MARKET TRENDS

National Brands vs. Private Labels: a market dynamics analysis for hygiene tissue in the United States

Article by Franklin Zambrano1, Antonio Suarez2, Dr. Hasan Jameel3, Dr. Richard Venditti3 & Dr. Ronalds Gonzalez MBA4

1Ph.D. student focused on tissue technology and performance, North Carolina State University 2Ph.D. student focused on sustainability, North Carolina State University 3Professor, North Carolina State University 4 Professor & Co-Director Tissue Pack Innovation Lab, North Carolina State University

Private labels have managed to gain market share from national brands in different consumer-packaged goods, growing at a CAGR of 2.5% since 2015 versus the 1% growth reported for national brands.

Private labels have managed to gain market share from national brands in different consumer-packaged goods, growing at a CAGR of 2.5% since 2015 versus the 1% growth reported for national brands.[1] Particularly hygiene tissue products in the consumer segment, such as bath tissue and paper towels, represent one of the articles with the highest impact on the sustained growth of private labels (Fig. 1), with approximately 27%[2] of the current tissue market share in the U.S., 55% in Europe and 35%[3] worldwide.

The success of private labels in consumerpackaged goods is attributed to their ability to offer the best trade-off between product performance and shelf price. Consumers perceive that private labels are reasonably priced for the performance offered, making them feel that they obtain higher value for their money. However, when national brands and private labels are compared on a performance basis in the context of hygiene tissue, which product group truly offers the best value? Is the feeling of satisfaction Fig. 1. Consumers’ willingness to purchase private labels. experienced by consumers well-founded? The goal of this analysis is to answer these questions in an attempt to provide more insights to manufacturers, retailers, and consumers about the current product offering in the U.S. tissue and towel market.

WHICH PRODUCT GROUP OFFERS THE BEST VALUE TO CONSUMERS?

related to how soft or absorbent the product is. Although other structural properties such as basis weight and strength are also critical for the overall performance of a tissue product, consumers will even pay a premium for improved absorbency or softness.[4][5] Tissue manufacturers strive to tailor their operations to maximize these properties based on their fiber selection, chemical additives, and manufacturing technology. Naturally, the ultimate combination of attributes will depend on the grade (e.g., Economy, Premium and Ultra) to which the product is intended to.

Figure 2 shows the average shelf price and water absorbency for consumer paper towels (kitchen towels) in the U.S market in 2019. The data, which covers ca. 95% of the product offering (based on market share by volume), is segmented into national brands, private labels sold by retailers, and private labels sold by wholesale clubs. Water absorbency was selected as the primary performance indicator since our previous analysis showed that overall, this feature is the main price driver for paper towels within the consumer tissue segment.[4]

In general, national brands show a combination of high shelf prices and high performance, which is in an agreement between what consumers are charged for and the product they get, i.e., there is a dollar value on each gram of water absorbed. When compared to national brands, private labels sold by retailers show inferior performance (14% lower) with a lower shelf price (23% lower). On the other hand, private labels sold by wholesale clubs behave differently to their competitors. Tissue products offered at wholesale clubs tend to be underpriced (41% less than national brands) related to the performance they offer (water absorbency only 5% below national brands). In other words, they provide an excellent trade-off between performance and shelf price – no wonder why toilet paper is Costco’s best-selling item[6] This observation aligns with the strategy of wholesale clubs, here their ma or profits come from subscriptions while they pass on the savings to subscribers. Naturally, it is important to consider the “bulk” factor playing a role in pricing, which tends to considerably decrease the shelf price (per unit of product) for wholesale products.

Fig. 2. Consumer paper towels in the U.S. market.

MILLENNIALS AND GROWTH IN RETAIL STORES WILL FURTHER DRIVE THE INCREASE IN OFFERING OF PRIVATE LABELS

The data collected by our team demonstrates the ability of private labels to offer a great trade-off between product performance and shelf price and helps partially explain why private labels have been successful in gaining market share within the consumer tissue segment as depicted in Fig. 3. The product offering of private labels within this segment aligns very well with the priorities and behaviors of generational groups such as Millennials, which have considerably increased their purchasing power with approximately $600 billion spent each year in the U.S. and projections to spend $1.4 trillion in 2020 (30% of total retail sales).[7] Millennials primarily seek value, quality, and experiences in their products,[8] which can be offered by private label paper towels. Studies have shown that 60% of Millennials prefer to purchase private labels over national brands,[9] while it has been reported that Millennials’ shopping carts contain 32% private labels compared to the 25% found in the average shopping cart.[10] Millennials are also known for causing changes in sales-volume-mix for given product categories. For instance, they are replacing napkins with paper towels, as the latter is considered more functional and multipurpose.

