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Private Label vs Brands
Store brands no longer suffer the
stigma of inferior quality among most American consumers. Supporting this
notion, Consumer Reports compared store brand and national brand products
across 29 categories of which the national brand was the winner in only six.
Furthermore, the tested store brands cost 27 percent less on average than the
national brands
The battle for brand loyalty
Consumers are emblematic of store brands (or private label goods) gaining
market share at the expense of national brands. Between 2006 and 2009, market
share rose across 74 percent of products in the personal care, household goods
and food and beverage categories in the United States, according to Information
Resources, Inc.2 In
2009, store brands represented nearly 18 percent of consumer packaged goods
spending and over 23 percent of CPG products sold.3
Many consumers increasingly sense a diminishing discrepancy between the
quality of national brands and their private label counterparts as retailers
sharpen their focus on store brands and garner loyalty, and consumer product
companies cede connections to retailers and increasingly knowledgeable
customers. Private labels represent 20 percent of stores and 18 percent
of supercenter sales.4 Furthermore,
store brand products were 31 percent cheaper across product categories than
their national brand counterparts.5 Store
brands are not just a recession related phenomenon – U.S. store brand sales
continue to grow over the long run despite improving economic conditions.6
The following recommendations may help consumer product companies to navigate
this changing environment:7
- Be a brand that the retailer cannot be.
- Be irreplaceable.
- Shed homogeneity.
- Create a retailer-specific product portfolio.
- Make me-too strategies an onerous path.
- Stop reckless promotions.
- Leave retailers bricked and mortared.
For retailers, the challenge is to anticipate and counter these consumer
product company actions.
How private label goods are changing
Generics no more
Store brands no longer suffer the stigma of inferior quality among most
American consumers. Supporting this notion, Consumer Reports compared
store brand and national brand products across 29 categories of which the
national brand was the winner in only six. Furthermore, the tested store brands
cost 27 percent less on average than the national brands.8
Reinforcing this perception of improved quality, mass merchandise
retailers have created multi-tiered store brands in many product categories that
include premium products which, in some cases, cost more than their national
brand competitors. Furthermore, in a recent survey a whopping 89 percent of
participating senior leaders at consumer product companies and retailers think
consumers are more open to trying private label products than they were two
years ago.9
Mounting evidence suggests that national brands are
losing their hold on the consumer. As a result, consumers are more willing to
try new and different brands and believe they have more convenient access to a
wider array of product choices.
A sharpened focus on private labels
Retailers, drawn by the prospect of bolstered profits and customer loyalty,
are increasingly investing in product portfolios and brand building to capture
the most demanding consumers. Many U.S. retailers are following the precedent
set in 1998 by Tesco, mass merchandiser that began
segmenting its customers and developing brands that cater to each group. For
example, Target, a U.S.-based mass merchandiser, offers a broad portfolio of
private labels—Market Pantry, up & up and Archer Farms, for example—each of
which caters to a different consumer group.
Increasingly, retailers are taking cues from national brands when managing
their portfolios of private labels. They are also applying more advanced marketing strategies and hiring
brand managers to complement their buyers and category managers.
Some retailers are also rationalizing the number of traditional national
brands they offer, often to make space for store brands.10 Some
people cite the selective return of secondary and tertiary national brands and
argue that retailers are overstuffing their shelves with private labels. Others
consider the significantly higher market share of store brands in Europe and say
that U.S. retailers have a long way to go.
Furthermore, Costco Wholesale Corporation, a U.S.-based warehouse club
operator, has blurred the line between national brands and private labels using
premium offerings and co-branding strategies with the likes of Starbucks, Quaker
Oats and Tyson.11 Surprisingly,
both consumer product and retail executives tend to believe that co-branding
between retailers and traditional national brands is a win-win situation.
Losing the consumer connection
Mounting evidence suggests that national brands are losing their hold on the
consumer. As a result, consumers are more willing to try new and different
brands and believe they have more convenient access to a wider array of product
choices.12
Storefronts also constitute a significant advantage for retailers relative to
their national brand competition. Stores let retailers collect cross-category
sales data, determine product placement, and influence on-site consumers.
