Private labels also do better when competing against fewer national manufacturers who spend less on national advertising. Surprisingly, high quality is much more important than lower cost. Educator and Student Discounts Available. Learn more ». Included in your e-book purchase are two files: PDF and. To open and read the epub file, we recommend using an e-reader program like the Apple Books app or the Google Play Books app.
Although we agree that many national brands are under pressure—especially from the number three brand on down in each product category—we strongly believe that the private-label challenge must be kept in perspective. To begin, managers must consider whether the threat posed by private labels will grow or fade.
Then, they must reconsider the strengths of the brand name: Brands are far from dead. Finally, if their companies already produce private-label goods, they should weigh the costs of competing in the generic market against the benefits. Several factors suggest that the private-label threat in the s is serious and may stay that way regardless of economic conditions. Ten years ago, there was a distinct gap in the level of quality between private-label and brand-name products.
Today that gap has narrowed; private-label quality levels are much higher than ever before, and they are more consistent, especially in categories historically characterized by little product innovation. The distributors that contract for private-label production have improved their procurement processes and are more careful about monitoring quality.
Innovative retailers in North America have shown the rest of the trade how to develop a private-label line that delivers quality superior to that of national brands. In European supermarkets, higher private-label sales result in higher average pretax profits.
Of course, the reasons for the strength of private labels in Europe are partly structural. First, regulated television markets mean that cumulative advertising for name brands has never approached U. But growing numbers of U. Mass merchandisers, warehouse clubs, and other channels account for a growing percentage of sales of dry groceries, household cleaning products, and health and beauty aids.
Wal-Mart Stores, in fact, is already one of the top ten food retailers in the United States. Private labels accounted for 8. Some national-brand manufacturers have encouraged the growth of new channels, but they may regret it later. Unlike supermarkets, mass merchandisers and warehouse clubs are national chains; they have the incentive to develop their own national brands through private-label lines, and they have the procurement clout to ensure consistent quality at low cost.
Private labels are continually expanding into new and diverse categories. Their growth follows some general trends. Private-label sales have also increased in categories such as clothing and beer.
With that expansion comes increased acceptance by consumers. The more quality private-label products on the market, the more readily will consumers choose a private label over a higher-priced name brand. Gone are the days when there was a stigma attached to buying private labels. The percentage of units accounted for by private labels varies widely by category. To some degree, the variation is a function of time—private-label canned foods, for example, have been on the market longer and in broader distribution than private-label diapers.
However, researchers have identified several factors, listed below, that favor private-label penetration. Taken together, these trends may seem daunting to manufacturers of brand-name products. But they tell only half the story. The increased strength of private labels does not mean that we should write an obituary for national brands.
Indeed, the brand is alive and reasonably healthy. It requires only dedicated management to thrive. Consider the following points. Brand names exist because consumers still require an assurance of quality when they do not have the time, opportunity, or ability to inspect alternatives at the point of sale.
Brand names simplify the selection process in cluttered product categories; in the time-pressured dual income households of the s, brands are needed more than ever. Put simply, brands have a running start. The strongest national brands have built their consumer equities over decades of advertising and through delivery of consistent quality. In contrast, retailer brand names are not prominent. On the Equitrend list of the top brands in the United States based on ratings of 2, brands , only 5 store brands appear, the highest of which is Wal-Mart at number 52, down from 34 in As the United States has emerged from recession, manufacturers of national brands have increased advertising and won back some consumers who had turned to private labels.
Sales of premium-quality, premium-priced brands are on the rise. Retailers cannot afford to cast off national brands that consumers expect to find widely distributed; when a store does not carry a popular brand, consumers are put off and may switch stores. What could be more convenient, some retailers argue, than to have consumers remember a single store name?
The problem is that stretching a store name—just like a manufacturer name—over too many product categories muddies the image. Many consumers rightly do not believe that a store can provide the same excellent quality for products across the board.
In , the company launched the Sears Brand Central store-within-a-store concept and committed itself to stocking a full assortment of national brands alongside its private labels in electronics and appliances. Faced with the pros and cons of private-label production, what should national-brand manufacturers do? Some brand-name manufacturers make private-label goods only to use occasional excess production capacity. In those circumstances, private-label production may seem tempting.
But beware. Although the system may work well for a company for a time, private-label production can become a narcotic. A manufacturer that begins making private-label products to take up excess capacity may soon find itself taking orders for private-label goods in categories where the market share of its own brand is weak.
For manufacturers seeking only to use excess capacity, private-label production can eventually become a narcotic. That step, too, may seem reasonable enough. Indeed, production managers may argue that in addition to using up excess capacity, private-label production can increase cumulative production experience and lower unit manufacturing and distribution costs.
Heinz, for example, is a major supplier of private-label baby food. However, it is easy to slide down the slippery slope. Consider what happened to Borden. Once a strong manufacturer of well-known brands, Borden found itself floundering in the early s largely because of a progressive, and eventually excessive, commitment to private-label manufacturing, which eroded its focus on sustaining its branded products. As a result of declining margins and cash flows, the company was finally sold to an investment firm in Manufacturers still tempted by private-label production should understand, first, that managers invariably examine private-label production opportunities on an incremental marginal cost basis.
The fixed overhead costs associated with the excess capacity used to make the private-label products would be incurred anyway. But if private-label manufacturing were evaluated on a fully costed rather than on an incremental basis, it would, in many cases, appear much less profitable. These two advantages—high availability and low price—have made private-label products considerably more appealing to consumers during the COVID pandemic.
The consumer shift toward private labels benefits retailers as well, since private labels are typically more profitable for them. Furthermore, high-quality private labels can gain a devoted following and become a powerful driver of customer loyalty to the retailer.
But will this private-label boom be a short-lived one? In the near term, are retailers at risk of disappointing first-time buyers of private-label products with a poorly-thought-out offering? And once the COVID crisis abates, will most consumers abandon store brands and go back to buying their preferred brands? During the pandemic, consumers have proved quite willing to change their buying behavior. Our consumer surveys show that nearly 40 percent of US consumers have tried new products or brands since the onset of the COVID outbreak.
Much of the switching behavior was because of availability issues—some branded products were out of stock for weeks as CPG manufacturers struggled to meet sudden spikes in demand Exhibit 1. Private labels have been one beneficiary of this switching trend.
Company leaders at North American grocers and mass retailers tell us that they have indeed seen heightened demand for private-label goods. When we asked consumers why they switched to private labels, more than 45 percent said price was the primary reason. That said, the second-most-cited reason was lack of availability of their preferred national brands Exhibit 2.
But other signs point to the shift being temporary. Retailers that seize this moment to reset their private-label strategies can translate short-term switching behavior into long-term customer loyalty. Even as retailers have introduced new private-label products and brands over the years, few have thought through the role of private labels in their businesses. Some private-label brands and products come into being simply because, for instance, a vendor offers to make a product at a lower cost and higher margin rate than a national brand.
Some retailers have been somewhat more deliberate in launching private labels: setting targets for margin and penetration rates, adjusting those targets as needed, and even making changes in their organizational structures to put more focus on private labels.
For some retailers, the private-label offering may have been successful in the pre-COVID environment but now requires reevaluation.
They require lower marketing spend and overhead because they rely on store traffic and shelf position to secure sales. The products tend to be either at the opening price point and significantly cheaper than national brands with certain quality or feature trade-offs , or me-too versions of leading national brands at lower price points.
In the least mature private-label markets, the target consumer segments are people on a tight budget looking for basic options, as well as savvy shoppers who relish the idea of buying national-brand equivalents for less money. Particularly in European countries and Canada, many retailers have become sophisticated owners of private labels, managing their private labels much like consumer-packaged-goods manufacturers do—with strict discipline around the unique value proposition of their brands and with clear standards and guardrails.
As this evolution has occurred, private labels have become a strong driver of store loyalty. Key areas in which to set aspirations and associated targets include brand awareness, customer perceptions, penetration, quality, value, profitability, and private labels as a driver of store loyalty.
The next step would be a high-level assessment—for instance, through customer surveys, competitor scans, and financial analyses—to understand the gaps between current performance and aspiration. Once a retailer has done a high-level assessment, it can then take a deeper look at five areas—namely, brand strategy, assortment and pricing, marketing and packaging, product design and sourcing, and organization and operating model—and develop an action plan in each.
Brand strategy. Research often reveals that consumers recognize private-label goods as lower-priced products but not as products that deliver on quality, innovation, or excitement. Furthermore, consumer perception of a private label can differ markedly across categories or departments: at some retailers, private-label diapers, say, are more expensive than the national brands whereas private-label soda is 20 percent cheaper than the national brands.
This step may seem obvious and basic but is often overlooked.
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