Some of the household brands today that began their lives in the early and mid 18th century, started as small independent stores that imported from the UK and other European countries. One of the first private labels was by Brooks Brothers who were traders back then. They launched their first store in 1818 in New York City. Mail order houses, Grocers & Drug stores that tasted success with selling manufacturer's brands adopted private-label strategies as a growth vehicle. Macy's, Sears, Walgreens, Kroger all owe their early success and growth to private labels.
The rise and fall of the private label era
Before self-serve supermarkets became the norm during the 40s and 50s, grocery chains, and stand-alone private brand stores grew from strength to strength due to private labels. The premise was 'high quality, low prices coupled with high turnover', achieved through their own manufacturing plants or direct sourcing from farmers and overseas suppliers. High-profile antitrust cases ruled in the favor of manufacturers and the ascent of national television led to the decline of private labels. Supermarkets and National brands rode the post-industrialization consumption wave, relegating private labels to a place meant for the purveyors of cheap bargains.
The Amazon of the 18th century
A&P was the Amazon of those times. Of course, not many of us have heard of it because anti-trust laws dismantled A&P. A&P was finally liquidated in 2015. Around the 1880s A&P was the largest importer and retailer in the world. They started with tea. By the 1880s they started manufacturing their own baking soda and baking powder. A&P's revenue was close to $10M in 1913. Inflation-adjusted, that money was the equivalent of $250M today. A&P was the retailer. They were the manufacturers and they were the traders. Such was their hold that national brands and retailers had to compete with them through the power of the state. This was in the 'roaring twenties' that was followed by the 'Great Depression' of the 30s.
Is history repeating now?
We don't have A&P. We have Amazon.
We had a roaring bull-run that has lasted for over a decade and now, are we in a recession or a depression?
The depression-era saw two varied outcomes for comparable companies that both had private labeling as the central element of their growth. A&P was brought to its knees by legal battles against manufacturers and retailers that accused it of unfair pricing. The private-label strategy was by itself not wrong but they flaunted it. On the other hand, Safeway and ShopRite also had 20% - 40% private labels but they were careful about the messaging. During the depression era, Safeway had the lowest prices among all the chains considered. There is no data on the share of private label sales in Safeway during this period but their private-labeling was their 'go-to' strategy.
Private labels served America through the years of depression. It was a sound strategy undone by government regulation. Today the governments are far less powerful than they were. Consumer choice and benefits seem to matter more than the urge to regulate trade practices. And, unlike the 30s, we now have eCommerce.
In the times of contraction that we have started experiencing, what is likely to happen?
Will we see the golden era of private labels once more? Are consumers likely to buy more D2C brands? The argument that is being made out is that the older population that is using eCommerce for the first time will also gravitate towards trying new D2C brands. While eCommerce will stand to benefit as we are already seeing across categories, I doubt if the same can be said about D2C.
If we take parallels from the great depression and the stats above, three things are likely to happen:
1. Shoppers will gravitate towards national brands (Supermarkets grew out of the depression era by primarily selling national brands to consumers that valued familiarity and trustworthiness.)
2. Shoppers will want things cheaper and not fancier (Trivia: Standard, Choice, and Fancy were the grades used by Grocers to differentiate between product tiers in the early part of the 19th century.)
3. Shoppers will embrace eCommerce more than ever (This is the only behavior that we cannot draw a parallel from the 1930s.)
Of these, trust (of known brands) and affordability (of cheap national brands and/or private labels) aren't really the strong points of D2C. There are only a handful of well-known, national D2C brands. Almost none of them are household names. It takes generations to build a brand. Performance advertising mastery is not going to cut that time short. D2C brands have stayed premium to differentiate themselves from Amazon knock-offs. Also, they differentiate on the quality that comes at a cost. What worked well for them during the period of abundance may not work well during the time of austerity.
The more shoppers embrace eCommerce the more it will benefit D2C brands. But the pecking order of D2C brands makes this claim a little too generous. Amazon holds about 50% of the eCommerce market. Of the remaining, there are about 700,000 eCommerce companies competing (Source: PipeCandy's data). There are about 50,000 eCommerce companies selling physical goods that make between $1M and $50M in sales through their websites. Again, by our estimate, there are about 5000-7500 D2C brands and most of them should be making less than $10M.
While the crisis and the resulting eCommerce adoption is good for D2C brands, it is only one of the three market-shaping behaviors. Affordability and trust come before convenience and safety (Even if you were to argue that the feeling of safety that comes with eCommerce is undeniable, it is likely to be short-lived.).
The Covid-19 crisis will lead to new launches from big brands focused on affordability and trust. Large retailers with deep pockets and retailers with debt will focus on private labels to improve their profits. eCommerce companies will grow substantially and the growth will be led by Amazon and omnichannel retailers. D2C will face the tailwinds too but it is going to be a trickle when compared to national brands and private labels.
PipeCandy is a market intelligence platform that tracks the global eCommerce & 'direct to consumer' landscape.
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