In February 2019, Warren Buffett admitted his mistakes. "I was wrong in a number of ways on Kraft Heinz," Buffett said in an interview with CNBC's Squawk Box. "We overpaid for Kraft Heinz." When discussing the challenges facing Kraft Heinz, he specifically mentioned Costco's private label Kirkland, which had sales of $39 billion in 2018, while Kraft Heinz, with over 100 years of history and significant advertising spending, had sales of only $26.3 billion that year. Buffett admitted he had misjudged the "battle between retail and brands." It turns out that the real enemy is always where you can't see it. In the food and beverage industry, brands seem to focus on competitors, not realizing that their own channel partners have been quietly building strength and standing on the opposite side. The power of private labels in channels should not be underestimated. Let's look at some data:

Costco's private label Kirkland had sales of $39 billion in 2018, accounting for about 25% of Costco's total revenue. After entering Tmall Global in 2016, a Kirkland nut product became a bestseller; Walmart began developing private labels aggressively in the 1990s. Now with over 190,000 SKUs, 30% of global sales and over 50% of profits come from lower-priced private labels (10%-20% cheaper than branded products); Hema's private label SKUs number nearly a thousand, accounting for 10% of sales. The actual repurchase rate for private labels is expected to be over 5 times (average repurchase rate is 4.5). CEO Hou Yi last year boldly stated he wanted to build Hema's private label value to 50%. According to the "2020 China Private Label Whitepaper" by Daymon International, private labels grew 26% in the past two years, far exceeding the FMCG market growth of 11% during the same period. Tmall, JD, Hema, Yonghui, FamilyMart, Lawson... When channel players enter the game, acting as both referees and players, how will this affect the market landscape? How should traditional brands respond to the impact of private labels?

-01- How Private Labels Have Gradually Threatened Traditional Brands From initially imitating brands and picking up bargains at low prices, to later standing on equal footing and counterattacking brands, channel private labels are increasingly pressuring traditional brands, even threatening to replace them.

1. Following in the footsteps To improve profit margins, major US retailers like Walmart, Kroger, and Albertsons have developed their own brands, even building factories to produce milk. Dean Foods has complained more than once in its annual reports: "Retailer private label milk prices are abnormally low, with a huge gap from ours." Looking at Dean Foods itself, liquid milk processing accounts for 67% of revenue, but profit margins are low, at around 4%-5% at the lowest. Product differentiation and brand premium are weak. Coupled with the rise of plant-based milk and declining US milk consumption, with threats from both front and back, it eventually became overwhelmed. Initially, private labels mostly imitated traditional brands, selling on cost-effectiveness, with advantages in low prices and high profits. Private labels have cost advantages in two aspects: on one hand, they squeeze manufacturers' gross margins, including upstream raw materials and midstream processing; on the other hand, they eliminate distributor margins, going directly from factory to their own platform, "no middlemen to take a cut." These reduced costs can be partly passed on to consumers as lower prices, and partly increase the channel's own gross margins. For example, Walmart's private label prices are 10%-20% lower than branded products, attracting a large number of consumers and creating 30% of sales. These private labels also account for over 50% of Walmart's profits, giving the channel ample profit space. At this stage, private labels mainly leverage platform awareness, requiring little brand communication investment early on, saving brand costs and allowing channels to have greater margin space and lower prices. In consumer perception, well-known brands still hold an unshakable position and have a natural moat. But for brands with weak brand power, low-priced private labels can also be a significant threat.

