What would have happened to Hulu and Netflix had they not taken the leap from content distribution to content creation? Had they clung to their existing business models rather than embracing original programming? Had they continued to rely on other companies to supply the products that drive customers to them? We don’t know for sure, but they may well have gone the way of Blockbuster.

In any industry, if you’re only selling what is also sold elsewhere, you’re limited in your ability to differentiate, and that often means a race to the bottom.

For grocers, the critical “original programming” opportunity lies in private brands. We believe strategy and execution in this area will determine who pulls ahead and who falls behind in the next five years.

Why now?

Private brand penetration in the U.S. has historically lagged behind Europe, but the gap is closing rapidly, with most of the market share shift of the last three years driven by more spending on private brands. The continuation of that transition over the next five years – from 18% market share to ~30% market share – represents over $100 billion in sales.

The opportunity is considerable, and so is the work required to take advantage, but conditions have never been more favorable.

First, consumers today – and younger consumers especially – are more open than they have been traditionally to new brands. They’re not as worried about the name on the packaging as long as an item offers the attributes they prize at a price they’re willing to pay.

Second, with a wealth of digital and social media channels, it has never been more economical to reach consumers. Grocers can promote their brands with custom messages for different target shopper groups at many points across the path-to-purchase journey. Also, e-commerce allows grocers to engage in new ways of suggestive selling that wouldn’t be feasible in stores given labor and space constraints.

Lastly, it’s prudent to remember that national brands are evolving their business models as well. Some are already experimenting with direct-to-consumer channels to cut out the grocer and repurpose trade spending. We expect this trend to accelerate, so we project that relying on national-brand products to draw consumers to stores will not be a viable strategy for the years ahead.

A new intention for private brands

Historically, grocers developed private brands to give customers a lower opening price point to participate in the category. These brands didn’t receive much in the way of marketing investment, much less product development. They weren’t built to win categories; their function was simply to house low-maintenance alternative products that delivered solid margins.

Today, the opportunity exists for grocers to build private brand portfolios that not only support margin goals but positively impact every aspect of the P&L. They can provide value in the following ways.

Driving loyalty through differentiated assortment. Most obviously, private brands known for quality, innovative products will drive trips because shoppers won’t be able to get those exact items anywhere else. Developing this kind of assortment requires close partnership with suppliers and a commitment to a research and development program laser-focused on what consumers want and need.

Increasing negotiating power with national brands. When a grocer has its own traffic-driving alternatives to national-brand products, it can be less reliant on trade spending. Having more flexibility in assortment also gives a retailer more freedom in SKU rationalization. As the reputation of the private brands strengthen, a grocer may even find it can drop national brands not delivering enough value.

Reducing complexity and costs. Working with fewer national brands can lower distribution expense thanks to fewer touches of products, fuller trucks and pallets, and simpler replenishment at store level. Leading with private brands also streamlines the price ladder and gives the grocer more control over promotional activities. Hours spent in ad meetings to evaluate hundreds of trade offers from different vendors can be reallocated to sourcing better products. The result is more time spent on building long-term advantage in the market and less time spent on chasing short-term gains in the high/low game.

How to make it happen

1. Define a purpose for your private brands

Private brands can stand for more than value alone. We believe a retailer’s private brands should be an extension of its overall value proposition. They should also be distinct from the banner name; our recommendation is that grocers develop a suite of brands for key traffic-driving categories. What shoppers want and need from a beauty brand may be different than what they seek in a fresh food brand, for example, so brands should be tailored to what shoppers value most in a given category.

Leadership needs to determine for which categories they want a brand and what role they want the brand to play for each category. Communicating those goals throughout the organization is critical.

2. Establish a team to “own” private brand strategy and execution

Think of private brands as startups. They need constant attention, assessment, adjustment and advocacy to grow and thrive. It’s critical to build a dedicated and entrepreneurial team assigned to this segment of the business across all categories. These team members should have clear mandates and P&L responsibilities directly to the C-suite. Leaders of this group must bring both the customer and product mindset of a merchant and the cost-focused mentality of a buyer.

3. Develop a unique assortment

Grocers ahead of the curve have vertically integrated with their suppliers, building long-term partnerships that allow for not only substantial and reliable volume but innovation pipelines for their brands. With these partnerships, grocers can gain preferred or exclusive access to new products. They may encourage vendors to pursue innovation and in exchange offer select stores as a testing ground. The ongoing feedback benefits all parties and makes the R&D process faster and more effective.

4. Prioritize awareness

Because building powerful private brands is a long-term strategic imperative, resources should be allocated accordingly. Grocers should get comfortable with giving their private brands special treatment: prioritized space allocation at shelf and on the website, consistent and high-visibility slots in the circular and on the app, more-than-proportional spend for in-store and digital advertising, and more.

Sometimes this approach will require difficult decisions to uncouple from trade spending and promotions that undercut the private brands. Changing up the established practices won’t always be simple, but it is necessary. If private brands don’t receive the investment and positioning needed to be competitive, they won’t deliver value in the short term or in the long term.