You know the old joke:
Just because you’re paranoid doesn’t mean they’re not out to get you. In a
nutshell, that describes how manufacturers of brand-name products react to
competition from private labels. On one hand, manufacturers are right to be
concerned: There are more private labels—“store-brand” goods—on the market
than ever before. Collectively, private labels in the United States command
higher unit shares than the strongest national brand in 77 of 250
product categories. And they are collectively second or third in
100 of those categories. But on the other hand, many manufacturers have
overreacted to the threat posed by private labels without fully recognizing
two salient points.First, private-label strength generally varies with
economic conditions. That is, private-label market share generally goes up
when the economy is suffering and down in stronger economic periods. Over
the past 20 years, private-label market share has averaged 14%
of U.S. dollar supermarket sales. In the depth of the 1981–1982 recession,
it peaked at 17% of sales; in 1994, when
private labels received great media attention, it was more than two
percentage points lower at 14.8%. Second,
manufacturers of brand-name products can temper the challenge posed by
private-label goods. In fact, in large part, they can control it: More than
50% of U.S. manufacturers of branded
consumer packaged goods make private-label goods as well.
It is difficult for managers to look at a competitive threat objectively
and in a long-term context when day-to-day performance is suffering.
Examples of big-name brand manufacturers under pressure from private labels
and generics aren’t reassuring. What manager wouldn’t worry when faced with
the success story of Classic Cola, a private label made by Cott Corporation
for J. Sainsbury supermarkets in the United Kingdom? Classic Cola was
launched in April 1994 at a price 28%
lower than Coca-Cola’s. Today the private label accounts for 65%
of total cola sales through Sainsbury’s and for 15%
of the U.K. cola market.
Reaction, to private-label success can have major repercussions. Consider
what happened in the week following Philip Morris’s announcement in April
1993 that it was going to cut the price of Marlboro cigarettes. Wall Street
analysts interpreted the price cut as the death knell of brands; Philip
Morris’s stock lost $14 billion of its
value; and the stocks of the top 25 consumer packaged-goods companies
collectively lost $50 billion in value.
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. What’s
needed is an objective approach and the same careful consideration a company
would give to any brand-name competitor. 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. And
if the companies have not entered that market, they probably shouldn’t.
The Private-Label
Threat
Several
factors suggest that the private-label threat in the 1990s was
serious and stayed that way regardless of economic conditions.
The Improved Quality
of Private-Label Products
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.
The Development of
Premium Private-Label Brands
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. Consider Loblaws’ President’s Choice line of 1,500 items,
which includes the leading chocolate-chip cookie sold in Canada. As a result
of careful, worldwide procurement, Loblaws can squeeze the national brands
between its top-of-the-line President’s Choice label and the regular Loblaws
private-label line. And President’s Choice has even expanded beyond Loblaws’
store boundaries: Fifteen U.S. supermarket chains now sell President’s
Choice products as a premium private-label line.
European
Supermarkets’ Success with Private Labels
In European supermarkets,
higher private-label sales result in higher average pretax profits. U.S.
supermarkets average only 15% of sales
from private labels; they average 2%
pretax profits from all sales. By contrast, European grocery stores such as
Sainsbury’s, with 54% of its sales coming
from private labels, and Tesco, with 41%,
average 7% 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.S. levels.
Second, national chains dominate grocery retailing in most west European
countries, so retailers’ power in relation to manufacturers’ is greater than
it is in the United States. In the United States, the largest single
operator commands only 6% of national
supermarket sales, and the top five account for a total of 21%.
In the United Kingdom, by contrast, the top five chains account for 62%
of national supermarket sales.
But growing numbers of U.S. retailers such as the Kroger
Company believe that strong private-label programs can successfully
differentiate their stores and cement shoppers’ loyalty, thereby
strengthening their positions with regard to brand-name manufacturers and
increasing profitability. What’s more, cash-rich European retailers like
Ahold (a Dutch supermarket chain) and Sainsbury’s have begun to acquire U.S.
supermarket chains and may attempt to replicate their private-label programs
in the United States.
The Emergence of New
Channels
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 8.8%
of sales at mass merchandisers in 1994; in some categories, that percentage
was much higher. For example, 39% of
soft-drink volume sold in mass merchandisers is private label versus 21%
in supermarkets. 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.
The Creation of New
Categories
Private labels are continually
expanding into new and diverse categories. Their growth follows some general
trends. (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. 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.
Brand Strength
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.
The purchase process
favors brand-name products
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 1990s, brands are needed more than ever. In
fact, a 1994 DDB Needham survey indicates that 60%
of consumers still agree that they prefer the comfort, security, and value
of a national brand over a private label. Although this percentage is lower
than the 75% figure common in the 1970s,
it has remained fairly constant during the last ten years.