Retailers use point-of-sale transaction data at a granular level to analyze and
understand consumers’ preferences between national and store brands, and 94
percent of surveyed senior leaders at consumer product and retail companies
agree that retailers can improve the way they use point-of-sale data to promote
store brands.13
In addition, the reach of traditional advertising is diminishing, and
retailers have strengthened their interactions with consumers. While traditional
advertising still has its role, many consumers, when asked, believe that it is
easy for them to avoid marketing efforts.14 Retailers
have increased their advertising spend, redesigned product displays to create
favorable impressions of their products, and printed targeted coupons at
checkout.
Transparency
Thanks to the proliferation of digital technology, consumers have become
increasingly empowered with comparative information about products. Consumers
have easy access to weekly retailer circulars and coupons and a variety of
online purchasing and comparison tools such as Amazon reviews, Consumer
Reports, Frucall.com, and Alice.com. This transparency makes brands less
relevant in buying decisions compared to other aspects of the product.15 As
a result, some consumers are trading down to lower-priced products,
demonstrating reduced brand loyalty, and increasing their use of private label
products across a wide array of product categories.
While transparency is still in the early stages of manifesting itself in the
consumer product and retail sectors, the challenge is clear. Brand
advocates—discerning consumers who disproportionately spend money on and
interact with a favorite brand—are more likely to recommend products, read
reviews and offer feedback.16 So,
in an increasingly transparent world, the most important and discerning
consumers.
Will consumers return when the economy improves?
The recent recession accelerated consumers’ movement toward store brands.
While some consumers migrated back to national brands after prior recessions, a
majority stayed with the store brand in recent U.S. recoveries.18 As
the economy improves, according to a recent survey, only 22 percent of
participating consumer product executives agreed or strongly agreed that a
majority of the consumers who switched to store brands in recent years will
switch back to national brands.19 Not
surprisingly, participating retail executives are more optimistic about their
store brands’ ability to stick.
As expected, private labels perform counter cyclically to business cycles in
the U.S. and Europe. During recessions, store brand sales tend to increase more
rapidly; however, they remain stable or contract slightly in good times.20 However,
as the economy improves, the migration back to national brands lags and is less
than the initial gain. In the long run, given the promising track record of
store brand performance, a continuation of this trend would be unsurprising.
All of this begs an important question for consumer product companies: how
can they compete effectively against store brands? Seven principles may help
national brands in their efforts to bolster their competitiveness in the face of
mounting pressures from private labels.
1. Be a brand that the retailer cannot be.
National brands should develop attributes that positively influence consumer
buying behavior and are difficult for retailers to replicate. Leadership in
exclusivity, product safety, social causes, innovation and sustainability can
help build distinctive advantages that translate into competitive advantages
over retailers and other national brands. Consumer product and retail executives
see innovation and exclusivity as brand associations that consumers value most
besides price and product performance.21
For each of its products, a national brand should assess the value, brand and
relationship equity and decide which of these attributes will be difficult to
replicate.22 By
aligning with widely appreciated social causes, a national brand may be able to
foster brand and relationship equity. Targeted marketing efforts, using a mix of
both new and traditional media, can also help communicate values and attributes
to consumers.
For example, Procter & Gamble has specific strategies pertaining to social
responsibility, operations and sustainable product innovation. Since July 2007,
P&G’s policy of developing and marketing sustainable innovations and products
has generated sales of $13.1 billion.23 P&G
also facilitates donations for the causes it supports. P&G donates one dose of
vaccine for each pack of Pampers that is purchased as part of the “One Pack=One
Vaccine” campaign.24
2. Be irreplaceable.
Consumer product companies should create destination brands, which share
several characteristics. First, they are products that consumers often expect to
see at the store and will change shopping patterns to find and purchase. Second,
replacing destination brands with substitutes leaves customers disappointed. As
a result, if customers do not find the product at a store, they will rarely
settle for another brand. Third, they are products that offer high value to the
consumer, regardless of how their price points compare to the rest of the
product category. Fourth, these are products that help build loyalty. For
retailers, these products help build store loyalty whether or not they are
exclusive to the retailer. For consumer product companies, these products have a
loyal consumer following that looks across channels for the product. Finally,
destination products use claims, certifications and supporting data that are
difficult to replicate.
