Private labels now account for nearly 20% of sales in major retail sectors, a figure that underscores their significant presence in the modern marketplace. For decades, private-label products have been heralded as a win-win for retailers and consumers alike: offering shoppers affordable alternatives while boosting profit margins for grocers and supermarkets. Yet retailers’ overreliance on private labels risks stifling innovation, limiting product diversity, and eroding their competitive edge.
In this blog post, we’ll explore how the very strategy that propelled certain retailers to the forefront of the industry could, if left unchecked, leave them vulnerable to shifting consumer demands and market disruptions.
The Golden Era of Private Labels
Private labels have transformed the retail landscape, revolutionizing how grocers and supermarkets approach pricing, margins, and customer loyalty. Once viewed as a second-tier alternative to national brands, owned-brand products have evolved into a cornerstone of modern retail strategy, driving growth and reshaping consumer expectations.
Revolutionizing Pricing and Margins
The financial appeal of private labels lies in their ability to deliver higher profit margins while offering consumers lower prices. Unlike national brands, which require retailers to pay premiums to stock their products, owned brands allow retailers to control every aspect of the production and pricing process. This cost control not only improves profitability but also provides flexibility in responding to market demands.
Walmart and Costco have mastered this model, building consumer trust with household names like Walmart’s Great Value and Costco’s Kirkland Signature. By offering products that rival national brands in quality but at a fraction of the price, these giants have demonstrated the economic power of private labels.
Cultivating Customer Loyalty
Private labels have also played a pivotal role in fostering loyalty. Chains such as Trader Joe’s and Aldi have built their reputations around store-brand products that are exclusive, unique, and high quality. By offering items customers can’t find elsewhere, these retailers have differentiated themselves from competitors and cultivated a devoted following.
For example, Trader Joe’s frozen peanut butter-flavored desserts and Aldi’s affordable gourmet selections are part of a brand identity that keeps customers coming back. Trader Joe’s has even leveraged social media to make some of its trending products viral sensations seen everywhere from TikTok to BuzzFeed. Meanwhile, traditional grocers such as Kroger and Albertsons have expanded their private-label lines, introducing premium options like Kroger’s Private Selection to compete with higher-end name brands.
By continuing to invest in private-label development and deliver consistently good products, these retailers not only provide customers with better value but also establish an emotional connection, with shoppers trusting the store to deliver quality and consistency every time they visit. By building that trust, private labels turn casual customers into brand loyalists who choose their preferred retailers again and again.
Why the Obsession Took Off
The rise of private labels isn’t just about profit margins; it’s also about control and adaptability. Retailers have embraced private label brands for the following reasons:
- Pricing Power. Retailers gain complete control over the pricing of their private-label products, allowing them to undercut competitors and respond to consumer demand for a lower price without sacrificing margins.
- Exclusivity. Unlike national brands, private labels are exclusive to the retailer, creating a sense of uniqueness and drawing shoppers who associate these products with the store’s value proposition.
- Consumer Preferences. Shoppers have increasingly prioritized affordability and perceived quality, a trend that aligns perfectly with the private-label model.
Retailers across the board, from Whole Foods to Dollar General, have leveraged these advantages to position their private label offerings as a smarter choice for consumers. The result? A booming category that has reshaped the grocery aisle and set a new standard for how store-brand products are marketed and sold.
However, while the golden era of private labels has been marked by growth and success, shopping habits are shifting. Private labels now have such strong brand identities, their retailers may struggle to adapt if consumer preferences change—potentially becoming victims of their own success.
The Overreliance Trap
As retailers increasingly double down on private labels, a new risk emerges: overreliance. While private labels deliver impressive short-term wins, they can pose long-term challenges that may stifle growth, alienate customers, and diminish innovation.
Reduced Product Diversity
Private labels often dominate shelf space, pushing out innovative third-party products. While store-brand items can perform well initially, an oversaturated market can lead to consumer fatigue. Shoppers accustomed to choosing between beloved products from the likes of Nestlé or Kraft may grow frustrated when those options are replaced by an endless array of private-label goods.
For example, while Aldi thrives on its private label strategy, it carefully balances its assortment to ensure customers still see value and variety. Retailers that fail to strike this balance risk losing shoppers who crave both familiarity and novelty. A grocery store without options such as Jif peanut butter or Ben & Jerry’s ice cream may drive customers to competitors who maintain a mix of national brands and store-brand products.
Innovation Slowdown
By prioritizing private labels, retailers can become complacent, missing opportunities to partner with up-and-coming brand counterparts or experiment with groundbreaking products. This lack of innovation leaves stores vulnerable to stagnation.
Consider experiential retail—where in-store events, cooking demonstrations, or community collaborations elevate the shopping experience. Retailers hyperfocused on expanding private-label lines may neglect these opportunities, overlooking proven ways to drive engagement and loyalty.
Even private label leaders like Costco have recognized the importance of innovation and collaboration. While its Kirkland Signature line dominates, Costco strategically partners with premium brands such as Starbucks, creating variety and excitement while enhancing customer trust. Retailers that fail to innovate risk becoming one-dimensional and uninspired in shoppers’ eyes.
Brand Dilution and Market Fatigue
Expanding private labels across too many categories can dilute their identity. Customers may begin to question the quality of store-brand products when they see the same label on everything from ice cream to household goods. What starts as a premium offering can quickly lose its appeal if it feels mass-produced or generic.
