After Amazon launched its first private-label brands in 2009, the company took a four-year hiatus before it created any more. With offices in Amsterdam and New York, PLMA represents more than 3,500 manufacturers and suppliers worldwide, ranging from companies that specialise in private label to those that produce private label products in addition to their own manufacturer brands. Large manufacturers who produce both their own brands and private label products.
For the consumer, private label represents the choice and opportunity to regularly purchase quality food and non-food products at savings compared to manufacturer brands, without waiting for promotional pricing. Private label brands are a line of products in a wide range of industries that provide a lower cost alternative to regional, national or international brands. The best defensive strategy for national brands against private label trends is to out-brand” them across marketing channels where retailers have less experience.
Private label products are almost always meant to be a lower cost, lower quality alternative to a national brand. Though the public generally used to see private labels as low-cost imitations of branded products, private labels have overcome this reputation and retailers are all offering private label products these days. More and more businesses are getting away from the ‘national’ brands and offering their customers private labeling.
After Coca-Cola retaliated aggressively against Cott in 1994, the latter’s profits as a percentage of sales plummeted along with its stock price; the company then moderated its ambitions to extend its private-label success formula to other product categories. Stealing market share from weaker national brands often merely opens the door for more serious private-label competition. The emergence of premium private labels and national store brands such as Sam’s makes this oversight more and more dangerous.
Too many national brands treat private-label competition as an afterthought in their annual marketing plans. Manufacturers must leverage their knowledge to create a win-win proposition for their trade accounts: Retailers and national-brand producers can maximize their profits jointly without excessive emphasis on private labels. However, the fighting brand can end up competing with the national brand for consumers who would not have switched to private-label products anyway.
For similar reasons, managers should be wary of launching fighting brands, which are price positioned between private labels and the national brands they aim to defend. In 14 categories, both Consumer and private-label producers had gained shares at the expense of weaker national brands; in most of these cases, Consumer’s national brand was the market-share leader. Analysis of U.S. retail scanner data showed that private-label penetration had increased from 1991 to 1993 in 16 of Consumer’s 24 categories, but in only 4 of them had private labels gained share by cannibalizing sales of Consumer’s brands.
Third, examine the impact of private labels on the market shares of your national brands. The president of a division of Consumer Corporation (not its real name)—a U.S. packaged-goods multinational competing in more than two dozen categories—was dismayed to find his plant shipping private-label product ahead of its own brands. In Europe, PepsiCo Foods International succeeded in capturing private-label businesses from its key competitor, forcing it to close plants and, more importantly, weakening its national brands.
Moreover, they contend, the learning about consumers and costs that comes from being in the private-label market can enhance the manufacturer’s ability to defend its national brands. Proponents also argue that the dual manufacturer has more ability to influence the category, the shelf-space allocation between national brands and private labels, the price gap between them, and the timing of national-brand promotions; and further, that its clout with the trade is enhanced by supplying both national brands and private labels. If one manufacturer refuses private-label contracts, another will take them, perhaps using the profits from private-label manufacture to support the marketing of its national brands.
And how much will the private-label goods cannibalize the company’s national brands? Once a strong manufacturer of well-known brands, Borden found itself floundering in the early 1990s largely because of a progressive, and eventually excessive, commitment to private-label manufacturing, which eroded its focus on sustaining its branded products. 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.
Faced with the pros and cons of private-label production, what should national-brand manufacturers do? Even if, in theory, retailers can make more profit per unit on private-label products, those products (with rare exceptions such as President’s Choice chocolate-chip cookies) just do not have the traffic-building power of brand-name goods. 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.
Price gaps between national brands and private labels are wide. The category is dominated by a few national-brand manufacturers, so retailers promote private labels to reduce dependency on them. (See the table What Drives Private-Label Shares?”) In supermarkets, for example, private labels have developed well beyond the traditional staples such as milk and canned peas to include health and beauty aids, paper products such as diapers, and soft drinks.
Ten years ago, there was a distinct gap in the level of quality between private-label and brand-name products. 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. Collectively, private labels in the United States command higher unit shares than the strongest national brand in 77 of 250 supermarket product categories.
On one hand, manufacturers are right to be concerned: There are more private labels—store-brand” goods—on the market than ever before. In a nutshell, that describes how manufacturers of brand-name products react to competition from private labels. Retailers with pretty good private-label brands will be able to create better sales opportunities for themselves.
Private label products are generally sold in many countries, so it is essential that all products are of high quality and comply with all the relevant single or global market standards, including sustainability and environmental impact s. This can be done by performing certification and audits, inspections, hygiene monitoring, and testing of food, beverages, and packaging.