Consumer product and retail managers, when surveyed, believe that 71 percent
of consumers will switch stores if their preferred brand is no longer available
at a retailer, and 62 percent of consumers make special trips to retailers just
to purchase their favorite store brand.25
Consumer product companies can learn from retailers like Trader Joe’s – a
growing specialty grocery store in the United States held by a trust of one of
the founders of the German grocer ALDI. Trader Joe’s appeals to both
value-seeking and health-conscious consumers with a unique product portfolio,
some 80 percent of which comprise private labels and, in some cases, destination
brands in their own right.26
Consumer product and retail managers, when surveyed,
believe that 71 percent of consumers will switch stores if their preferred brand
is no longer available at a retailer, and 62 percent of consumers make special
trips to retailers just to purchase their favorite store brand.
3. Shed homogeneity.
National brands might identify regional or local variations in tastes and
preferences and use them to create products. While for national brands a
movement toward local variants runs counter to conventional wisdom related to
economies of scale, local variants provide an opportunity to appeal to consumers
in a more focused way than homogenous store brands.27 In
a recent survey, a majority of the participating retail managers agreed that
national brands would increase market share if they create local variations that
appeal to consumers in targeted locations.28 Interestingly,
participating consumer product managers showed less support for this notion when
compared to retail managers, suggesting they may be missing an opportunity.
National brands can also look to deliver personalized customer experiences to
compete against homogeneous store brands. For example, Mars, Inc. offers M&M
chocolate candies with personalized colors, text and logos.
Meijer, a regional U.S. grocery and mass merchandiser, uses localization to
compete against national consumer product and store brands from larger
retailers. Meijer created a portfolio of premium Gold line products that are
positioned as regional specialties that have a “distinctive history, heritage,
or story” often tied to a specific region. Products like Michigan Apple
Cheesecake, for example, have a unique story to tell about the origin of the
ingredients or recipe.29
4. Create retailer-specific product portfolios that surround private labels.
As retailers develop multi-tiered product portfolios tailored to their
consumers, national brands can develop a retailer-specific strategy to compete
against low-end, mid-range and premium products, which could include
manufacturing private label goods. Retailers increasingly deploy thoroughly
researched store strategies for their private label brands. Such strategies
sometimes result in SKU rationalization that predominantly impacts second tier
national brands.30 National
brands that survive rationalization will be pitted against a bevy of private
label products. From a price-sensitivity perspective, removing secondary
national brands helps private labels and hurts primary national brands.31
In the battle for the customer, store brands are winning.
Unless manufacturers can create a clear reason in the consumer’s mind that the
brand is more important than the store when making their choices, the
manufacturers are bound to lose margin to the store. Discounts do not do this.
Coherent branding strategies do.
National brands can develop granular, heterogeneous strategies that address
threats from competing retailers. Their owners need to identify their cost and
quality constraints before developing competitive strategies. At the low end,
national brands can create differentiated fighter brands or manufacture private
labels. A mid-range product strategy could require constant product innovation,
packaging changes, price positioning and targeted promotions. In order to
compete in the premium market, national brands could focus on well-communicated
product performance claims driven by innovation and positive brand associations.32
5. Make me-too strategies an onerous path for retailers.
“Me-too” private label products with similar look and perceived quality as
the national brand allow for easy side-by-side comparisons at the store. All too
often, retailers are able to take national brand products to third party
manufacturers, or even the branded company, and develop a private label version
with similar packaging. While consumer product and retail executives tend to
believe that consumer brand companies frequently refresh their packaging and
products to compromise “me-too” store brands, in a recent survey, a majority of
participating consumer product executives agreed that retailers are able to
quickly create “me-too” store brand products after the launch of national
brands.33
Would your brand be able to stand the test of a retailer promotion to buy
the national brand and get the store brand for free? National brands that
tend to pass this private label trial test have a number of characteristics.