This is especially true when the focus on private labels overtakes strategic curation. Kroger avoids this trap by using its Private Selection premium line to compete with higher-end national brands while ensuring it retains the exclusivity that customers associate with quality. Overextending private labels, however, can damage that carefully crafted perception.
Price War Pressures
Private labels often compete on pricing, which can drive a dangerous race to the bottom. When retailers rely too heavily on undercutting national brands, they risk shrinking profit margins and cutting investments in R&D or product innovation. Over time, this strategy becomes unsustainable and leaves retailers ill-equipped to compete with shifting customer preferences.
Retailers should instead follow the example of Costco’s Kirkland Signature, which pairs affordability with perceived value. By balancing competitive pricing with trusted quality, Costco avoids compromising customer perception—a lesson retailers leaning too heavily on budget private labels may overlook.
Consumer Trust Risks
Private labels also come with reputational risks. A single quality mishap—such as a product recall—can undermine customer trust not just in the private label but also in the retailer as a whole. Unlike national brands, which absorb the reputational blow themselves, store-brand failures reflect directly on the retailer.
Shoppers expect consistency, particularly when private labels promise value and quality. A poorly executed rollout or overlooked quality control can leave customers skeptical and more likely to return to trusted national brands.
In the end, overreliance on private labels can become a trap. For retailers, the challenge lies in striking the right balance—leveraging private labels for profitability while keeping innovation and customer trust at the forefront.
A Balanced Approach: Innovation + Private Labels
Consumer preferences are evolving rapidly due to constant advertising and information consumption, and private labels, once the darlings of retail, are facing new challenges. While cost-conscious shoppers fueled the private-label boom during periods of economic uncertainty, today’s consumers—especially Gen Z and millennials—are increasingly drawn to products that emphasize uniqueness, sustainability, and social responsibility. They’re prioritizing foods that align with their values, such as locally sourced items or those produced by small, independent brands. Retailers like Whole Foods and Trader Joe’s have capitalized on this by curating unique selections and promoting partnerships with artisanal producers. Stores overly reliant on generic private-label products risk alienating this demographic, however, as the one-size-fits-all model feels increasingly outdated.
Private labels have undoubtedly transformed the retail landscape, but retailers should take a balanced approach. A strategy that combines private labels with national brands and innovation can ensure long-term growth and adaptability in a rapidly evolving market.
Here’s how:
Diversify, Don’t Overinvest
Retailers should aim to balance private label expansion with investments in other areas, such as technology, customer experience, and product diversity. For example, grocers such as Albertsons have successfully developed their private label line while also rolling out digital innovations such as loyalty apps and personalized promotions that deepen customer relationships.
Investing in variety also helps retailers cater to shifting consumer preferences. Balancing high-performing private label brands with unique counterparts from small producers or artisan suppliers can give shoppers the best of both worlds.
Collaborative Innovation
Partnerships with national brands can inject creativity and excitement into a retailer’s offerings. Limited-edition or co-branded campaigns are a proven way to drive customer engagement and brand loyalty. Consider the success of Costco’s Kirkland Signature collaborations, which include partnerships with Starbucks and Jelly Belly, pairing private-label value with the cachet of trusted name brands.
Retailers can also explore collaborations to create exclusive products that align with consumer trends. For example, grocers could partner with wellness-focused brands to create a lower-price line of plant-based meals or sustainable snacks, further emphasizing accessibility and innovation without abandoning their private label strategy.
Customer-Driven Innovation
The best strategies start with understanding the customer. Retailers that leverage data to personalize shopping experiences can better serve their audiences without relying exclusively on private labels. Kroger is among the grocery chains that excel in using customer insights to inform everything from product placements to individualized coupon offerings via their loyalty app.
By prioritizing what customers actually want, retailers can develop innovations that align with real demand. For example, offering curated subscription services featuring popular brand-name products or using data to identify in-demand product categories can yield higher profits without oversaturating the market with private-label items. Trader Joe’s shines in this area by tailoring its offerings to regional preferences and stocking limited quantities of unique items, creating a sense of exclusivity and urgency.
Striking the right balance between innovation and private labels ensures that retailers remain competitive and resilient, able to adapt to changing market conditions without sacrificing their core strengths. The lesson is clear: Thriving in the grocery industry requires not just leveraging the power of private labels but also continuously evolving to meet customer expectations and market demands.
Find the Right Mix for Your Store with InContext
Private labels have undeniably reshaped the grocery industry, offering retailers a powerful tool to drive profits and build customer loyalty. However, as the market evolves, it’s clear that overreliance on any single strategy—including private labels—can leave retailers vulnerable to shifting consumer demands, missed opportunities, and stagnant innovation.
At InContext, we know the stakes are high, which is why we provide solutions that let you test with confidence, not guesswork. Thinking about introducing a new brand into your store? We can help you simulate its impact—down to its precise shelf location—with unprecedented real-world correlation rates. Whether it’s adjusting product layouts, experimenting with new concepts, or rethinking your category strategy, our tools take the risk out of your decisions. With InContext, you can stop testing and start knowing, empowering you to make informed, data-driven moves that maximize both profits and customer satisfaction.
Don’t leave your store’s future to chance. Discover how InContext can help reveal the right path forward, ensuring your strategies are as dynamic and forward-thinking as the customers you serve.
Find your perfect balance with InContext. Contact us today to get started.
