Grocery inflation is bad for almost everybody but the companies that make store brands

You may’ve noticed while wandering the aisles of your supermarket that things have gotten pretty expensive. 

Pre-Covid, the average branded product — a box of Kellogg’s Corn Flakes, for example — would have cost you about 18% more than the supermarket’s private-label alternative, such as Walmart’s Great Value corn flakes. Today, the upscale version of the product costs 23% more, on average, data from Bank of America-Merrill Lynch shows.

“These price increases are very much front of mind and right in front of shoppers on a multiple-time-a-week basis,” said Steve Markenson, vice president of research and insights at the Food Marketing Institute. “Shoppers are taking concrete steps to take control of their weekly spend. They’re being very savvy about how they spend their food budget.”

To counter food inflation, FMI data suggests that 63% of Americans are taking advantage of deals to reduce the cost of their grocery bill. About 61% are taking more drastic action by changing what they buy. Invariably, that means switching out the branded products they’re used to for nonbrand, private-label products that fill supermarket shelves — and now customers’ baskets.

That’s bad news for companies facing the biggest private-label competition, like Hormel, which has a 25.7% exposure to private-label alternatives; Tyson Foods, which has a 24.7% exposure; and Dole, which has 24% exposure, BAML data suggests.

But for the companies that produce the cheaper private-label products undercutting recognizable names in supermarkets, it’s a bonanza.

“Consumers are increasing their spending and retailers are increasing their investments,” said Doug Baker, vice president of industry relations at FMI.

In all, 38 of the 75 food categories tracked by investment bank Jefferies have seen private-label products grow their market share in the last year. Private-label sales are likely to top $250 billion this year, up from $236 billion last year, PDG Insights CEO Diana Sheehan said in an August webinar held by Grocery Dive. PDG Insights data suggests 98% of American households are choosing private-label alternatives in at least one grocery category. (Sheehan did not respond to a request to comment for this story.) 

In the US, private-label penetration is closing in on 25%, according to Morgan Stanley. While most Americans are buying one or two items, private-label items account for one in four items across the entire shopping basket, with consumers sticking with big brand names on some types of food. But it’s not just consumers’ shopping habits that are changing the face of our supermarket shelves. Retailers are also downplaying the importance of branded items in favor of own-brand and private-label goods.

“Whereas in the 1950s, the major brands had all the power in retail because they were the people who were driving sales, the major power in retail now sits in the hands of the retailers,” said Richard Kohn, a private-label branding specialist at The Marchitect, a consultancy. “They own the real estate. They own the space, they own the placement, they own the pricing, and they own the customer loyalty.”

They are also flush with cash and can go to the manufacturers of branded products and ask for a private-label alternative, all while offering competitive prices to producers to do so. Walk the booths at the Private Label Manufacturers Association conference each May and alongside the shelves of private-label manufacturers, you’ll see the same branded goods they make for large companies. They’re often made to the same or even better specifications as the branded stuff. In April, Walmart unveiled its largest private-brand product launch in two decades, with 300 new items under its Better Goods label, from yogurt to tortilla chips. And in September, Albertsons launched its own label, Overjoyed. 

Those entries into the field join Costco’s Kirkland Signature brand, beloved by its more than 100 million members worldwide, whose products some swear are as good as branded alternatives, if not better. Rumors abound about the way big-name manufacturers produce Kirkland dupes of some products, from Starbucks coffee to Huggies diapers. Both products sold in Costco warehouses are reportedly made by the market-leading companies they’re undercutting when it comes to price. 

Kohn explained how he consulted for a major household paper-goods company, which he declined to name, on “the ultimate toilet paper.” 

“We did a massive amount of private label for one or two of the very big brands,” he explained. “Their spec was actually a better product than what was going to be our top-spec brand of product.”

The fact that major manufacturers, or the companies they subcontract production out to, also moonlight by producing private-label items isn’t the industry’s best-kept secret. The names of those manufacturers are somewhat more shrouded in secrecy — though reporting suggests if you’re picking up a Walmart-owned brand loaf of bread, it was likely produced by Sara Lee and sells for a fraction of the price of Sara Lee-branded bread. Conagra, the company behind brands like Duncan Hines and Slim Jim, also produces Vienna sausages and some flours for Walmart on the side. And that Great Value cornflakes box you pick up instead of Kellogg’s? It could have come from the same factory.

TreeHouse Foods is one of the largest private-label manufacturers in the States, and its president and CEO, Steven Oakland, said in the company’s Q3 2024 earnings call that “overall private-brand industry dynamics remain favorable.” He added, “Private brands continue to take share.”

If the idea of manufacturers like Conagra or TreeHouse Foods servicing big brand names as well as making similar private-label products seems like cannibalizing your own customers, then it’s worth looking at how the various elements of the equation add up. 

If consumers can’t afford to buy brand-name products, they’re not going to, whether an alternative is made in the same factory or not. But the big brand behind those products will have to scale down production because they’re not selling the same number of units. In TreeHouse’s third-quarter earnings call, Oakland said that Walmart and Albertsons launching own-brand lines was a good sign.

“They recognize that new consumers today are looking for both value and have a lot of loyalty to the store,” he said. “We think there’s going to be new avenues for us to grow.”

He added that TreeHouse was supplying products to both those new brands.

“From the producer side, they have machines they have to fill,” Kohn said. “If they’re not being guaranteed that volume by the brand, and they’re not tied up with exclusivity, and the brand is not performing at a level that fills those machines so they’re efficient and able to cover all their fixed costs, where are they going to look to get the rest of their volume?” 

Kohn said the price that manufacturers receive from supermarkets for their private-label products — and from the large brands to produce their flashier, more expensive products — isn’t all that different.

“The pricing that’s built into a branded product is 99% of the time not driven by a higher quality,” Kohn said. “It’s driven by the fact that the branded company has to pay for the marketing to maintain their brand position.”

Without the weight of that brand history, supermarkets looking to develop private-label lines can engage in a more symbiotic relationship with manufacturers that also helps the latter build their business. 

“A lot of times, the manufacturer would do whatever the retailer asked them to do,” FMI’s Baker said, speaking about initial forays into own-brand production. “Now they’re inviting that manufacturer to share the expertise that they have within their categories to boost new product development.”

FMI’s own survey data within the industry shows that 90% of manufacturers want deeper relationships with the businesses they work with.

The doubly difficult issue for owners of branded food-product firms is that once they lose customers to private-label alternatives, it’s notoriously difficult to win them back. “External factors have driven more customers to private labels,” Baker said. “Once they get used to them, they start to grow trust in that brand.”

That’s good news for the companies that make those private-label products, and it’s bolstered by the fact that supermarkets are becoming savvier about their own-brand offerings.

“Most retailers are saying they’re currently early or midway in terms of developing their private brands as a key point of differentiation for their customers,” Baker said.

“Increased investment shows just how focused the industry is on maximizing the potential of private brands and creating it as an opportunity for success and to keep the momentum going.”

Chris Stokel-Walker is a journalist in the UK. His latest book is “How AI Ate the World.”