It seems that every customer, channel or product category goes through cycles where private label becomes bigger than smaller (and then bigger again). If you manage a brand, private label can be the bane of your existence since it is cheaper at retail and is a management driven initiative.
Retailers get into private label when they think their customers don’t care about brands, when they think your product is too expensive for what it is and/or when they think they can make a lot more profit by buying it themselves rather than by buying it from branded manufacturers.
The hidden truth is that it really isn’t cheaper for most retailers to buy product themselves although it often takes a long time for them to figure it out (if they ever do). What it does do is promote their brand at the expense of your brand.
In order to buy product themselves, retailers need to create a whole infrastructure to support buying. They need purchasing, engineers, designers, maybe an office China, QA; they need to maintain inventory and they may have to buy larger quantities; and if the product isn’t successful, they have no one to go to for a return or mark down money. All these people and supporting infrastructure is overhead that is added to their fixed costs. Inventory affects their balance sheet. And markdowns affect their profitability. So they may be making bigger margins but are they really making more at the bottom line? Very often, not really; they just fall in love with those really big margins!
And their management wants to promote their brand instead of yours. They want consumers to see them as the supplier and retailer and be more loyal to where they buy than branded products that they happen to carry.
Not everyone will buy private label. Depending on the category, this can be a large percentage of buyers. Or it can be very small – there are some things where brand really doesn’t matter; do you really care who makes your paper clips? And customer experience with private label can change the dynamics over time. How many returns? How many repeat purchases?
My experience is that for many categories this is about a 5 year cycle. It takes that long for retailers to get into private label, experience the costs of being a manufacturer, really understand their hidden costs then scale back their large private label initiatives to something more modest.
Of course this isn’t true for all retailers. Wal-Mart is not going to stop being a private label manufacturer – although they will adjust what is in the mix. Most grocery chains have figured out what categories give them the best return for private label and they devote more or less space accordingly.
So as a branded marketer, what do you do? First (and obviously), make sure that your product is better than private label. It needs to perform better, look better and have a clear, compelling quality advantage that you can communicate to consumers. You also need to have a perceived value which means a fair price as perceived by the consumer not by your management. The more consumers think you are overpriced, the more likely private label becomes. Finally, you need to make sure consumers know who you are. They need to ask for you by name and demand that the retailer carry your product. If they don’t know who you are or don’t care, then private label will become dominant.
Private label is a fact of life. How you manage your brand to create an advantage is up to you.
