Inflation is pushing shoppers toward cheaper, private-label brands — and companies like Walmart and Target stand to benefit

• Shoppers are buying cheaper, private-label products more amid record inflation.
• It's become a trend during periods of economic downturn, like the 2008 recession.

In grocery and big-box stores across the country, shoppers have a decision to make: Stick to the brands they know and love, or switch to the store's brand and save?

In the face of record inflation, shoppers are increasingly choosing the latter.

The rising cost of everything from gas to food has forced many consumers to think twice about name-brand items and opt for stores' private-label products instead — meaning, products from brands owned by those same grocery or big-box retailers. This switch has happened during other periods of economic downturn, and it's a boon for retailers like Walmart and Target, who have a strong roster of private-label brands.

At Walmart, which operates over 3,500 grocery locations nationwide, rising costs are shifting the way customers shop. The company said during its first-quarter earnings call in May that customers are buying more private-label products as they feel "inflation pressures."

"We do see some switching, which would include switching specifically from brands to private brands," John Furner, CEO of Walmart US, said during the call. "We see categories like deli, lunch meat, bacon, dairy, where we see customers trading."

Target places a slightly different emphasis on its private-label brands: They're designed to "drive trips to Target, not simply to provide another option when guests are already in a store," Christina Hennington, Target's chief growth officer, said during the company's first-quarter earnings call in May.

Still, Target is likely benefiting from inflation, given that its in-house brands, much like Walmart's, tend to be cheaper than products with better name recognition.

"I think it's important as we think about consumers looking for value, the strength of the owned brands in food and beverage: Good & Gather and Favorite Day," CFO Michael Fiddelke said during the call. "The guest response we've seen to those two owned brands has just been incredible."

Private-label products have grown so much that big brands are starting to take notice. Clorox executives noted private-label growth during the company's most recent earnings call, while Procter & Gamble said it will start making more "overt" claims about the quality of its Dawn dish soap, presumably over private-label products.

But at Walmart, the company's own Great Value dish soap costs $2.28. Dawn's dish soap, though slightly larger in volume, costs $2.94.

'It just has to be cheaper'

This type of shopping behavior — switching from name brands to private labels — happened during another period of economic uncertainty: the 2008 recession.

Between 2008 and 2009, shoppers started spending less on dining out, skipped manicures and hair appointments, bought smaller amounts of items, and, notably, switched to private-label goods, according to data from IRI, a market-research firm that tracks data in the consumer packaged-goods industry.

Now, similar patterns are repeating themselves. In March, as gas prices started to rise and consumers started to feel the strain on their finances, private-label purchases started to climb compared with 2020 and 2021. At grocery stores, shoppers started buying more off-brand baby formula, oil, butter, and milk — when it came to "non-edible" items, gloves, foil, and toilet paper became popular private-label purchases, according to IRI data.

But it's not a given that shoppers will always trade down to private-label when times are tough — there are a few factors that get customers to make the switch, according to Sucharita Kodali, a retail analyst at Forrester.

"Consumers don't really have an issue with it if the packaging looks nice and the pricing is the right pricing and the quality of the merchandise is good," Kodali told Insider.

But at the end of the day, it does need to provide meaningful cost savings to the consumer.

"There's no formula that says, 'if it's 10 to 20% cheaper ...', it just has to be cheaper," Kodali said. "It's not the difference between something being $9.95 and $9.99. That's not going to make a difference. But in some categories, if there's a dollar difference, that's substantial."