First, they have an aggressive cadence for product innovation, including
frequently refreshed packaging and product obsolescence that requires retailers
and private label manufacturers to continue to invest. Second, they maintain a
pipeline of new product launches using unique R&D and supply chain capabilities.
Third, they protect and defend the broad range of intellectual property
associated with their brands, including litigation against private label
manufacturers on product claims.
6. Stop reckless promotions.
Many consumers are savvy when it comes to promoting branded goods. Excessive
promotions train the consumer to wait for deals and can shift the focus from
product attributes to prices. Consequently, national brands should pull back
price-related promotions that can decrease consumers’ reference price points.
When developing a promotions strategy, consumer product companies should more
actively consider non-price-related promotions. In a recent survey, most
participating consumer product and retail executives agreed that consumers have
become more price sensitive in the last two years due to national brand
promotions.34 While
short-term promotions can increase sales, they can damage brand equity in the
long term and narrow the premium between national brands and private labels.
According to Professors Leonard Lodish and Carl Mela, brands were less able to
command a pricing premium, and private label products gained market share,
between 2003 and 2005. Their analysis shows that some of this deterioration is
self-inflicted by short-term promotion strategies where brand managers over
invest in price promotions at the expense of advertising, product development
and distribution strategy.35
Furthermore, Mela states that: “In the battle for the customer, store brands
are winning. Unless manufacturers can create a clear reason in the consumer’s
mind that the brand is more important than the store when making their choices,
the manufacturers are bound to lose margin to the store. Discounts do not do
this. Coherent branding strategies do.”36
Promotions during a recession require a balancing act. While over promotion
potentially damages brand equity, a lack of promotional activity could take an
established brand out of consideration. With genuinely new products, short-term
promotions to generate trial have the potential to generate long-term repeat
purchases.
7. Leave retailers bricked and mortared.
While consumer product companies are actively experimenting with
direct-to-consumer options, they have taken a slower approach to online sales
than retailers, perhaps because of potential conflicts with existing channels.
In a recent survey, participating retail executives, compared to the
participating consumer product executives, tended to be more bullish on recent
advances in mobile digital technology that allow product and price comparisons.37 Moreover,
these retail executives are more likely to expect significant sales growth from
both the retailer’s online presence and the consumer product company’s
direct-to-consumer efforts. Not only can direct-to-consumer be a path for core
products, but it can also be a home for niche product variants that the
retailers do not stock. Retailer SKU rationalization presents an opportunity for
national brands to shift some consumers to their online channel for lower-volume
SKUs.
Across the shopping lifecycle—research, selection, purchase, receipt, use and
return—consumer product companies, online-only retailers, multi-channel
retailers, and third-party comparison tools each strive to play a role. While
physical or multi-channel retailers may be preferred at some points of the
shopping experience, consumer product companies should try to play a primary and
secondary role at each step because consumers have differing shopping
preferences across product categories.
For research, selection and purchase, a variety of emerging and established
online comparison and purchasing tools allow consumers to compare product
performance and price across branded and private label goods. Consumer product
companies should consider how they can become a venue for comparisons, like
Progressive Casualty Insurance Company’s online automobile insurance quotes that
include competitor rates. In cases where the branded products rank favorably,
they should be directed to an online or store option.
For repeat purchases, consumer product companies should consider how they can
provide automated replenishment, like Gillette’s online store that allows
consumers to order recurring replacement of razorblades. Furthermore, consumer
product companies’ online presence can offer always-in-stock service.
Are you ready for battle in a world of private label goods?
While, in a recent survey, participating retail and consumer product
executives indicated that they expect the market share of store brands to
increase in the next two years, we believe national branded goods still have an
opportunity to maintain and gain market share.38 To
compete in a world of private label goods, developing clearly differentiated
national brands, creating unique products, and renouncing reckless promotions
are table stakes. Furthermore, national brands should develop a product
portfolio that reflects each retailer’s consumer base, that includes localized
products and reflects quickly cadenced improvements to packaging and product
performance. Finally, national brands should revisit and accelerate the pace of
their direct-to-consumer efforts.
Underlying each of these suggested strategies is the need to address the
diminishing disparity between national and store brands through a renewed focus
on differentiation.
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