What Sleepytime Bear Taught Me About Store Brands
Buy Private Label Brands. Potential Savings: Hundreds of $ or More Per Year. Difficulty Level: Low
|Oct 28, 2019||14|
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One of my formative experiences was the Celestial Seasonings factory tour. We met Sleepytime Bear. My father-in-law almost set off a security breach when he left the group and headed toward their R&D lab.
Above all, I’ll never forget the moment when, among the boxes of Celestial Seasonings teas, I saw a set of cartons marked “Trader Joe’s”. Our energetic and affable tour guide - think a cross between Jesse Pinkman (in happier days) and the “Dude, You’re Getting a Dell” guy - assured us that Celestial Seasonings didn’t make tea for anyone else. But I couldn’t get out of my head the thought that perhaps private label (or “store brand”) products offered comparable, and sometimes identical, quality as the name brands at lower cost.
We’re all familiar with private label products, sometimes referred to as “store brands”. These are products generally offered as a lower-cost alternative to common branded goods - think Trader Joe’s “Joe-O’s” versus Cheerios, or Wal-itin versus Claritin, or Costco’s Kirkland Signature versus just about anything. Discounts vary widely, but can reach extremely high levels (50% off or more), particularly in the case of over-the-counter (OTC) medications.
Why are these discounts so deep? Generally, by selling a private label brand rather than a branded product, the retailer (say, Target) can cut out the significant gross profit earned by the consumer packaged goods company (say, Procter & Gamble). For example, P&G earned an average gross margin of 51% in their most recent quarter. By sourcing their own product that is similar to a P&G product (say, Tide), Target can sell their competing store brand at a very large discount to P&G, essentially splitting their savings with the consumer, and still make a large profit.
The numbers are even more extreme in OTC meds, where the branded pharmaceutical companies (for example, Johnson & Johnson) often earn gross margins of 60% or more. For OTC meds, the store brand often has the same active ingredient, is nearly identical to the branded product, and is less than half the price.
The strongest support for always considering private label comes from a study from business professors at Brown, University of Chicago, and Stanford. According to their research, the more savvy the shopper, the more likely they were to choose a private label product. That is, the pharmacists bought the store brand medication 91% of the time (versus 74% on average) and the chefs bought the store brand salt, sugar, and baking soda 77% of the time (versus 60% on average).
Private label is particularly enticing for expensive and recurring purchases like diapers and baby formula, which can cost well over $1000-2000 per child in the first year. Other good candidates include household staples like paper towels, toilet paper, and detergent. We like the Amazon brands (Solimo, Presto, etc) which have even deeper discounts with monthly delivery, but all of the big box stores and groceries have their own options.
The annual savings up from going private label for even a small handful of household goods can easily add up to a few hundred dollars. In the case of bigger ticket items like diapers and formula, the savings can easily cross $1000. Worth thinking about next time you’re in the store (or scrolling through Amazon or Target’s website).
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 The two terms aren’t quite the same, but close enough.
 That is, for every $1 of sales, P&G earned 51 cents of gross profit (before other expenses).
 In fact, a handful of the fastest-growing and most successful retailers and grocers, such as Costco, Trader Joe’s, Aldi, and Lidl sell mostly or exclusively private label brands at extremely attractive prices. While more and more US physical retailers report declining or stagnant sales, private label-centric stores have been growing rapidly.
 There’s a reason the hospital usually has “free” Similac or Enfamil for you to take home with your newborn, or why parents-to-be often receive complimentary cans of Similac in the mail. They are trying to get you hooked - once your baby is happy with a certain type of formula, you’re highly unlikely to switch. Baby formula in America is shockingly expensive for a few distinct reasons, including very little competition (Enfamil, Similac, and Gerber control 95% of the market) and some regulatory distortions.