Shoppers are largely creatures of habit, but after two years of rising prices, a broader shift to private label brands is underway. Inflation doesn’t appear to be going down anytime soon, although price increases have been subsiding since the June 2022 peak. The consumer price index, which measures a basket of common goods and services, rose 0.5% in January and 6.4% year over year , according to data released by the Labor Department on Tuesday. While rising shelter costs accounted for about half of the monthly increase, food prices also remained elevated — up 0.5% month over month and a 10.1% gain from January 2022. “Inflation has shredded household budgets over the past 2 years, and not just when it comes to one-off discretionary expenses or special occasions, but for keeping up with day-to-day bills,” Bankrate chief financial analyst Greg McBride said in a note following the CPI release. “Until inflation returns to the 2% neighborhood, pressure on household finances will continue.” In fact, some 60% of consumers said they are likely to cut back on spending over the next six months because of inflation, a late January survey by Morgan Stanley found. One way to save is to trade down — ditching a more expensive brand for a cheaper alternative. About one-third of U.S. consumers are switching to less expensive proteins and purchasing store brands, according to Deloitte’s Global State of the Consumer Tracker on Jan. 29. The online survey is fielded every month in 24 countries and targets 1,000 adults in each country. Research from consulting firm Gartner mirrors that survey. In a smaller sampling of U.S. consumers in September, 44% of consumers said they are trading down when it comes to food, groceries and nonalcoholic beverages. ‘A tailwind’ for private label That is good news for store brands, otherwise known as private label. Total store unit sales of private label have increased to 22.5% of overall purchases this year from 21.9% last year, with most of the tick up happening in the back half of 2022, according to market research company IRI. While the growth is slow and is uneven across categories, the positive impact on private label should pick up this year, Truist analyst Bill Chappell predicted. “The industry has a tailwind, but I only think it’s going to get stronger in ’23,” he said. “A lot of people thought that when inflation hit a year ago, it should have been boom times immediately [for private label]. But … behavioral change takes time.” Big-box retailers such as Walmart and Target as well as warehouse clubs such as Costco all have private label brands that can help them weather consumer pivots. Kroger is also a player in the space. Yet the biggest pure play on private label brands is Treehouse Foods , Chappell said. The company has a wide-ranging portfolio of store brand items, from snacks and hot cereal to cheese and beverages. On Monday, Treehouse reported a miss on revenue — $996.2 million for the fourth quarter, a 22% year-over-year increase, compared with the $1 billion expected by Wall Street analysts, according to StreetAccount. Despite the top-line miss, its earnings per share of 98 cents were in line with estimates. “Today, we are better positioned to capitalize on the strong market dynamics in private label snacking & beverages. The macro environment continues to support a clear consumer shift toward value, as demonstrated by private label unit share gains for 54 consecutive weeks in the categories in which we operate,” Treehouse Foods CEO Steve Oakland said in a statement . “We believe THS’ higher margin private label categories have momentum and EBITDA margins should continue to improve through the year as supply chain costs ease,” Chappell wrote in a note Monday, following the earnings report. He has a buy rating on the stock and a $60 price target, suggesting 24% upside from Monday’s close. The rating is in line with the average analyst rating on FactSet, but his price target is higher than the average of $51.33, per FactSet. Chappell said the company is “perfectly positioned” to capture the increasing use of store brands. “They’ve had some challenges over the years and private label has had some ups and downs over the years, but in a time where you have once-in-40 year inflation and a potential recession, this is the perfect time to own private label,” he said in interview with CNBC. Another name in the space is Post Holdings . While not a pure play, the company produces private-label cereal and liquid eggs. Last week, the company reported a fiscal first-quarter earnings and revenue beat, thanks largely to its food service unit. However, during the earnings call, the management team also noted its private label business was strong, growing 13.5% in the quarter. While Chappell has a hold rating on Post, the stock has an average analyst rating of overweight, according to FactSet. Where consumers are trading down It’s clear consumers, in general, are spending less. In December, personal consumption expenditures excluding food and energy increased 4.4% from a year ago , according to the Commerce Department. That’s the slowest annual rate of increase since October 2021. However, recent data from Bank of America shows signs of strengthening, with credit and debit card spending per household rising 5.1% year over year in January. Still, households that earn less than $50,000 are feeling the pinch — card spending per household increased only 0.9% from July 22 to January, the firm found. While the trading-down trend is slowly picking up steam, it hasn’t been felt across the board, at least not yet. Several companies, including Kellogg and Kimberly-Clark , have recently said during earnings calls that the consumer is “resilient” and that they haven’t