PRIVATE LABELS

PRIVATE LABELS ARE BRANDS

 Consumers want brands for the quality assurance and the
emotional satisfaction they provide
 Any product that is not a brand will have limited market appeal
 Brands do not necessarily have to be manufacturer brands
 They can also be store brands
 As retailers became bigger and more sophisticated – their
private labels became more successful
 Store brands are infused with emotion and imagery rather
than only with functional logic that dominated private labels
few decades ago
NOT A RECESSIONARY PHENOMENON
 Private label generally goes up when the economy is
suffering and down in stronger economic periods

 Consumers regarded private labels as a cheap substitute

for the real thing, rolled out by retailers during recessions
and discarded once the economy picked up again

 Part of private label growth in a recession is permanent

 As consumers learn about the improved quality of private

labels in a recession, a significant number of them remain
loyal to private labels even after the necessity to
economize on expenditures is over
 TYPES OF PRIVATE LABELS
 Private labels are tools for retailers to achieve their strategic
objectives – market share and profitability
 Retailer store brands have four general consumer
propositions to compete against manufacturer brands:
 Generics
 Copycats
 Premium store brands
 Value innovators
 Traditional retailer strategies – generics, copycats
 New approaches – premium store brands, value innovators
PRIVATE LABEL EVOLUTION
 GENERIC PRIVATE LABELS
 Generics are all about the lowest possible price

 PLs start as cheap, inferior products – historically, PLs did not carry even
the name of the store and were thus called generics

 Consumers saw them for what they were – undifferentiated, unstated

quality, at a very low price

 The cheap, shoddy products offered lower-income and price sensitive

customers a purchase option

 Enabled retailers to expand their customer base

 Generics appeared only in the basic, functional, low-involvement categories

 Offered in one size, one variant only – few additional SKUs for retailer,
rarely ran price promotions

 Retailers bought from manufacturers – those specializing in private labels,

brand manufacturers selling excess capacity
 GENERIC PRIVATE LABELS
 Generics did not account for a large proportion of retailer’s volume –
they were not strategically important to the retailer
 Suffered from poor shelf placement, less visible retail shelves
 Generics / first-price range may not generate required profitability to
justify their shelf space
 End up cannibalizing retailer’s own higher-priced and higher margin
private label range
 Expectation of retailers – such a line attracts price-conscious
customers, whose shopping basket ends up with a mix of low-
margin generics plus some higher-margin nongeneric products
 Thus first-price generics may not be profitable in its own right, but it
may still attract profitable shoppers
 COPYCAT STORE BRANDS
 Carry the name of the retailer as a brand
 They are “copycats” in the sense that they imitate the leading
manufacturer brands in the category
 Uncomfortably close in terms of packaging to manufacturer brands
 Placing copycats adjacent to leading brand encourages both brand
comparison and brand confusion in shoppers
 Retailers aggressively promote copycat brands using price promotions
and comparative messages
 To ensure quality, retailers analyze contents of a leading manufacturer brand
and re-create the product step-by-step (reverse engineering)
 Free riding on manufacturer’s innovation, research, product development,
image-building efforts for its brand
 Price is lower than referent manufacturer brand while still delivering high
margins to the retailer
 COPYCAT STORE BRANDS
 No risk associated with new product introduction – retailers only
introduce such brands once manufacturer’s product has become a hit

 By introducing copycat PLs, retailer effectively creates some competition

for the brand leader

 This increases the retailer’s negotiating power with the brand leader as
well as other manufacturer brands in the category

 Retailer generates larger category profits –

1. From the higher margins on its own PL
2. From the higher margins induced from manufacturers under
the threat of favoring the store brand

 Copycat brands are all about driving revenues and profits from
manufacturer brands to retailers
 SUCCESSFUL GENERICS
 Accounts for a small percentage of a retailer’s total sales
because they suffer from poor margins
 Provide a purchase option for extremely price-sensitive but
quality-insensitive shoppers
 Attract profitable customers, despite inadequate
profitability at the product level, through cross-selling of
higher margin products
COPY CATS
 SUCCESSFUL COPYCATS
 Free ride on the brand manufacturer’s investments in
research, product development and advertising in order to
offer comparable product at cheaper price

 Aggressively promote against manufacturer brands with

price comparisons on the shelf and in advertising

 Increase the negotiating power vs. manufacturer brands,

especially in categories with dominant manufacturer brand
players

 Operate in categories that depend on a constant stream of

new products – minimizes chances of failures
 PREMIUM STORE BRANDS
 Retailers realize that while copycat branding helps as a tool against
manufacturer brands, it does not differentiate the store against other
retailers

 Does not provide a reason for the consumer to buy with one
retailer in favor of another retailer, since every major retailer has an
equivalent private label

 To escape this commoditization retailers are investing in premium

store brands

 Distinction with copycat brands is clear vision of retailer to differentiate

on quality vis-à-vis manufacturer brands, plus the absence of any
attempt to copy the packaging of the leading manufacturer brands

 Retailers wish to differentiate premium PLs explicitly from other

manufacturer and retailer brands
 PREMIUM STORE BRANDS
Two types:

 Premium-lite store brand – proposition is “better and

cheaper”
To be equal to or better in quality than leading manufacturer
brands while selling at a discount

 Premium-price store brand – proposition is “best that

money can buy”
Retailer brands that are both higher in price and superior in
quality compared with leading manufacturer brands
PREMIUM-LITE STORE BRANDS

 Starts with leading manufacturer brands as the standard

and then attempts to make a superior product at a lower
price

 If retailers can pull this off (product development

perspective) and convince customers of performance
(marketing perspective), life can become unbearable for
manufacturer brands

 Holy grail of retailer private label strategy

 PREMIUM-PRICE STORE BRANDS
 Premium-price private labels are more expensive than manufacturer
brands

 Consumers are willing to pay more for better quality private labels than
manufacturer brands

 Competes head-on with manufacturer brands and other retailers on

quality, not price

 This PL must be able to price above some of the leading manufacturer

brands in the category

 There will be niche and specialty brands that are priced higher, as most
retailers have a mass-market strategy

 A premium-price store brand will sometimes be the highest-priced

product in the category, but more often there will be some manufacturer
brand that will sell at an even higher premium
TESCO BRAND PORTFOLIO
PRICE POSITIONING
SUCCESSFUL PREMIUM STORE
BRANDS
 Differentiate from other retailers and thereby generate store
loyalty
 Beat the manufacturer brands on objective quality
 Offer unique products, ingredients and flavors
 Come in distinctive packaging that emphasizes the differences
with manufacturer brands rather than mimicking them through
copycat strategy
 Aspire to price at par with the mainstream manufacturer brands
and command a premium price to some of them
 Contain some brand imagery
 VALUE INNOVATORS
 As retailers analyzed contents of leading brands and
produced copycats and premium store brands, they
discovered opportunities

 Retailers could create good/better quality product at

remarkably low prices

 This included stripping away most of the elements of

imagery like expensive packaging and superfluous features.
 Swedish furniture chain IKEA
 U.S. Wal-Mart
 German Aldi (700 SKUs, 90% - 95% private labels, 20% market
share)
 VALUE INNOVATORS
 Customers not confused by rows of products differentiated
by brand name only
 All products are developed in conjunction with leading
manufacturers to highest quality standards
 Generate process-related savings (IKEA customers have to transport
furniture home) – value innovator retailers most profitable

 Rather than being everything to everybody they focus on

precisely defined consumer segment
 The more successful they become – less room to grow
 For growth:
1. Target new segments – lose positioning
2. Expand internationally – add overhead, logistics cost
SUCCESSFUL VALUE INNOVATOR
OWN LABELS
 Aim for product quality at par with manufacturer brands at unbeatable
prices, with constant search to lower prices continually

 Achieve lower prices through rigorous system processing cost savings

(low overheads, limited assortment, minimal displays) rather than by
compromising on product quality

 Give up image factors such as expensive packaging

 Create fancy labels to give the feeling of choice in a PL environment

 Pass on many shopping functions to the consumer

 Focus on an underserved target segment

 Do not stray too far from this segment to avoid risk of losing competitive
advantage
FOUR TYPES OF BUYERS
 FOUR TYPES OF BUYERS
 Private label buyers are price-sensitive consumers who perceive
a small quality gap between leading manufacturer brands and the
store brand. They will purchase store brand.

 Brand buyers are consumers who are low on price sensitivity and
perceive a large quality difference between leading manufacturer
brands and the store brand. They will buy a manufacturer brand.

 Random buyers are not particularly price sensitive and see little
difference in quality.

 Toss-ups are consumers who are high on price-sensitivity and

perceive large quality differences between manufacturer brands and
the store brand.
Strategy to induce PL buys
 Random buyers can be attracted to PL by using in-store
stimuli that guide shopper to the PL (favorable shelf facings,
end-of-aisle displays)

 (Toss-ups usually purchase manufacturer brand since for most

consumers quality is more important than price)

 Toss-ups can be converted into PL buyers if retailers

convince them that the quality of the private label is comparable
to, if not better than, quality of manufacturer brands
CONSUMER DECISIONS
Winning value propositions FOR MANUFACTURER
BRANDS against private labels
 If reasonable similar choices are available among manufacturer brands
and PLs, consumers make buying decisions by trading off price against
the value provided

 Value has both rational and emotional aspects to it:

 Rational reasons – functional benefits, performance and quality
 Emotional reasons – image, building close bonds with consumers

 Steps:
1. If manufacturer brand does not have right image, prospect is lost
2. If it passes image test, consumer examines whether price is
competitive compared to PL
3. If price gap acceptable, consumer prefers manufacturer brand
4. Then comes quality test: does it deliver performance that satisfies
consumer to build relationship with the brand?
VICIOUS
CYCLE
FOR
MANUFACTURER
BRANDS
CONSUMER IS THE WINNER
 Mega-retailers have used their negotiating power to push brand
manufacturers to reduce their prices

 Rather than pocket all gains, retailers plough them back into price
cuts for consumers

 Only way manufacturers can compete is by launching innovative

products and constantly improving quality

 Has resulted in increased quality, product choice, price-value

combinations available to consumers

 The private label revolution has helped empower the consumer