2. Standing on equal footing The CEO of Fresh Legend once revealed: 56% of consumers come to Fresh Legend for aquatic products because we offer boxed fish. These boxed fish are Fresh Legend's signature. Also, ALDI, a retailer in Germany, has over 90% private label products. In the past, ALDI competed on low prices; now it focuses more on providing quality, innovative products. For example, in 2014 it launched the liveGfree series, the first store-brand gluten-free line in the market; Simply Nature is made with "honest ingredients" for organic and natural products. Consumers go to Fresh Legend and ALDI mostly for private labels that are "only available here." ALDI's private label VitaLife kombucha, a seasonal limited edition, won the "Best Limited Product" award at the 2020 World Food Innovation Awards. Traditional brands are distributed across multiple channels. If everyone sells the same products, consumers can go anywhere. If a channel sells its own brand products and creates its own characteristics through innovation and quality, becoming the channel's signature, it can attract more consumers and enhance customer loyalty. These innovative and high-quality products bring exclusivity and foot traffic to the channel. The channel will correspondingly increase marketing investment and traffic support, bringing higher added value to private labels, thus forming a competitive relationship with traditional brands on an equal footing. At the same time, when private labels mature, the channel has alternatives, giving it a stronger position in negotiations with brands, creating a situation of "win-win if we cooperate, I win if we part." If brand owners want to continue cooperation, they need to consider the platform's contribution to their sales and make certain price concessions. For example, FamilyMart's private label Yami Jiang series includes gummies, marshmallows, peanuts, sunflower seeds, pork jerky, coconut flakes, yogurt fruit bites, and more. The packaging is uniformly minimalist, with good taste and quality, occupying a separate shelf in FamilyMart stores. FamilyMart's private label snacks are not only competitors to snack brands but also give the channel more bargaining chips with brands.

3. Dimensional reduction strike Back to the story at the beginning. In 2018, Costco's private label Kirkland had sales of about $39 billion, surpassing the total of all Kraft Heinz brands (26.3 billion) that Buffett invested in, becoming the best-selling health brand in the US. Buffett said in a CNBC interview: "Kraft Heinz has a history of over 100 years, with a lot of advertising embedded in people's lives. But now, private label Kirkland has appeared. Despite having only about 750 stores, its sales are 50% more than all Kraft Heinz brands combined." 7-Eleven once launched a toast bread called "Golden Bread" across Japan, priced at 1.5 times that of well-known brands and twice the price of its own store-brand toast. Surprisingly, the high price didn't sink sales; instead, it created a market sales myth: over 650,000 loaves sold in two weeks, over 15 million loaves in four months, with average daily sales of 125,000 loaves. In the third stage, the influence and awareness of channel private labels significantly improve, with quality comparable to or even surpassing traditional brands, possessing brand characteristics and barriers. Consumers buy private label products not for price reasons but because they genuinely believe the private label is better and more worth buying. It's worth noting that in the internet age, online channel private labels have another advantage—big data. Hema's private label bottled rice has a significantly higher unit price per 100g than other products on the market, but it solves the problem of determining water-to-rice ratio for the target group through no-wash technology and packaging with water level markings. Hema once disclosed that after the first three months of launching bottled fresh-milled rice, monthly sales growth exceeded 57%. Zhao Jiayu, Hema's general manager of national standard product procurement, revealed that "bottled rice" was indeed novel. Its journey from nothing actually contains Hema's secret weapon for building private labels—big data. Zhao said that initially no one thought of selling bottled rice. It was just to preserve rice aroma that they changed the specification of Wuchang rice from the common 5kg packaging to trial 2.5kg and 1kg packages. The sales data turned out to be much better than large packages. "We develop products based on user needs, not channel needs." Zhao said that starting in 2019, Hema formed a C2M user research team, integrating Taobao user consumption big data into Hema's user research system, making new product development more precise and successful.

First, online big data can accurately convey user needs, helping channels develop products that hit consumer pain points and set the most reasonable prices; Second, through review systems, channels can quickly obtain consumer feedback, helping product optimization and iteration, eliminating poorly performing products and reducing trial-and-error costs; Third, online channels can use user data for precise traffic guidance, enabling low-cost, high-efficiency promotion. E-commerce platforms like Tmall and JD have strong data resources and platform awareness. Developing private labels with the support of big data could be a dimensional reduction strike against traditional brands.

