what you will get.

How to rectify this situation? I recommend three things:

1. Change your mindset. Truly embrace that store brands are brands, first and foremost. Have trust in them, love them, nurture them, rather than carry them as a poor cousin of the “real thing.”

2. Learn from best practices. There are a few grocers who, according to U.S. shoppers, deliver high store brand quality (score of 5) – Costco, Trader Joe’s, and Central Market. I might add Kroger’s Simple Truth (not its standard Kroger brand). Go to these places, study their store brands, tear them apart and analyze where they are different from yours, and act accordingly.

3. Build longer-term relationships with store brand suppliers. What is the impact of changing suppliers every six months, and making unexpected, additional demands? These have one effect: there is no trust, and it is never about quality. Hard discounters Aldi and Lidl have used a relationship model with tremendous succes in Europe. They are regarded as tough but fair and dependable. Are you? It allows them to get high quality for low prices, while suppliers actually prefer to work with them, because long-term contracts give them certainty. On top of this, building high levels of supplier engagement will ensure you become the retailer of choice.

Only if you do that can you up the game, build store loyalty, and grab higher margins.

The author is C. Knox Massey Distinguished Professor of Marketing at the Kenan-Flagler Business School, University of North Carolina. This article draws on his latest book, Retail Disruptors: The Spectacular Rise and Impact of the Hard Discounters (Kogan Page, 2019). He is also the author of Private Label Strategy: How to Meet the Store Brand Challenge (Harvard Business School Press, 2007). You can connect with him on LinkedIn


Don't miss the Summer edition of Inside Private Brands. Subscribe now!