seen any trading down. “Traditionally, [what] we’ve seen with price increases is that there’s not an immediate effect,” said Greg Carlucci, senior director analyst for consumer goods at Gartner. “It is still a little early to tell as far as the impact on the unit volume of a lot of companies.” The brands that can communicate quality and value may be able to prevent consumers from trading down from their products, he said. For now, items such as shortening and oil, butter and fresh eggs have seen an uptick in store brand purchases, according to IRI data. Those are the areas that are seeing the highest inflation. “That’s where you’re going to see them lean into store brands,” said Mary Ellen Lynch, principal of IRI’s center store solutions. “It will be the kind of the core products, like the single-ingredient products or simple products, commodity-type products, as opposed to those branded items where there’s innovation or a particular flavor they really love, or they’re not going to give up.” If and when the consumer takes it further, it will be about the quality and consistency of the store-brand product, she said. “The consumer has to trust it,” she said. For his part, Truist’s Chappell said the creep up in private-label consumption is being seen in bread, cereal and pasta as well. Store brands no longer ‘taboo’ Private label also isn’t what it used to be, at least in consumers’ minds, said Kathy Gramling, EY Americas consumer industry markets leader. Americans forced to trade down due to supply chain constraints found store brands they enjoyed, she said. On top of that, millennials and Gen Zs don’t have the same strong identity with brands as their parents do, she added. “This idea of, ‘I would never be buying private label,’ if you call it a taboo or a [stigma], has long been gone now, for many, many quarters,” she explained. Becoming the brand of choice Store brands can grow for those retailers that make it a “very key strategic component” of their business, Lynch said. “The key for store brands is to kind of become the brand of choice,” she said. Walmart has the most share of the private label market among omnichannel retailers, at 25%, according to Numerator . Costco follows with 12.3% of market share, and Kroger has 8.8%. Sam’s Club, part of Walmart, has 7% share, Albertsons has 4%, and Target has 3%. Kroger is in the process of acquiring Albertsons for $24.6 billion. For retailers such as these, private label brings higher margins. Walmart’s store brands include Sam’s Choice and Great Value, the latter of which is the most popular private label brand, according to Numerator. In August, the company’s chief financial officer, John David Rainey, said on an earnings conference call that the company has seen more pronounced trade-down activity. “Private brand penetration has also inflected higher,” he said. “And in food category, specifically, the private brand growth rate doubled compared to Q1 levels.” The big-box retailer reports its latest earnings on Feb. 21. “Within the food and grocery category, the increasing penetration of private label is helping a bit because it is higher margin,” said Joe Feldman, a senior research analyst at Telsey Advisory Group. However, grocery overall is a lower-margin business. “If you look at Target or Walmart or Costco, the mix of selling more grocery goods is overall still a little bit of a drag on your total gross margin,” Feldman said. Eating at home isn’t going away One of his favorite names is Costco, because it caters to a more affluent consumer and nearly two-thirds of its business is grocery and consumables that people still need, Feldman said. He has an outperform rating on the stock and $580 price target, implying 14.5% upside from Monday’s close. The warehouse giant has just one store brand: Kirkland. “Kirkland brand has been a champ, and they don’t view it as a trade down,” Feldman said. “They actually see it as a trade up, even though it costs less,” he added. “Their growth in Kirkland has been a little faster than they normally would see in a given year, just given where the environment is right now.” He also has outperform ratings on Target and Kroger, as well as Walmart, another favorite. “They’re [all] very well positioned, because the consumer is focused on just getting by week to week and getting food on the table for their family,” he said. For investor Jake Dollarhide, co-founder and CEO of Longbow Asset Management, Walmart is the 800-pound gorilla in the room. “They have put that weight behind technology, delivery, pick up, and making it easier to check out of stores,” he said. Dollarhide has positions in Walmart, Kroger, Target and Costco. His top pick on trading down is Kroger, which is the closest to a pure play on private label grocery stores and has the most value, he said. “Paying your mortgage, paying rent, electricity, gas, automobile gas and eating at home are not going to go away,” he said. If the S & P 500 declines for 2023, each name except for Target has the chance to be higher on the year, Dollarhide predicted. If the index goes up anywhere from 10% to 20% for the year, all four names could do well, he said, explaining that it will mean there was a soft landing in the U.S. economy and the Federal Reserve ‘s rate-tightening campaign didn’t cause a recession. “The U.S. consumer is going to continue to be strong,” he said. Even when inflation cools, though, it doesn’t necessarily mean consumers will ditch their store brands. Truist’s Chappell doesn’t see a reason people would go back to brands after finding a private label they like. “Private labels have gotten so much better … and so many more options,” he said. “There’s more ways to trade down.” — CNBC’s Michael Bloom contributed reporting.