Brand-name goods have
a solid foundation on which to build current advantage
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. From year to year,
there is little change in consumers’ rankings of the strongest national
brands. Forty of the top 50 brands on Equitrend’s consumer survey were the
same in 1993 as in 1991. In contrast, retailer brand names are not
prominent. On the 1995 Equitrend list of the top 100 brands in the United
States (based on ratings of 2,000 brands), only 5 store brands appear, the
highest of which is Wal-Mart at number 52, down from 34 in 1994.
Brand strength
parallels the strength of the economy
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. A 1993
Roper Starch Worldwide survey found that 48%
of packaged-goods buyers knew what brands they wanted before entering the
store, up from 44% in 1991.
National brands have
value for retailers
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. Retailers must not only stock but also promote, often at a loss,
those popular national brands—such as Miracle Whip, Heinz ketchup and
Campbell’s soup—that consumers use to gauge overall store prices. 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.
Excessive emphasis on
private labels dilutes their strength
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. Even Sears, Roebuck & Company, the premier
private-label retailer in the United States, found it necessary to invest in
category-specific subbrands such as Craftsman and Kenmore—which, in turn,
have been outgunned by more focused manufacturer brands such as Black &
Decker and Sony. By the late 1980s, Sears’ excessive emphasis on private
labels led to consumers’ perceptions that the retailer’s assortment was
incomplete as well as to reduced store traffic and poor profits. In 1990,
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.
Winning Strategies
We recommend that national-brand manufacturers take the
following nine actions—whether they currently make private-label products or
not—to stem any further share gains by private labels.
Invest in brand
equities
This is not a new thought, but it is worthy of fresh
consideration. For most consumer-goods companies, the brand names they own
are their most important assets. James Burke, former CEO of Johnson &
Johnson, has described a brand as “the capitalized value of the trust
between a company and its customer.” Brand equity—the added value that a
brand-name gives to the underlying product—must be carefully nurtured by
each successive brand manager. Managers must continually monitor how
consumers perceive the brand. Consistent, clear positioning—supported by
periodic product improvements that keep the brand contemporary without
distorting its fundamental promise—is essential. For example, Procter &
Gamble Company has made 70 separate improvements to Tide laundry detergent
since its launch in 1956, but the brand’s core promise that it will get
clothes cleaner than any other product has never been compromised.
Consistent investment in product improvements enhances a brand’s perceived
superiority, provides the basis for informative and provocative advertising,
increases the brand’s sustainable price premium over the competition, and
raises the costs to private-label imitators who are constantly forced to
play catch-up.
Innovate wisely
Desperate to increase sales and presence on the shelves and
to earn quick promotions, too many national-brand managers launch line
extensions. Most are of marginal value to customers, dilute rather than
enhance the core-brand franchise, add complexity and administrative costs,
impair the accuracy of demand forecasts, and are unprofitable on a full-cost
basis. In 1994, more than 20,000 new grocery products were introduced, half
of them line extensions and 90% of them
unlikely to survive through 1997. Too many line extensions confuse
consumers, the trade, and the sales force, and reduce the manufacturer’s
credibility with the trade as an expert on the category. In addition, if
line extensions fragment the business, the average retail sales per item
will decline. That, in turn, opens the door for a private-label program that
focuses just on a brand’s best-sellers and therefore can deliver attractive
average sales and profits per item. Product-line extensions do make sense
when a category has a large premium component and the level of rivalry is
high. But in most instances, especially in commodity categories that are
driven by price, product-line proliferation and innovation are a waste of
money.
Use fighting brands
sparingly
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. The purpose of a fighting brand is to
avoid the huge contribution loss that would occur if a leading national
brand tried to stem share losses to private labels by dropping its price;
the fighting brand gives the price-sensitive consumer a low-cost branded
alternative. Philip Morris has effectively used fighting brands L&M, Basic,
and Chesterfield around the world to flank Marlboro. Likewise, Heinz has
used fighting brands well in pet foods. 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 this reason, Procter & Gamble
recently phased out White Cloud toilet tissue and Oxydol laundry detergent.
Rarely do fighting brands make money. At Consumer, fighting brands had close
to $1 billion in revenues but were
unprofitable after the allocation of fixed costs. The management time that
these products absorb is often better invested in building the equity of the
national brand.
Build trade
relationships
The best consumer goods companies should know more about
their consumers and their categories than any private-label manufacturer.
Indeed, they should also know more than their trade customers, who, though
closer to the end consumer and inundated with scanner purchase data, have to
plan assortments of products and allocate shelf space for 250 to 300
categories with only the resources that 1%
after-tax profit margins will permit. 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. They can do so if
manufacturers take these steps:
