Private Labels in retailing

A private-label brand (also called a reseller, store, house, or distributor brand) is a brand that retailers and whole­salers develop. Benetton, The Body Shop, and Marks & Spencer carry mostly own-brand merchandise. In grocery stores in Europe and Canada, store brands account for as much as 40 percent of the items sold. In Britain, roughly half of what Sainsbury and Tesco, the largest food chains, sell is store-label goods. Germany and Spain are also European markets with a high percentage of private-label sales.52

For many manufacturers, retailers are both collaborators and competitors. According to the Private Label Manufacturers’ Association, store brands now account for one of every five items sold in U.S. supermarkets, drug chains, and mass merchandisers. In one study, seven of 10 shoppers believed the private-label products they bought were as good as, if not better than, their national-brand counterparts, and virtually every household purchases private- label brands from time to time.53 The stakes in private-label marketing are high. A one-percentage-point shift from na­tional brands to private labels in food and beverages is estimated to add $5.5 billion in revenue for supermarket chains.54

Private labels are rapidly gaining ground in a way that has many manufacturers of name brands running scared. Recessions increase private-label sales, and once some consumers switch to a private label, they don’t always go back.55 But some experts believe 50 percent is the natural limit on how much private-label volume to carry because (1) consumers prefer certain national brands, and (2) many product categories are not feasible or attractive on a private-label basis. In supermarkets, private labels are big sellers in milk and cheese, bread and baked goods, medi­cations and remedies, paper products, fresh produce, and packaged meats.56

1. ROLE OF PRIVATE LABELS

Why do intermediaries sponsor their own brands?57 First, these brands can be more profitable. Intermediaries may be able to use manufacturers with excess capacity that will produce private-label goods at low cost. Other costs, such as research and development, advertising, sales promotion, and physical distribution, are also much lower, so private labels can generate a higher profit margin.58 Retailers also develop exclusive store brands to dif­ferentiate themselves from competitors. Many price-sensitive consumers prefer store brands in certain categories. These preferences give retailers increased bargaining power with marketers of national brands.

We should distinguish private-label or store brands from generics. Generics are unbranded, plainly packaged, less expensive versions of common products such as spaghetti, paper towels, and canned peaches. They offer standard or lower quality at a price that may be as much as 20 percent to 40 percent lower than nationally adver­tised brands and 10 percent to 20 percent lower than the retailer’s private-label brands. The lower price is made possible by lower-cost labeling and packaging and minimal advertising and sometimes lower-quality ingredients.

Generics can be found in a wide range of different products, even medicines. Pharma giant Novartis is one of the world’s top five makers of branded drugs, with such successes as Diovan for high blood pressure and Gleevec for cancer, but it has also become the world’s second-largest maker of generic drugs following its acquisition of Sandoz, HEXAL, Eon Labs, and others.59

2. PRIVATE-LABEL SUCCESS FACTORS

In the battle between manufacturers’ and private labels, retailers have increasing market power. Because shelf space is scarce, many supermarkets charge a slotting fee for accepting a new brand to cover the cost of listing and stocking it. Retailers also charge for special display space and in-store advertising space. They typically give more prominent display to their own brands and make sure they are well stocked.

Retailers are building better quality into their store brands and emphasizing attractive, innovative packaging. Supermarket retailers are adding premium store-brand items. When Kroger’s switched to new vendors to supply better-quality cheeses, meats, and veggies for its upscale private-label pizza, sales soared; the supermarket chain now owns 60 percent of the premium pizza market in its stores.60 One of the most successful supermarket retailers with private labels is Canada’s Loblaw.61

LOBLAW Since 1984, when its President’s Choice line of foods made its debut, the term private label has brought Loblaw instantly to mind. The Toronto-based company’s Decadent Chocolate Chip Cookie quickly became a Canadian leader and showed how innovative store brands could compete effectively with national brands by matching or even exceeding their quality. A finely tuned brand strategy for its premium President’s Choice line and its no-frills, yellow-labeled No Name line (which the company relaunched with a vengeance during the recent recession) has helped differentiate its stores and built Loblaw into a powerhouse in Canada and the United States. The President’s Choice line has become so successful that Loblaw is licensing it to noncompetitive retailers in other countries. To complete a “good, better, best” brand portfolio, Loblaw has also introduced an “affordable luxury” line of more than 200 President’s Choice food products under a distinctive “Black Label” design. Each one—from eight-year-old cheddar and ginger-spiced choco­late sauce to bacon marmalade—is marketed with a story about where it’s from, who produces it, and why it was chosen. To capitalize on the overall strength of its private labels, Loblaw launched a Food Network reality TV show, Recipe to Riches, where contestants compete to have their homemade recipes developed into an actual President’s Choice product available to purchase the very next day at Loblaw’s stores.

