The Cost-of-Living Crisis: National Brands vs. Private Labels

"You know the old joke: Just because you're paranoid doesn't mean they're not out to get you." That's the first sentence of the 1996 Harvard Business Review article about the rising prominence of Private Labels. Over twenty years later, these words still ring true.

Private Labels continue to claim a significant share of supermarket sales. In the first quarter of 2022, in the US, "dollar share for private brands in all major channels was 18.2%". And let's remember that it's an $810 billion industry. Indeed, National Brands have their work cut out for them, especially now that shopping behaviors are evolving due to the cost-of-living crisis.

The situation is complex, to say the least. That's why, in today's article, you'll learn about:

• How Private Labels matured over the years to suit the needs of customers. 
• How customers adjust to the cost-of-living crisis and how National Brands are affected.
• How brand-name products can stay relevant in this economic climate.

Private Labels Rise to Power 

Private Labels offer quality products at affordable prices. Initially they were limited to basic foods, like flour or sugar. In two centuries, Private Labels evolved from basic, cheaper products into branded low-cost alternatives, a genuine competition to the National Brands: the Coca-Cola's, and KitKat’s of the world.

After that brief history lesson, let’s look into how Private Labels continue to offer products at a lower price without appearing to compromise on quality.

When you buy a can of Coca-Cola, you’re paying for its production and shipping, but also marketing and advertising. The same goes for branding and eye-catching packaging. According to Statista, “Over the last seven years, Coca-Cola has spent an average of four billion dollars a year on advertising worldwide.” Private Labels usually rely on the retailer's existing marketing infrastructure and the relationship built between the retailer and the consumer.

Private Labels are also eliminating the middleman in the form of distributors or wholesalers. These economies of scale are also factors in the lower price tag for own brands. Private Label products are mass produced, significantly reducing the cost-per-unit.

And as we’ll demonstrate in the next section, for consumers, pricing is the key factor in these uncertain times.

Impact of the Cost-of-Living Crisis on Customer Behavior

This year, inflation reached a 40-year high, and consumers are feeling the effects. Consumers are aware of the impact on their day-to-day purchases and savings. They are cutting back on spending, looking for cheaper brands, and changing where they shop to seek better deals.

Let's look at how the current cost-of-living crisis impacts customer behavior and how this means people are looking to Private Label products as the answer.

Household expenses

Since early 2020, inflation in the US & UK has begun to skyrocket. And although the situation is far better now than a year ago, people continue to feel its effects. February 2023 marked a full year with an average 4% inflation of food prices in the UK. It means that an average shopper needs to spend an additional £811 to buy the same amount of food & drink. While in the US, it is estimated that food prices will increase 6% in 2023.

Seeing these trends, we prepared a report on how the cost of living crisis impacts consumers earlier this year. In the UK Food & Drink market, 70% of respondents said they struggle to keep up with their usual buying habits. While in the US, 59% of users are worried about their livelihoods.

Have a look at the results from our most recent analysis of the US and UK Food & Drink market.

It’s worth noting that neither National Brands nor Private Labels are immune to increased costs. However, thanks to the factors discussed earlier, own brands are often starting from a lower price point, giving them the upper hand, despite inflation.

Having said that, we can identify the following changes in consumers’ behavior:  

• Decreased purchasing power. People are carefully assessing their income and expenses.  
• Prioritizing essentials. People are prioritizing essential expenses such as food, housing, utilities, and healthcare over cravings or premium goods.  
• Becoming more price-conscious. People have become more price-sensitive and actively seek out discounts, promotions, and value-for-money offerings.  

Balancing National Brands and Private Label Purchases  

When carefully managing their household expenses, people assess their loyalty to National Brands. The cornerstone of a good brand-name product is effective marketing. However, more consumers wonder whether the additional cost of branded products is justified. At the same time, people begin to think that Private Label products belong on the same shelf as National Brands (pun intended). Some reports indicate that 60% of shoppers in Europe view Private Labels on par with National Brands.

A very competitive brand category, like cereals, is a good example here. The barrier to entry for Private Label products is low. As a result, there is a wide variety of own brands produced by retailers at cheaper price points. We've analyzed what ProQuo AI respondents say about this category: 37% of said they now buy their supermarket’s own brands (20%) or cheaper brands (17%). It’s a similar picture in the Beauty & Cosmetics market, where 25% of respondents are cutting back or seeking more affordable alternatives.

