A dramatic change is quietly happening at retailers across the country.
You’ve probably already begun reaping the cost savings as a consumer. However, you may be missing out on the profit opportunities as an investor.
Let me explain. Have you noticed that you buy more “store brand” products since the Great Recession?
Whether it’s Safeway paper towels or Whole Foods olive oil, you’ve likely been buying more store brand products in recent years.
You’re not alone. Since the recession, the vast majority of consumers have dramatically increased purchases of private label products – a.k.a. the "store-brand" – because they are less expensive. Today, private labels account for 20% of grocery store sales in the U.S.
Private label products are like the generic drug alternatives to branded drugs. They’re basically the same, but less expensive. Sales are particularly strong in product categories with little room for innovation, like paper products.
For me it's a no-brainer. If I'm at the local supermarket, I can pick up store brand paper towels at less than 50% of the cost of “Bounty.” I don't even have to think about it anymore.
There is a veritable war going on between private-label goods and branded goods – and the brands are losing the battle. Certainly the recession was one catalyst. But even as the economy recovers, spend-thrift habits persist.
Private labels are bringing bigger profits to the retailers, and consumers love them.
Retailers love private labels because it's more profitable for them. By selling their own products and cutting out the national brand names, retailers can earn as much as a 10% higher gross margin.
And, consumers love private label because they are a great value since retailers can easily undercut the prices of the nationally advertised products.
I recently read a study in the January 2012 issue of the Journal of Marketing on this very subject while searching for stocks that could cash in on the private label boom.
The study raised some great points, like how recessions represent a golden opportunity for retailers to grab share with store brands. The big question now is whether consumer habits will shift back to the big brands as the economy strengthens.
My opinion is that they will not. And this is particularly true for product categories without a lot of room for innovation. Prime examples should be household products, like paper towels.
The implications of this trend run much deeper than just spend-thrift consumers saving a few bucks. It shows that consumers are more conscious today of how they spend their money.
Even after the recent surge in wealth due to rising home prices and record stock prices, consumers are being frugal when it comes to household staples. And they’re looking to save on the basic necessities so they can splurge on iPads and iPhones.
Armed with this knowledge, it’s simply a matter of finding a way to play the trend.
There's nothing more boring than a store-brand roll of toilet paper, paper towels or napkins. But with consumers buying these essentials week after week, retailers are raking in the profits.
One company in particular is growing rapidly, while rewarding shareholders with a fat 5.0% dividend yield.
This company isn’t a retailer. Instead, it makes private label products for discount retailers including Wal-Mart (NYSE:WMT) and Dollar General (NYSE:DG). Months of research led me to this single company, and it’s my favorite way to this store-brand boom.
My complete investment report on the company is available in my recent issue of the 100% Letter. I’d like to send you all the details on how to profit from this evolving trend – just click here now.