The COVID-19 pandemic has rattled consumers for obvious reasons, not the least of which is forcing them to do more of their shopping online. The Food Marketing Institute suggests 21% of consumers tried online grocery shopping for the first time in the wake of the pandemic, and adds that 19% of them have stuck with the approach even though stores have reopened in the meantime. Shoppers already ordering groceries online did more of it this year too, and both groups are ultimately expected to double online shopping's share of the U.S. grocery market by 2025, according to an outlook from Mercatus and market research company Incisiv.

The coronavirus contagion, however, is also prompting less obvious changes in consumer behavior. Perhaps chief among them is a new affinity for private label consumer goods like Costco's (NASDAQ:COST) Kirkland Signature brand or Kroger's (NYSE:KR) Simple Truth. Forced by a limited availability of rival products as well as cost concerns, consumers gave these alternatives a shot. Surprise! They like them well enough that many consumers intend to continue buying these goods even when they no longer have to. This translates into an edge for a couple of these store chains.

Woman browsing a grocery store aisle.

Image source: Getty Images.

Private labels turn into powerhouses

Years ago, "generics" didn't get a whole lot of love from retailers, and grocers in particular. Consumers weren't particularly impressed either.

Much has changed in the meantime. Stores began to treat their own products more like national brands -- an effort that rethought packaging, production, and placement. The end result is incredible growth of this category. Though it's still only a fraction of national brands' share of the packaged goods market, research outfit IRI estimates last year's private label revenue growth doubled the country's pace of growth for non-private label items.

And it's well they should make this shift. CBInsights estimated that gross margins are between 25% and 30% better on a grocery store's house brands, versus margins of only around 1% on nationally recognized items.

This year's unusual disruption has only accelerated private label grocery demand. A survey performed by Magid in May indicates that six-out-of-10 U.S. consumers plan on buying a store brand again after being forced to try it in the early days of the pandemic. By June, that proportion had inched up to seven-out-of-10 consumers. Both figures jibe with a similar report from marketing and branding agency Ketchum, which posted poll results in the middle of the year suggesting 63% of U.S. consumers plan on buying more private-label goods in the future, as the importance of brand names fades.

One doesn't have to read between the lines to see this paradigm shift, and how it translates into new growth opportunities that field it the right way.

Private label winners

Most grocers do pretty well with their private label products. Kroger's Simple Truth chipped in $2.5 billion of last year's $23.1 billion worth of private label brand revenue, while Walmart (NYSE:WMT) reported its Great Value line alone does on the order of $27 billion worth of annual sales. Market research outfit Numerator estimates Great Value products can be found in nearly 90% of the country's households.

Of the names that could add the most shareholder value on the heels of this growing demand for house brands, however, Target (NYSE:TGT) and Costco are on top.

For Costco, private label is already big business. Kirkland Signature's annual sales on the order of $40 billion not only best Walmart's Great Value, they do so with only about a tenth as many stores. House brands now account for roughly a fourth of Costco's revenue. It's clearly figured out the winning formula for selling its own goods. A little more private label interest makes an outsized impact on its bottom line.

As for Target, its investors arguably have the most to gain from this shift.

While it's smaller than rival Walmart and grocery competitor Kroger, Target's size may ultimately work to its advantage. The company has the ability to create and cultivate new product categories like the aforementioned Good & Gather. For instance, Numerator estimates a little over 13% of the nation's households bought a Good & Gather food product in 2019 even though the house brand only launched in August of last year. Although the retailer doesn't divulge too many specifics about its nearly 50 store brands' results, several estimates peg store brands' share of the retailer's business at about one-third of its total revenue.

Investors will want to know that proportion may have already begun to grow in a big way too, after launching curbside grocery pickup nationwide in June including perishables and frozen goods. Last quarter's total sales were up nearly 21%, while same-store sales grew 10% year over year. Both were stronger improvements than most of its rivals achieved for the same quarter, and that was largely before the company added premium categories to its Good & Gather lineup. It's since added 600 over Good & Gather skus to its mix as well as launched Good & Gather Signature, expanding its appeal to consumers who now care more about what's in the package than the name on the package.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.