Staying Relevant as a National Brand

Everything discussed here today paints a picture of fierce competition for National Brands. Of course, brand-name products will reign supreme for the foreseeable future. However, the decreasing market share and pricing pressures are a cause for concern, especially for mid-sized companies.

Now, let’s move on to how National Brands can stay top-of-mind for consumers in current socio-economic conditions.

Let Products Speak for Themselves

One of the reasons why brand-name products still hold 80% of the market share is the superior perceived and actual product quality. In the Food & Drink market, taste is the key differentiator and is the reason why Coca-Cola sits at over 40% market share in their category. Consumers are willing to pay extra for superior quality and trust put in the brand to deliver that quality consistently. Brands can also communicate the unique features, advanced technology, or specialized expertise that sets their products apart from private label offerings.  

Moreover, brand-name products offer prestige or hype unattainable with Private Lebel products. That prestige can only be achieved with long-term branding and storytelling efforts. Premium positioning can attract consumers who value the status associated with well-established national brands.  

On the other side of the same coin, there is the brand’s emotional appeal. People, especially Gen Z, are willing to pay more for products that make them feel good. Those consumers are passionate about products that integrate with their values and connect with them more personally. They justify spending more on brands that have purpose, are inclusive and empathetic to their needs, and enable self-celebration. However, without outstanding brand equity, price-conscious consumers might still favor the cost-effective option.

Another way National Brands can win over shoppers is by emphasizing that their products are sustainable, made organically, or with 100% recycled packaging. Of course, there is a point at which being environmentally conscious is outweighed by price concerns. It’s called the price elasticity of demand. For example, in a survey conducted by McKinsey, people said that they are willing to pay more to be green, but not more than 25% more. Analyzing the price elasticity of demand in your category can prove beneficial, enabling you to understand your customers better.

Measure Your Marketing Effectiveness & Understand Your Competition

Marketing is a double-edged sword for National Brands. On one side, brand-name products rely on advertising to reach consumers, which factors in the increased pricing. Conversely, effective marketing can give a brand a competitive advantage by increasing brand awareness, fostering brand loyalty, and directly impacting sales.

So, it comes down to the effectiveness of your marketing efforts.

The cornerstone of that effectiveness is your Brand Equity. It reflects how much premium people are willing to pay for a product compared to a generic, or in this case, Private Label, product.

The ProQuo AI platform offers insight into your Brand Equity Score based on the 16 Drivers of Brand Equity. For example, you can determine whether survey respondents in your category find your brand-name product innovative, accessible, or it offers good value for money.

Innovation is a significant factor when competing against Private Labels. For example, in the case of soft drinks, offering new flavors, sugar-free versions, or limited editions can attract new and existing customers. You can measure the results of your marketing efforts in real time and over time to get a complete picture. If you want to know more, we’ve published an article on improving your Brand Equity.

Another factor that is crucial to consumers in the inflationary climate is value for money. With our platform, you’ll be able to see whether your brand’s perceived value for money has been affected by the cost-of-living crisis. Has value for money decreased for your brand while Private Labels have risen and is there a considerable gap between your perceived value and that of your Private Label competitors? With ProQuo, you’ll able to answer those questions and monitor that aspect of your brand in real-time.

Understanding your Brand Equity is as important as knowing how your competitors perform. Are you delivering the table stakes, the aspects of your product customers in your category expect the most? Our platform allows you to measure your brand in all 16 Drivers against both Private Labels and other National Brands. With competition tracking, you can play to your strengths, doubling down on the best-performing aspects of your brand. You can also see opportunities in spaces not yet conquered, or where you’re falling behind.

“It’s pretty simple. If you’re not tracking your competitors, how are you keeping an eye on your share of the category? Category Drivers shift over time, you can’t just look inwardly or talk to yourselves, you need to be tracking your key competitors to understand where they are focusing, and to identify opportunities for your brand to move into.” 

John Curran, Global Senior Sales Director, ProQuo AI  

If you want to measure the performance of your brand and competition and the effectiveness of your marketing efforts, book a demo of ProQuo AI.