-02- Private Labels Rise: How Should Traditional Brands Respond? Channels are counterattacking. Are brands helpless? Coca-Cola and PepsiCo gave us a shot in the arm over 20 years ago. Cott is the world's largest supplier of private label carbonated drinks, producing for various channels like Walmart's Sam's Choice and Great Value. In 1994, UK retail giant J. Sainsbury launched Sainsbury Classic Cola, supplied by Cott. Within a month of launch, the retailer's Coca-Cola share dropped from 63% to 33%, Pepsi from 18% to 6%, while Classic Cola quickly reached 60% share, and 17% of the entire UK cola market. Cott CEO Gerald Pencer once said: "We produce products at least as good as, or better than, Coca-Cola or Pepsi." He expected Cott's sales to double the following year. Then the two cola giants counterattacked. They made massive marketing investments: packaging innovation, price promotions, and advertising. For example, Coca-Cola used its famous slogan—"Always"—to launch an advertising campaign. A cola bottle read "We only make the real thing. We always have." Next to it was a pile of other cola bottles reading "Never" and "We don't make cola for other companies." Over time, Coca-Cola and Pepsi regained most of their market share, while Cott's stock fell from $35 in 1994 to $7 in 1996. So, how can traditional brands block private labels like the "two colas" did?

1. Build brand moats Born in 1886, Coca-Cola has a history of 134 years. Over this century, many channels have eyed the cola business, wanting a piece, like Walmart's Sam's Cola Soda and Great Value Cola, J. Sainsbury's Classic Cola, but none has replaced Coca-Cola. Through the changes of time, Coca-Cola still sits firmly in the top spot, becoming the red rose in generations of consumers' hearts, the timeless "happy water for fat people." Why? Because its moat is strong enough, unreplicable and irreplaceable. Simply put, brand power can be divided into three levels. The first level is the supply chain. Brands have cultivated products for years, with mature supply chains. Maintaining and expanding this advantage is the foundation for competing with private labels. Channel private labels mostly focus on cost-effectiveness, using OEM models. If they develop a wide range of categories involving too many OEM factories, quality control risks increase, and economies of scale are insufficient. The second level is the benefit proposition. In a certain category, function, or scenario, this brand is the best choice. For example, when we mention cola, we think of Coca-Cola and Pepsi; when we mention milk, we think of Yili and Mengniu. This is the key point where brands can differentiate from private labels. Brands can increase R&D efforts, continuously update and iterate, giving the brand technical barriers, supply chain barriers, and exclusivity and complexity, raising the cost for channels to enter the field. The third level is brand culture. Brands have unique characteristics, representing a certain group or lifestyle. Cola is just a category; any brand can make it. But Coca-Cola has become synonymous with cola, enduring because it has become a culture, rooted in consumers' minds, irreplaceable. Brands need to position themselves accurately and communicate their personality to consumers long-term, solidifying brand culture.

