Food & Beverage

Grocery store dilemma: Store brands ringing up higher sales, but not online — yet

Key Points
  • Private labels account for about 14 percent of packaged food sales.
  • Last year, 12 percent of shoppers bought groceries online at some point. Amazon's planned purchase of Whole Foods could push more retailers to grow their e-commerce platforms.
  • Whole Foods and Costco have created and grown their own popular brands.
A Whole Foods cashier
Robert Gauthier | Los Angeles Times | Getty Images

Customers are buying generic brands more than ever in stores, but they're not buying as many online. For now, at least.

Last year, trips to a brick-and-mortar store that included the purchase of a private-label product grew 1.1 percent, according to Nielsen. Online, that number fell 1.7 percent. However, just 12 percent of shoppers bought groceries online at some point last year, according to Cowen and Co.

Experts say digital private-label sales are bound to turn positive. The same shoppers who have embraced store brands at traditional stores will likely follow them online as retailers boost their e-commerce efforts.

"Private labels have a tremendous opportunity, and maybe an even stronger one in the digital world," said Jack Ringquist, principal and global consumer products leader at Deloitte.

Shoppers sampled store brands during the recession and liked what they tasted. What surprised the industry is that shoppers continued to buy such products when the economy improved. Private labels now account for about 14 percent of packaged food sales, and that number is likely to continue to grow, said UBS analyst Michael Lasser.

The aversion to generic has evolved somewhat into an affinity. The success of Trader Joe's highlights the increasing acceptance — and even embrace — of private labels. The movement has even convinced Aldi to expand its footprint and European chain Lidl to enter the U.S. market.

"Private label in the past was low quality. It was viewed as an opening price point," Lasser said. "What's happened is retailers and those pushing private label have come to realize it can be very effective to offer private-label products, they but have to be like-quality to name brands."

Creating an in-house brand can be lucrative for grocers. Store brands have higher margins and can encourage loyalty, both of which mean more money for retailers. And to build these brands, stores only have to display them on shelves next to traditional brands.

The virtual shelves on grocers' websites are different from their physical counterparts. Websites can display only a handful of products on each page, meaning some products receive prime spots while others get sent to the back.

The system may seem like it could help some brands while hurting others, but Barclays analyst Karen Short disagrees. If a private label is popular in the real world, it will likely be popular in the digital world, too.

"It's not the same as shopping for clothes," Short said. "You have a shopping list. You aren't browsing. You are a little, but not really."

Online grocery delivery service Peapod carries its parent company Ahold Delhaize's private-label products. Customers in areas that do not include the company's physical stores like Stop & Shop still buy its brands, said Jac Ross, senior director of product development, innovation and integrity.

"We see regional differences, as you would expect in different parts of the country, and maybe demographic differences, but I don't think you see anything particularly different with either less or more items," she said.

One of Ahold's private brands is Nature's Promise. At Peapod, 65 percent of all orders contain a Nature's Promise product, and 73 percent of households have bought a Nature's Promise item in the last year, another spokesman said.

Not all store brands will see the same success, though, Short cautions. Grocers that have earned the respect and trust of their customers have the best chance.

Costco is one store that has grown a successful private label. Its Kirkland Signature brand accounts for 20 percent of the store's grocery sales, UBS' Lasser said. When shopping online, customers can choose to shop only Kirkland products instead of all products in the various categories of the grocery, household and pet department.

Whole Foods also has had a successful private-label business with its 365 Everyday Value brand. The grocer has even used that brand as the name for its smaller format, value-oriented stores.

It will be interesting to see how both Whole Foods' private-label and online businesses grow after the Amazon deal closes. Amazon itself has dabbled in private-label food brands with its Mama Bear, Happy Belly and Wickedly Prime brands. No doubt the potential of the combination has spooked investors.

Wal-Mart has raced to bulk up its online business. It bought last year and has invested heavily into improving its e-commerce infrastructure. A Wal-Mart spokesperson said customers are loyal to its private brands, "both in-store and online."

"While we are the largest private-brand player in the U.S., we've spent a lot of effort to invest in product development, sourcing, technology and new talent to be able to build an even better business," the spokesperson said in a statement. "These brands help us deliver great prices for our customers, innovative products and quality items that we know our customers are going to love."

The grocery battle is about to enter the digital frontier, and private-label brands could be on the front lines.