From the customers’ perspective, private labeling doesn’t mean too much. When grocery shopping, they find brand names and store brands of dairy products in the dairy aisle. They might wonder about the quality of the store brand products, but they see the price differences. The store brand names products are cheaper than the brand products. They do have more choice. Why do these stores have their own products? Are they manufactured themselves? The quick answer is that most of these products are private-label products. What is this private labeling business model, and what are its benefits? Before diving into the benefits, let’s understand the difference between private labeling and co-packing business models.
1. Private labeling and co-packing
Private labeling and co-packing are two business models often used in food production and other industries. However, they serve different purposes and involve distinct product manufacturing and branding approaches.
a. Private label
Private labeling is when a manufacturer produces a product branded and sold under a retailer’s or company’s brand name. The retailer or company owns the brand and controls the product’s marketing, packaging, and labeling.
The product can sometimes be customized, for instance, ingredients, formulation, or packaging. However, it’s often based on the manufacturer’s pre-existing formulations, for example, a grocery store’s branded yogurt or milk produced by a third-party manufacturer. The common buyers of private label products are retail chains, online sellers, or brands wanting their name on a ready-made product without owning production facilities.
b. Co-packing
Co-packing or contract packing is when a manufacturer produces and packages products for another company that owns the product formula or concept. The company hiring the co-packer owns the product’s recipe, formula, or design and works with the co-packer to produce it.
The products are highly customized since they are typically developed by the hiring company and tailored to their specifications. For example, a small dairy company hires a co-packer to produce its unique organic milk or ice cream line using its proprietary recipe. The common buyers are entrepreneurs, startups, and companies looking to scale production without building manufacturing capabilities.
From a business perspective, both models can be advantageous depending on your business goals, resources, and market strategy. This article focuses on private-label dairy products, which have become a cornerstone of the modern food industry, offering consumers value and variety while driving business profitability. The sector has experienced significant growth across various product segments and continues to evolve with innovations that cater to changing consumer demands.
2. Trends in private-label dairy by product segment
The private-label market for dairy encompasses a wide range of products, including milk, cheese, yogurt, butter, and frozen desserts. Each segment demonstrates unique trends shaped by consumer preferences and market dynamics.
- Fluid milk: Private-label milk is a dominant player, capturing over 50 percent of retail sales in the U.S. The high market share is attributed to the essential nature of milk and its commoditized pricing structure. Private-label milk brands often compete on affordability while offering specialty options like organic, lactose-free, and grass-fed varieties to cater to diverse consumer needs.
- Cheese: Private-label cheese holds a significant 35-40 percent market share, driven by demand for staple varieties such as cheddar and mozzarella. Retailers have expanded their offerings to include artisanal and specialty cheeses, aligning with the premiumization trend while maintaining competitive prices.
- Yogurt: While private-label yogurt commands a smaller market share of 15-20 percent, it is growing steadily. Greek yogurt, low-sugar options, and plant-based alternatives have become focal points for innovation in this segment. Retailers increasingly invest in unique flavor profiles and functional benefits to stand out in a competitive market.
- Butter and cream: Private-label butter occupies about 30 percent of the market, benefiting from the surge in home baking during the pandemic. Similarly, whipping and table creams are popular for their consistent quality and affordability, especially in households and food service operations.
- Frozen desserts: Private-label ice creams and frozen desserts hold 20-25 percent market share, with growth driven by exclusive flavors and health-conscious alternatives like low-calorie or dairy-free products. Retailers are leveraging these offerings to attract niche consumer groups.
3. Benefits of private-label dairy for businesses
a. Benefits for consumers
- Affordable quality: Private-label dairy products are often more cost-effective than national brands while maintaining comparable quality. This affordability appeals to budget-conscious shoppers, allowing them to access high-quality products without overspending.
- Diverse option: Retailers offer a broad range of private-label dairy products, from staple items, milk, and butter to niche options such as organic or lactose-free alternatives. This variety ensures that private-label brands cater to a broad audience with varying dietary needs.