Despite the efforts of national brands to target Millennials with novel products such as the giant tissue roll by Charmin®,[12] this generational group represents one of the major driving factors for the expansion of private labels, and thus discount grocery stores (e.g., Aldi and Lidl). The number of discount grocery stores in the U.S. has increased by almost 45% between 2013 and 2018, and it is forecasted to keep a sustained growth in the years ahead.[13,14] Aldi represents an example of the future of discount retailers in the U.S. With 2,500 stores estimated by the end of 2022, the discount supermarket chain is projected to become America’s third largest supermarket chain behind Walmart and Kroger.[15] There is no doubt that this accelerated increase in the number of private label-focused retailer stores will come along with an increase in the offering of private label tissue products. Therefore, it is highly expected for this situation to contribute to further gains in market share by private labels.

NATIONAL BRANDS AND PRIVATE LABELS HAVE DIFFERENT STRATEGIES TO CATCH CONSUMERS

«Evidence from the field shows that national brands strive to offer performance, whereas private labels focus more on offering value to consumers»

National brands are performance-driven products, where high shelf prices are required in order to compensate for their high R&D expenses and manufacturing costs. It is essential to recognize that performance is not the only variable affecting the shelf prices for national brands but attributes such as brand name, promotion, distribution channel, and sales volume play a critical role in determining the final price paid by consumers.

On the other hand, we found that private labels are value-driven products, where the quality consumers get for their money will depend on whether the tissue product is distributed by a retailer or a wholesale club. Retailers have different sales strategies depending on how large their corporation is and their business model.

In the case of multinational retailers such as Walmart, which offer most of the U.S. product portfolio, their products (store private label) need to outperform national brands directly on the shelf. In a practical sense, this means that consumers have the chance to stand in front of the shelf, stare at

the whole market offering, and compare head-tohead the different products before ma ing a final purchase decision. These circumstances force multinational retailers to have highly competitive prices and reasonable performance in order to win market share from their competitors. Otherwise, consumers will likely pick the traditional national brand.

The situation turns out to be different for smallersi e retailers here significant differences in shelf price (either above or below the average price range) for a given level of performance are observed. n cases here shelf prices are significantly above the average, factors such as brand loyalty, limited product offering on the shelf, sustainable labels, consumers’ misperception associated with the belief that by purchasing the store brand they will get the best deal, or merely convenience, might be the driver for consumers to buy these products. Alternatively, cases where shelf prices are below the average price typically correspond to discount grocery stores (e.g., Aldi), whose business models focused on selected private labels with higher perceived value, allows them to have lower retailing prices while offering a premium product performance.

Wholesale clubs follow a different market strategy, which consists of having a reduced product offering, typically the leading national and their store brand. Consumers are given limited options to benchmark prices at the store, which makes the store brand seems much more attractive because of its lower price. The ideal product performance, in conjunction with the reasonable shelf price, in uences buying patterns in consumers, ho easily engage with the store brand as they feel they are being offered real value. This results in a win-win situation since wholesale clubs simultaneously ma imi e their profits.

Fig. 4. Comparison of private label to the leading national brand.

PRIVATE LABELS LIKE TO COMPARE THEMSELVES TO NATIONAL BRANDS

A common advertisement strategy used by private labels consists of comparing themselves to a leading national brand in terms of performance. In order to determine if these claims are valid, we

compared both options for paper towels taking into consideration shelf price, basis weight and performance (indicated by water absorbency).

Figure 4 provides a comparative overview for paper towels from private labels and their respective advertised leading national brand. We observed a similar situation for almost all products analyzed, where private labels offered articles having considerably lower prices, with differences that can reach up to 40%, and a poorer performance that contradicts with the claims on the package. However, in most cases, the difference in price is disproportional to the difference in performance with the former being higher, which leads users to trade-off consumer experience for savings. In addition, it is orth mentioning that private labels e hibited a lo er use of fibers, represented by a lo er basis eight, hich supports the strategy of sacrificing performance to offer a price competitive product.

We also analyzed the different tissue drying technologies used for manufacture of private labels and national brands (Fig. 5). National brands exhibit a more extensive use of advanced technologies, hich are associated ith higher manufacturing costs, such as drying energy and better uality fiber utilization. In addition, some of the products analyzed are manufactured using patented technologies, which not only render higher quality but also the opportunity of differentiation in the Ultra segment resulting in higher shelf prices. Thus, in order to compete against national brands, private labels bet on the use of fe er fibers and less e pensive processes to offer products that, even though present a lower performance, are economically attractive to consumers.

References

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