MERU Insights: How Private Label Sourcing Excellence Can Boost Retail Margins

How Private Label Sourcing Excellence Can Boost Retail Margins

Retail margins continue to be squeezed as product and other input costs rise. At the same time, retailers struggle to fully pass along those increases to an ever-growing price-sensitive customer base. One powerful tool that tends to get overlooked is using private label goods to appeal to price-conscious consumers, which can preserve (or even improve) margins.

There’s never been a better time for private labels, also called private brands. In 2024, private label sales at grocery stores grew 4x as much as national brands and in the last 10 years, private label % of market share has increased by 15% to 50%¹. Retailers have full control over the design, specifications, choice of manufacturers, and positioning for their private brand offerings.

However, retailers aren’t capturing the full opportunity private brands offer. We believe that what often gets in the way is mindset: to achieve excellence in private brands, retailers must think like consumer packaged goods (CPG) manufacturers. That means retailers must adopt the approaches, tools, and operating models that the most sophisticated CPG companies use—especially when it comes to sourcing, where incorporating next-generation tools, can reduce costs by 10% or more.

[1] In 2024, Private label sales grew by 3.9% compare to 1.0% for national brands (Grocery Dive); “Private Label Growth in 2025: A Shift Away from Brands” (International Supermarket News)

Four Ways to Establish Next-Generation Private Brand Sourcing

Create Visibility Into Input Costs

Sourcing managers can use automated tools (often built in-house with APIs to subscriptions like IHS or CME or leveraging an ERP module) to track real-time fluctuations in cost inputs and calculate the impact of these fluctuations on the end product’s cost. For example, from ’19-21, shipping rates for t-shirts increased by 200 percent which translated to an increase of 5 percent to the total cost of each t-shirt for one retailer. For this retailer, this insight helped them push back on a vendor’s cost increase of 10%, saving them hundreds of thousands of dollars.

Standing up and customizing these tools will require an upfront investment, but this level of visibility helps retailers avoid the losses that can result from being blindsided by macroeconomic forces. It provides a fact base for vendor negotiations and can help retailers ensure that they’re being charged fair market prices for their private label goods.

Identify Target Costs

It’s not uncommon for private brand sourcing managers to rely solely on supplier perspectives to shape their cost expectations. Some sourcing managers readily accept supplier rationales for cost increases without doing their own research; some anchor negotiations only on one or two suppliers’ offers instead of independently deriving a target cost.

Private brand sourcing excellence requires a mindset shift. Retail merchants buying national brands tend to think “margin-back”—meaning they set a target margin for a product and then determine the retail price once they’ve learned the cost. Instead, private brand merchants would be better off using a “cost-forward” approach: what are the various cost components of the product and, based on those components, how much should the product cost?

This fact-based analysis informs the retailer's cost discussions with vendors instead of,
as is often the case, letting vendors lead the conversations.

Drive Vendor Competition

Employing an eRFX system—a digital tool for managing requests for proposals (RFPs) or requests for quotes (RFQs)—allows retailers to solicit more vendors, receive more detailed cost component information, and source more competitive bids in less time than if this process were handled manually.

These tools (such as Scout or Coupa) also provide off-the-shelf analyses of supplier bids at a product level, both for total costs and cost components, helping retailers quickly assess the competitiveness of every bid and provide vendors with detailed feedback. Retailers can also run competitive sourcing events, such as online auctions, faster and more smoothly. By centralizing this capability, they can ensure a consistent and standardized approach to all supplier interactions.

Establish Sourcing Centers of Excellence

Some leading retailers have created sourcing centers of excellence (CoEs), which are centralized teams of specialists who can perform sourcing-related activities such as analytics or vendor negotiations faster, more rigorously, and in a standardized way. CoEs can support merchant teams, coordinate cross-functional collaboration, and disseminate best-in-class sourcing practices across the organization. A CoE’s size and specific responsibilities often depend on the number of competitive sourcing events occurring each year, the retailer’s ability to standardize the process and analytics, and the division of responsibilities between merchants, sourcing managers, and the CoE itself.

One thing a CoE can do well is help define a retailer’s private brand opportunity by gathering data—such as consumer trends, commodity costs, private brand penetration rates, and supplier bids—from internal and external fact bases. CoEs focused on negotiations can work with buying teams on vendor segmentation and sourcing, using industry-leading digital business and spend-management tools for effective negotiation and favorable outcomes.

Despite the proven effectiveness of a private label sourcing CoEs, many retailers still haven’t created them. A common reason for this is the lack of consistent processes or analytics when it comes to sourcing events or negotiations. Another reason is the inability to demonstrate the ROI to leadership of setting up a centralized team. The first step in establishing a CoE is to codify a consistent, analytical process and piloting it with a subset of categories. Once that process shows success, then setting up a CoE will help ‘replicate’ that process across the remaining portfolio.

Conclusion

To achieve private label excellence, retailers need a mindset shift. Private label teams should adopt the mindset of CPG manufacturers, particularly when it comes to product design and sourcing. In both areas, the use of top-of-the-line digital tools and advanced analytics can dramatically improve performance to help retailers tap into the full power of their private brands. There’s no more opportune time than now.

Authored By: Eric Kuehl, Managing Director

The author wishes to thank Nick Conner, Associate, and Chris Cee, Vice President, for their contributions to this article.