Although retailers get credit for the success of private labels, the growing power of store brands has also benefited from the weakening of national brands. Many consumers have become more price sensitive, a trend reinforced by the continuous barrage of coupons and price specials that has trained a generation to buy on price. Competing manufacturers and national retailers copy and duplicate the quality and features of the best brands in a category, reducing physical product differentiation. Moreover, by cutting marketing communication budgets, some firms have made it harder to create any intangible differences in brand image. A steady stream of brand extensions and line extensions has blurred brand identity at times and led to a confusing amount of product proliferation.

Bucking these trends, many manufacturers or national brands are fighting back. “Marketing Insight: Manufacturer’s Respond to the Private-Label Threat,” describes the strategies and tactics being taken to compete more effectively with private labels.

3. MARKETING INSIGHT Manufacturer’s Response to the Private-Label Threat

To stay a step ahead of store brands, leading brand marketers are investing significantly in R&D to bring out new brands, line extensions, features, and quality improvements. They are also investing in strong “pull” advertising programs to maintain high brand recognition and con­sumer preference and to overcome the in-store marketing advantage private labels can enjoy.

Top-brand marketers also are seeking to partner with major mass distributors in a joint search for logistical economies and competitive strategies that produce savings for both sides. Cutting all unnecessary costs allows national brands to command a price premium, though price can’t exceed consumers’ perception of value.

Creating strong consumer demand is crucial. When Walmart decided to pull Hefty and Glad food bags from its shelves, selling just Ziploc and its own Great Value brand, Hefty and Glad stood to lose because the retail giant accounted for a third of their sales. When consumers complained about the loss of these and other brands and switched some of their shopping to other stores, Walmart relented and put them back on the shelves.

Effective positioning is crucial. Despite holding a hefty 60 percent price premium over its private-label competitors, Pepto-Bismol gained market share during the recession. A clever advertising campaign por­traying the product as an effective multipurpose “insurance policy” for gastrointestinal maladies struck a chord with value-minded consumers.

University of North Carolina’s Jan-Benedict E. M. Steenkamp and London Business School’s Nirmalya Kumar offer four strategic recom­mendations for manufacturers to compete against or collaborate with private labels.

  • Fight selectively when manufacturers can win against private labels and add value for consumers, retailers, and shareholders. This typically occurs when the brand is number one or two in the category or occupying a premium niche position. Procter & Gamble rationalized its portfolio, selling off various brands such as Sunny Delight juice drink, Jif peanut butter, and Crisco shortening, in part so it could concentrate on strengthening its 20-plus brands with more than $1 billion in sales.
  • Partner effectively by seeking win-win relationships with retailers through strategies that complement the retailer’s private labels. Estee Lauder created four brands (American Beauty, Flirt, Good Skin, and Grassroots) exclusively for Kohl’s to help the retailer generate volume and protect its more prestigious brands in the process. Manufacturers selling through hard discounters such as Lidl and Aldi have increased sales by finding new customers who have not previously bought the brand.
  • Innovate brilliantly with new products to help beat private labels. Continuously launching incrementally new products keeps the manufacturer brands looking fresh, but the firm must also peri­odically launch radically new products and protect the intellectual property of all brands. Kraft doubled its number of patent lawyers to make sure its innovations were legally protected as much as possible.
  • Create winning value propositions by imbuing brands with symbolic imagery as well as functional quality that beats pri­vate labels. Too many manufacturer brands have let private labels equal and sometimes better them on functional quality. In addition, to have a winning value proposition, marketers need to monitor pricing and ensure that perceived benefits equal the price premium.

Source: Kotler Philip T., Keller Kevin Lane (2015), Marketing Management, Pearson; 15th Edition.

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