You know the old joke: Doesn’t mean they’re not out to get you, just because you’re paranoid. In a nutshell, that describes how manufacturers of brand name products respond to competition from private labels. On one hand, producers are right to be worried: There are far more private labels—“store-brand” goods—on the market than in the past. Jointly, unit shares that are higher are commanded by private labels in the United States than the most powerful national brand in 77 of 250 supermarket merchandise classes. And they may be put together third or second in 100 of those types. But on the flip side, many makers have overreacted to the threat posed by private labels without fully comprehending two outstanding points.
First, private label strength normally fluctuates with economic conditions. Which is, private label market share generally goes up when the economy is suffering and down in more powerful economic intervals. Over the past 20 years, private label market share has averaged 14% of U.S. dollar supermarket revenue. In the depth of the 1981–1982 downturn, it peaked at 17% of revenues; in 1994, when private labels received great media attention, it was more than two percentage points lower at 14.8%. Second, producers of brand-name products can check the challenge presented by private label goods. In reality, in large part, they’re able to control it: More than 50% of U.S. makers of branded consumer packaged goods make private label goods as well.
It is not easy for supervisors to take a look at a competitive risk objectively as well as 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 not worry. Classic Cola was launched at a cost 28% lower than Cocacola’s. Today the private label accounts for 65% of entire cola revenue through Sainsbury’s and for 15% of the U.K. cola marketplace.
Reactions to private label success may have important repercussions. Consider what happened in the week following Philip Morris’s statement in April 1993 that it was going to cut on the purchase price of Marlboro cigarettes.
Fulfilling with the private-label challenge requires the same thought a firm would give to any challenger.
Although we agree that many national brands are from your number three brand on down in each product class— particularly under pressure— we ardently believe that the private-label challenge must certanly be kept in view. What’s desired is an objective approach and the same careful thought a firm would give to any brand-name opponent. Managers must consider whether the risk posed by private labels will grow or disappear, to start. Finally, if their businesses already create private label goods, they ought to weigh the expense of competing in the generic market from the benefits. And when that market has not been entered by the companies, they likely shouldn’t.
The Private Label Danger
Several factors indicate that the private label danger in the 1990s is serious and may remain that way regardless of economic conditions.
The Improved Quality of Private Label Products.
Ten years ago, there clearly was a distinct difference in the particular level of quality between private-label and brand-name products. That difference has narrowed, now; private-label quality levels are considerably higher than before, and they’re more consistent, especially in categories historically characterized by little product innovation. The vendors that contract for private label generation have improved their procurement procedures and are more cautious about tracking quality.
The Development of Premium Private Label Brands.
Innovative retailers in North America have revealed the remaining commerce how to produce a private-label line that produces quality superior to that of national brands. Consider Loblaws’ President’s Choice line of 1,500 things, which contains the leading chocolate-chip cookie sold in Canada. As an outcome of cautious, worldwide procurement, Loblaws can press the national brands between its top of the line President’s the regular Loblaws and Choice label private-label line.
European Supermarkets’ Success with Private Labels.
In European supermarkets, higher private label sales end in higher average pretax gains. U.S. supermarkets average just 15% of sales from private labels; they average 2% pretax gains from all sales. By comparison, European grocery stores including Sainsbury’s, with 54% of its income coming from Tesco, and private labels, typical 7% pretax gains, with 41%.
Of course, the reasons for the strength of private labels in Europe are structural. First, controlled television markets mean that accumulative marketing for name brands has never approached U.S. amounts. National chains dominate grocery store retailing in most west European nations, so retailers’ power in regard to producers than it’s in the United States ’ is greater. In the United States, the largest single operator controls the very best five account for a total of 21%, and just 6% of national supermarket revenue. By contrast, in the UK, the very best five chains account for 62% of national supermarket income.
But growing amounts of U.S. retailers such as the Kroger Company consider that strong private label programs can successfully identify their stores and cement shoppers’ loyalty, thus reinforcing their positions with regard to brand name makers and raising profitability. What’s more, cash-loaded European retailers like Ahold (a Dutch supermarket chain) and Sainsbury’s have started to acquire U.S. supermarket chains and may try to repeat their private-label systems in the United States.
The Development of New Channels.
Warehouse clubs, mass merchandisers, and also other channels account for a growing portion of sales of health and beauty aids, household cleaning products, and dry groceries. Wal-Mart Stores, in fact, is one of the utmost effective ten food retailers in the States. By way of 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, however they might 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 pull to make sure consistent quality at low cost.