On top of inflation-induced cost price volatility, retailers are now facing the fallout of consumers shifting to less-expensive channels and product ranges. The latter has cost European retailers more than €700 million of annualized commercial margin already, turning many private label portfolios into liabilities within just 12 to 18 months. As consumer spending may not return to pre-2022 levels for several years, it is critical for retailers to address this challenge seriously and head-on. In our report Addressing The Private Label Dilemma In Retail, we highlight the actions to consider based on our experience working with retailers over the past decades.
At first glance, the growth of private label is good news. As cheaper alternatives to branded products, private label lines should allow to slow the shift to cheaper competitors or channels, while also helping consumers through the cost-of-living crisis. However, the shift puts pressure on retailers’ margins also, with volumes flowing to lower- and low-end range products that dilute overall profitability. As a result, while the first wave of challenges rooted in the return to inflation has been difficult to absorb, this second-order effect will create even more challenges.
The strategic intent behind added-value private label lines is clashing with the new reality of crumbling volumes during the cost-of-living crisis. Retailers must decide how to continue winning through private label while improving economics.
Our private label playbook comprises a comprehensive set of recommendations for doing so effectively.
Immediate actions to improve private label margins
Stop the margin erosion and enhance your ability to act based on better control and steering of product-switching dynamics. These are some key steps to follow:
- Perform a rapid private label assessment
What are the results of mix-changes? What are the underlying switching dynamics? Which internal sourcing capabilities and how can they be improved?
- Get systematically on top of private label cost of goods sold and commodity cost opportunities
What is the input cost evolution across all private label products? What benefits does AI automation offer in understanding navigating input cost modelling complexities, and providing leverage in negotations with manufacturers?
- Run fast-track category resets based on a thorough understanding of consumer product switching behavior
How to optimize product allocation, store placement, and pricing to positively impact switching dynamics, prevent slippage, and maintain price perception targets?
Private label actions for the long term
The current crisis is a reminder that the substantial enhancements to private label management capabilities of the last decade are just the beginning. In most cases, there are still gaps in product management and operations capabilities as well as in reaching meaningful scale. Things to consider:
- The next private label customer proposition
Recalibrate your north star and reposition your portfolio. Consider what you want to grow and focus on. Translate strategy into action by defining operational targets and guidelines at a granular level.
- Develop true product cost-management capabilities
Move towards a true product company mindset that considers customer proposition, product cost, and supply chain as one.
- Get real in terms of scale and focus on volume bundling
Combating margin erosion requires a focus on volume bundling through alliances, backed by top-down guidance and incentives to overcome internal resistance.
Since 2022, retailers are mostly reacting to cost of goods sold (COGS) inflation via negotiations and pricing. As the dust settles, it’s becoming clear that retailers face another wave of challenges driven by consumers trading down to the bottom-end of their private label portfolio. This opens gaps in their profitability picture, while the declining volumes in the upper parts of the portfolio raise core strategic questions. The time has come to review assortment and private label propositions, as well as underlying capabilities, to navigate the storm successfully and come out on top.