Private Label vs. National Brands: The Pricing Tightrope in Hard Discount & Pharmacy Retail

mamta Devi
2 hours ago
5 min read

Introduction

In today’s hard discount and pharmacy retail landscape, private label is no longer a side strategy — it is the core profit engine.

Across global markets, retailers are increasing private label penetration to 40%, 50%, even 60% of total sales. Inflation, value-seeking consumers, and weakening brand loyalty have accelerated this shift. But while private label volume is growing, many retailers are quietly leaving margin on the table.

The reason? Pricing.

Private label pricing is not about being the cheapest option on the shelf. It is about positioning — against national brands, against competitors, and in the consumer’s mind. Price it too low, and you erode margin while signaling inferior quality. Price it too high, and you remove the incentive to switch.

Between those two extremes lies a narrow, powerful space — the pricing sweet spot. And mastering it is what separates profitable hard discounters and pharmacy chains from those trapped in permanent price wars.

The Reality: Private Label Is No Longer Optional

Figure 1: Private Label Share in Retail Sales

Private label penetration in hard discount retail typically ranges between 40–60% of total sales, and in many European hard discounters, it exceeds 70% (NielsenIQ; McKinsey Private Label Reports).

Globally, private label share reached record highs in 2023–2024 as inflation reshaped shopper behavior (NielsenIQ, 2024). In the U.S., store brands hit ~20% share by value, while in Europe they average 35–45%+, depending on the market (PLMA, NielsenIQ).

In pharmacy chains, private label is often the highest-margin category, particularly in OTC, vitamins, personal care, and wellness (McKinsey Retail Insights).

Translation: If your private label strategy is weak, your margin structure is fragile.

The Pricing Tightrope

Private label pricing is a psychological and economic balancing act.

Figure 2: Pricing Strategy

Too Cheap

Signals inferior quality
Attracts only price-sensitive shoppers
Compresses margin unnecessarily
Undermines premium perception in pharmacy categories

Too Expensive

Eliminates the switching incentive
Reduces penetration
Makes national brands look like better value

The goal is controlled undercutting — not blind discounting.

The “Sweet Spot Formula”

A practical benchmark many successful discount and pharmacy retailers follow:

Private Label Price = 65%–80% of National Brand Price

But this is not universal. It varies significantly by category psychology.

Category-Specific Strategy

Figure 3: Category-Specific Strategy

1. Commodities (Milk, Eggs, Sugar, Basic Generics)

Target: 70–75% of national brand price

Why?

These are high-visibility traffic drivers. Shoppers anchor heavily on price here. The discount must be clear — but not destructive.

Example: If a national brand milk SKU sells at $1.00, the private label should sit around $0.70–$0.75. Below $0.65, you risk margin erosion without incremental volume gain.

2. Differentiated Products (Snacks, Personal Care, OTC Basics)

Target: 60–70% of national brand price

Here, switching requires persuasion. A stronger price gap increases trial.

In pharmacy chains, store-brand pain relievers or allergy medication typically price 30–40% below branded equivalents, yet offer comparable formulations.

This is where private label can aggressively win share.

3. Premium Private Label (Organic, Specialty, Functional)

Target: 80–90% of national brand price

Premium private label competes on value, not cheapness.

Retailers like Trader Joe’s, Aldi’s “Specially Selected,” and premium pharmacy wellness lines succeed by positioning store brands as “smart alternatives” — not budget substitutes.

A 10–20% gap is enough when quality perception is high.

Why the Gap Cannot Be Static

National brands change prices frequently. Promotions, inflation adjustments, shrinkflation, and trade funding create constant volatility.

If you fix private label at a static discount, you risk:

Gap widening too much (margin loss)
Gap shrinking too much (volume loss)

According to McKinsey (2023), dynamic private label management became critical during inflation cycles, as national brand volatility increased.

Competitive monitoring is not optional. It’s mandatory.

Case Study: Pharmacy Chain Margin Lift

A mid-sized pharmacy chain faced stagnating private label margins despite strong penetration.

Problem:

Private label priced too aggressively (average 58% of national brand)
High volume, but compressed margin
Strong quality perception already established

Action Taken:

Repositioned key OTC and personal care SKUs from 58% to 68–72% of branded equivalents
Conducted controlled pilot tests in 40 stores
Monitored elasticity, brand switching, and basket impact

Result:

+8% margin increase on private label category
No measurable decline in penetration
Improved profitability per square foot

The insight? They were underpricing their own strength.

The Testing Methodology That Works

Rolling out chain-wide price changes without testing is reckless.

Best practice framework:

Select matched test vs. control stores
Adjust price gaps by +3–5 percentage points
Measure:
Run for 6–8 weeks minimum
Roll out only if margin improvement offsets any volume loss

Market Insight: Why Private Label Is Winning

Recent retail research highlights key structural trends:

Inflation permanently shifted consumers toward value-seeking behavior (NielsenIQ, 2024).
60%+ of shoppers say they will continue buying private label even after inflation stabilizes (McKinsey Consumer Survey).
Younger consumers show lower brand loyalty and higher openness to store brands (PLMA).

For hard discounters and pharmacy chains, this creates an unprecedented opportunity: Private label is no longer a fallback — it is a competitive weapon.

Why This Is Not Just “Pricing Software”

Private label pricing requires:

Category psychology understanding
Brand perception management
Competitive tracking
Elasticity testing
Strategic margin modeling

Algorithms alone don’t decide positioning. Judgment does.

Especially in:

Hard discount retail
Pharmacy chains
Hybrid discount formats
Value-driven emerging markets

This applies directly to chains like Tiendas 3B, FEMSA formats, regional pharmacy networks, and hard discounters globally.

The Strategic Question

Are you pricing private label to:

Look cheap?
Or to win profitably?

The difference is often 5–10 percentage points in price gap — and millions in margin.

Conclusion

Private label pricing is a strategic discipline, not a mechanical calculation.

The retailers winning today understand that the goal is not to undercut national brands at any cost — it is to create a deliberate, controlled price gap that drives both switching and sustainable margin. That gap varies by category, by perception, and by competitive intensity. It must be monitored continuously. And it must be tested before scaling.

Hard discount and pharmacy retailers who treat private label as a long-term brand — not just a cheaper alternative — are consistently outperforming in both profitability and customer loyalty.

The question is no longer whether private label should lead your strategy.

The real question is: Are you pricing it with intention — or by habit?

If you are unsure, it may be time to rethink the framework behind your store brand strategy.

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