- Trust and transparency: Private-label products benefit from the trust consumers place in their retailers. Many stores emphasize transparency in sourcing and production, enhancing consumer confidence in the safety and quality of their private-label dairy lines.
- Exclusive innovations: Private-label dairy products often provide exclusive offerings, such as unique ice cream flavors or fortified milk products, giving access to innovative products that cannot be found elsewhere.
b. Benefits for retailers
- Enhanced profit margins: Private-label products allow retailers to capture a greater share of profits by eliminating intermediary brands and producing goods directly or through contracted manufacturers. This higher margin makes private-label dairy attractive for supermarkets, club stores, and discount retailers.
- Brand differentiation: Private-label dairy products enable retailers to differentiate themselves in a competitive marketplace. Exclusive products or innovative offerings in the dairy aisle can help establish customer loyalty, ensuring repeat purchases and bolstering a retailer’s brand identity.
- Adaptability to trends: Retailers can swiftly respond to emerging trends with private-label lines. For instance, the rising demand for plant-based dairy alternatives and functional foods has prompted retailers to expand their product portfolio to meet needs without the lengthy timelines often associated with national brands.
- Supply chain efficiency: Private labels allow businesses to optimize their supply chains by directly partnering with manufacturers, resulting in cost savings and consistent product quality. This streamlined approach enables retailers to manage inventory effectively and reduce operational complexity.
c. Benefits for manufacturers
Manufacturers partnering with retailers to produce private-label dairy products enjoy several key advantages:
- Stable demand and long-term contracts: Private-label production often involves long-term agreements with retailers, providing manufacturers with consistent and predictable demand reducing uncertainties in production planning and revenue streams.
- High production volumes: Private-label products require large quantities, allowing manufacturers to benefit from economies of scale. High-volume production helps lower per-unit costs, enhancing profitability.
- Flexibility to focus on core strength: Manufacturers can leverage their expertise in dairy production without competing in retail branding or direct-to-consumer sales.
- Access to retailer insights: Retailers often provide manufacturers with valuable consumer data, allowing them to tailor their production to align with current trends and preferences.
- Opportunity for expansion: Partnering with large retailers gives manufacturers access to broader markets without establishing their own distribution channels.
- Brand diversification without risk: Producing private-label dairy allows manufacturers to diversify their product portfolio and revenue streams while avoiding the risks associated with launching and managing their brand.
4. The future of private-label dairy: Innovations on the horizon
The private-label dairy market is posed for continued growth, fueled by technological advancements, evolving consumer demands, and a focus on sustainability.
- Sustainability initiatives: Sustainability is becoming a core focus for private-label brands. Retailers are adopting environmentally friendly practices, such as using recyclable packaging, reducing carbon footprints, sourcing dairy from farms prioritizing animal welfare. These efforts resonate strongly with environmentally conscious consumers and enhance brand appeal.
- Technological advancements: Automation and AI are pivotal in improving private-label dairy production. Enhanced tracking systems ensure product consistency and safety, while data-driven insights allow retailers to anticipate consumer preferences and innovate accordingly.
- Functional and fortified products: Private-label dairy brands expand into the functional food space by offering products fortified with probiotics, vitamins, and minerals. These items cater to health-conscious consumers seeking added nutritional benefits.
- Plant-based alternatives: The rise of plant-based dairy alternatives presents an opportunity for private-label brands to diversify their offerings. Oat, almond, and soy-based products are increasingly featured alongside traditional dairy, capturing market share from plant-based national brands.
The private-label dairy market is thriving, driven by affordability, quality, and a growing focus on innovation. Each product segment offers unique growth opportunities, while benefits extend to businesses and consumers through cost savings, diversity, and exclusivity. As sustainability and technological advancements shape the future, private-label dairy products are set to play an even more significant role in the global food market. For retailers and manufacturers alike, the potential to innovate and lead in this dynamic sector is immense, ensuring private-label dairy remains a vital part of the industry for years to come.