2. Leverage the internet Zhong Xue Gao, founded in 2018, was exactly when Xiaohongshu was gathering traffic. Most people give Xiaohongshu money, and Xiaohongshu does things accordingly. But Zhong Xue Gao chose to infiltrate internally, letting every staff member at Xiaohongshu taste the product. Lin Sheng once said in an interview: "It was so exaggerated that when Xiaohongshu people had morning meetings, the snacks brought in were all Zhong Xue Gao." Eventually, Zhong Xue Gao's concept and products moved Xiaohongshu, which was willing to support and cultivate this emerging brand. "We only took three months to achieve the number one in Xiaohongshu notes, topics, interactions, and sales." New to the market, Zhong Xue Gao first "connected" with Xiaohongshu internally, then made an overall promotion strategy around the platform, using KOLs to drive the brand, making the "internet celebrity ice cream" Zhong Xue Gao quickly achieve brand communication on Xiaohongshu, building brand awareness. Another internet celebrity, "dark horse in cosmetics" Perfect Diary, uses offline experience store guides and online shopping red envelope cards to direct users to the brand's WeChat matrix—official accounts, personal accounts, group chats, and mini-programs. Perfect Diary's official accounts have different types, including those for fans, students, and beauty/skincare guidance; they also created a personal WeChat account named "Xiao Wanzi," acting as a beauty consultant, adding hundreds of thousands of users as WeChat friends, providing services in group chats and moments, such as answering questions, collecting feedback, and sharing updates. Now Perfect Diary has 1.96 million followers on Xiaohongshu, 2.588 million on Douyin, 460,000 on Weibo, 58,000 on Bilibili, 1.401 million on Kuaishou, and thousands of WeChat groups, mostly with over 200 people. The experiences of Zhong Xue Gao and Perfect Diary are highly instructive for startups. Startups have limited supply chain and marketing resources. Building moats is not easy. But the internet gives everyone a low-cost opportunity to build walls. On one hand, brands can gain traffic through the internet. Through social media, communities, and other online operations, startups can spread widely, build awareness at low cost, and let consumers know them and remember the brand name as "internet celebrities." On the other hand, brands can maintain traffic through the internet. With social media, brands can bypass channels, connect directly with consumers, and get feedback faster. At the same time, brands can strengthen private domain traffic, cultivate loyal fans, enhance stickiness, and let consumers spontaneously become brand advocates and "counterfeit fighters."

3. "Riding multiple boats" Three Squirrels started online, with over 90% of sales from online channels. In recent years, it has aggressively developed offline channels, built its own APP, done community building, and circled traffic to reduce platform constraints and gain more autonomy. Nongfu Spring started placing vending machines in 2015; last year it opened its own convenience store—Nongfu Spring Sesame Store—selling Nongfu Spring bottled water, beverages, Northeast fragrant rice, and more; this year it launched a home delivery service, supplying communities directly through mini-programs. Facing channel threats, brands need to make "multiple preparations", laying out diversified channels, including offline, traditional online e-commerce, social e-commerce, and even creating their own channels and self-production and self-sales. We observe that many foreign brands are adopting the DTC model, i.e., Direct to Consumers, where product manufacturers provide goods directly to consumers without traditional middlemen. Plant-based milk brand Califia Farms, ice cream brand Halo Top, meal replacement brand Soylent, bulletproof coffee brand Bulletproof, and Mars-invested nut bar brand KIND all use this model. Pepsi recently opened two direct-to-consumer online stores in the US, allowing consumers to buy products directly during the pandemic. The DTC model allows direct-selling brands to effectively control sales costs, ensure direct connection with consumers, reduce dependence on single channels, gain more say, and improve risk resistance.

4. Mutual benefit and win-win This achieves a virtuous cycle of production, circulation, and consumption. Another typical case is the cooperation model between Newland and Hema. In the past, Newland mainly served as a B-end supplier, not knowing which consumers bought its products or what advantages and disadvantages they had. Through cooperation with Hema, using it as a 2C window, the brand gained a platform to communicate with consumers, making product trial and upgrade faster. Therefore, brand-channel cooperation is also a way out. Brands provide good products and topics, tilt channel resources, one produces and one sells, both win.

-03- Conclusion At present, domestic private labels are still in early development, with a low share compared to foreign countries, only 1.3%. Channels have increased efforts in private labels in recent years, entering the competition. In the short term, they won't overturn the market. Brands need not panic but should remain vigilant. With further development of private labels, leveraging product advantages and channel resources, they may make disruptive moves within a certain channel. Whether traditional brands can withstand the impact of private labels depends on product strength and brand power. Of course, channel players and brand owners are just two roles on the big ship of "consumption," both in the same value chain. Everyone is there to meet consumer needs, so it's not a fierce "you die or I die." Competition pushes the industry upward; cooperation pulls together as one rope to move forward. As long as you calm down and do your brand well, this ship won't capsize. Source: FBIF Food & Beverage Innovation (ID: FoodInnovation) Authors: Xiaoyang, Cici Tips will be paid 400-2000 yuan if adopted.