Store brands like Kirkland are winning the war for consumer wallets, squeezing out national brands

By Bill Peters

From razors to pet food, private label keeps eating retail. For many consumer packaged-goods companies, there's no point fighting it.

The Schick brand has been around for 100 years. Schick revolutionized shaving with injector razors and multiblades in a single cartridge, slugging it out in the marketplace for decades with rival shaving giant Gillette. But today, Schick's owner, Edgewell Personal Care, makes razors not only under the Schick name but for Walmart's Equate private-label brand and Target's Up & Up line.

Those products might appear to compete with one another. But while the different razors are often manufactured in the same factory, different technology, parts and production lines are used, according to Edgewell CEO Rod Little. Moreover, Edgewell (EPC) is currently consolidating four manufacturing plants across its Americas region into one megasite making the various razors.

Little told MarketWatch he didn't believe his company's Schick-branded products were undermined by the shaving products it makes for Walmart (WMT) and Target (TGT). "It gives us scale to be able to compete with Gillette," he said.

Private-label products, which are made by contracted manufacturers for retailers that sell them in stores under their own names and logos, are steadily extending their reach into the consumer packaged-goods market. U.S. retailers' private-label brands, like Costco's Kirkland and Walmart's Great Value, are now serious competitive threats to Procter & Gamble, PepsiCo and other household-staples stalwarts, industry experts say. Retailers keep investing in producing higher-quality goods, which helped private-label products generate sales in the U.S. of around $245 billion last year, according to data from market research firm Circana, up from $184 billion in 2020.

Roughly one in five products that Americans buy on retail-store shelves today is a private-label product, Circana data show. These private-label products, which are generally cheaper than national brands like Tide and Doritos, have made it easier for consumers to keep spending as prices for basics rise, propping up economic growth. As more shoppers buy the store brands, the balance of power between retailers and manufacturers keeps shifting in the retailers' favor, analysts say.

Private-label competition has strengthened in 'pretty much all of our categories' over the past year. 'They [have been] stealing share.' Dana McNabb, General Mills

"We had seen private label get stronger in pretty much all of our categories" in the last year, Dana McNabb, chief operating officer of Cheerios maker General Mills (GIS), said during a post-earnings-report conference call in July. "They were stealing share."

As private label grabs a bigger slice of the retail market, the older, bigger consumer packaged-goods makers are now left with a choice: beat the retailers or join them.

Both paths come with potential pain for established brands. Beating retailers means competing with a sprawling web of smaller, largely unknown manufacturers that can develop products more quickly, leaving retail chains with room to experiment with the latest trends, be it protein or hot honey. Moreover, even a consumer-goods manufacturer's boldest creations can be mimicked by a retailer's private label.

As for joining them? National-brand manufacturers may or may not want to make private-label products for stores, but it's an open industry secret that they often do. Those collaborations risk steering customers away from the things those producers are in business to sell, and leave them vulnerable to the strategic and complex decisions big retailers make around shelf space.

It's not just razors. Similar overlap can be found elsewhere. Bottled-water maker Niagara told MarketWatch it makes private-label product for grocery chain Kroger and other big retailers; indeed, its logo can be found on the plastic water bottles sold under Kroger's (KR) store brand. Similarly, the packaging on some Wegmans bottled water sold at Wegmans Food Markets locations says it's bottled in a plant in Johnstown, N.Y., run by the company that makes Crystal Geyser bottled water. Crystal Geyser and Wegmans did not respond to requests for comment.

' "Frenemy" is a good way of thinking about it.'Jeff Dotson, Ohio State University

Costco (COST), meanwhile, states on its website that all of its Kirkland dry pet foods "are made by Diamond Pet Foods in five company owned manufacturing facilities."

" 'Frenemy' is a good way of thinking about it," said Jeff Dotson, a marketing professor at Ohio State University. "It's an adversarial-cooperative relationship between manufacturers and retailers."

How consumers gravitated toward private label

When Jeff Strong joined Procter & Gamble (PG) in 1988, the widely accepted blueprint for a retailer's success was simple: Load the shelves with popular items sold and marketed nationwide. At that time, many private-label products in America were still cheap, generic, bottom-shelf fare - recall the beer that came in yellow cans that simply read "BEER" on them - and they did not seriously compete with branded products.

By the early 2000s, though, management at P&G started to become worried, Strong said. In Europe some retailers were putting up big sales gains, but not by selling chips made by PepsiCo's (PEP) Frito Lay or P&G essentials like Bounty that shoppers could find anywhere. Instead, they were bypassing those consumer-goods behemoths and designing and selling cheaper alternatives themselves, under private-label brands that were only available at their stores.

P&G asked Strong, then the marketing director for Pampers, to compile a report on the private-label threat. The report concluded that private labels wouldn't necessarily kill big legacy players, and that danger depended on the product and the country, he said. But it suggested bigger risks ahead if the world's largest chains decided, one day, to stock their shelves with more products bearing their own names that competed directly with P&G brands. A color-coded world map in the report plotted out that threat: green for lower-risk countries, where retail consolidation was low, and red for higher risk.

The U.S., where large retail chains were taking greater control of the market, was among the countries labeled red, Strong said. P&G said it couldn't comment on the matter.

In the decades since, U.S. retailers' in-house brands indeed became a bigger threat for P&G, PepsiCo and other consumer-goods behemoths.

Strong left P&G in 2008, worked at Johnson & Johnson (JNJ), and, in 2011, landed at laundry-detergent maker Sun Products, where he ran the company's private-label business. Along with names sold around the country like All detergent and Snuggle fabric softener, the company also made detergent for Costco's Kirkland and Member's Mark at Sam's Club, albeit with different formulations, he said. Those products were often shipped to retailers on the same trucks, he said. The company had plants in Salt Lake City and in Bowling Green, Ky., that made both the national-brand and store-brand products, he said.

Combining national brands like All and private-label alternatives under one umbrella was the point. It was a way to make both kinds of products for different customers in different places. At times, the private-label products received better treatment.

"The product we made for Costco that was sold under the Kirkland Signature label was significantly higher quality than All," Strong said.

Every retailer today wants its own version of the Costco private-label success story Kirkland.

Henkel, a company that makes adhesives as well as laundry and hair-care products, bought Sun Products roughly a decade ago. Henkel declined to comment on Sun's old factories and the products made there. Costco did not respond to questions about its Kirkland brand for this story.

Retail analysts point to two developments that accelerated the rise of private-label products. The first is the enormous success of Kirkland, Costco's private label, which emerged from an effort to consolidate dozens of store brands under one name. It was a revelation, and a wake-up call, for fellow retailers.

The products sold under the Kirkland label, from groceries to golf balls, are cheaper than products sold by national brand names. But they're often just as good, and often just down the same aisle at Costco stores. Now, every retailer wants its version of Kirkland.

Retailers like private-label products because they allow the chains to undercut competitors on price, control production and advertising costs, and deliver fatter margins, retail analysts say. Since stores' private-label fare sells for less than nationally marketed offerings, shoppers, historically, have flocked to them whenever the economy slumped, and away from them when the economy strengthened.

That changed during the "great recession," an event some analysts see as the second game changer for private-label offerings. Ricky Volpe, a professor of agribusiness at Cal Poly San Luis Obispo, said the popularity of private-label products rose during that downturn, which lasted from 2007 to 2009. But even after the economy recovered, he said, consumer demand for private-label products held steady.

"In my mind, that was the great awakening nationally for private label," Volpe said. "It created a new generation of American shoppers that are at least open to the idea of private label, if not loyal to them."

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