Why does every major grocery chain have their brand next to the national brands? Are the factories making these the same but putting a different label on it? Or does Target and Kroger have factories that produce all the products? Where do these store brands come from?

Question

Why does every major grocery chain have their brand next to the national brands? Are the factories making these the same but putting a different label on it? Or does Target and Kroger have factories that produce all the products? Where do these store brands come from?

In: Economics

Answer 1

Stores sell their own brands because they have higher margins, making the store more money!

So stores like Kroger or Target don’t have their own factories. They may develop the recipe in house but use contract manufacturers to make the items. For example, once a commercial bakery company has a facility that can make cookies, it’s easy to make different similar cookies. So a factory could be hired by Keebler to make their Chocolate Chip cookies one day/week, and then they adjust the recipe/ingredients and machinery (say, to stamp 2/75″ cookie size instead of 3″) to make Target store brand the next day/week. Yes, even national brands use contract manufacturing facilities even if they own their own (say for seasonal varieties, temporary increase in demand, cheaper than building new line with different equipment, etc). Or a national brand may rent out their facility, basically acting as a contract manufacturer for store brand items, as a way to fill production downtime. They are usually not the exact same recipe even if made in the same facility.

Now the difference is in the layers of money changing hands… for a national brand, Kroger pays Keebler something like $2 for a package they sell for $4. Kroger can develop their store brand and pay the contract manufacturer $1 to make that same package, and then sell it for $3.50 to undercut Keebler while also making more profit.