PRIVATE LABELS AND E-COMMERCE
Private labeling is when a retailer purchases products from various manufacturers and then markets those products under its own brand. Private label goods are often referred to as “store brands,” as opposed to the “name brands” that are sold under the brand name of the manufacturer. For example, the consumer products giant Procter and Gamble manufactures peanut butter and sells it under the brand name Jif, while the supermarket chain Kroger purchases peanut butter from smaller manufacturers and sells it as Kroger brand peanut butter. Private label products tend to be less expensive than competing name brands, largely because of reduced advertising expenditures.
Private labeling gained prominence during the recession of the late 1980s, when many consumers chose to give up expensive name brand products in an effort to save money, and many retailers began to market store brands in an attempt to increase sales. But when consumer confidence in the economy rebounded in the 1990s, consumer loyalty to name brands did not. Today, private labeling is a widespread business practice among supermarkets, drugstore chains, and mass merchandisers. These retailers sell hundreds of different items under their own brand names, from basic household items and food to specialty items and even clothing. A survey by the Private Label Manufacturers Association indicated that sales of private label merchandise topped $43 billion in 1998. In addition, the market share held by private brands was expected to increase to 23 percent at large food retailers by 2004.
In the early days private label goods were essentially cheap imitations of the leading brands, even copying the colors and designs of the major competitors’ packaging. Even though court rulings have supported right of private labelers to imitate the packaging of leading brands (unless there is documented confusion among consumers), private label retailers have now moved away from imitation and toward attractive packaging of their own design. Some retailers believe that they need eye-catching packaging because they do not do much advertising, and instead rely on consumers taking notice of their offerings as they walk through store aisles. Over time, many consumers began to consider store brands on the same level as national brands as far as quality, performance, and satisfaction.
Another emerging trend concerns the type of products that are sold as store brands. Whereas the majority of private label products used to be the most basic household goods, the areas of growth in recent years have been in premium and super-premium goods. “The growth in premium brands shows that while today’s consumers are value-conscious, they’re still picky about product quality,” Jenny McCune wrote in an article for Small Business Reports. “Inferior goods aren’t attracting consumers at any price, which is why sales of generic goods—the no-name, no-frills varieties—are actually down.”
The continued growth of private labels has encouraged retailers to devote significantly more attention to developing store brands. “Eager to satisfy these value-conscious consumers and make higher margins to boot, many retailers are promoting their house brands as never before,” McCune noted. “They’ve focused on improving the quality of store brands to better compete with name brands and other private-label lines. They’re also lavishing the brands with marketing attention, rather than simply tossing the goods on the shelves and leaving them to fend for themselves.”
McCune claimed that the recent growth of private labels has also provided new opportunities for small and medium-sized manufacturers in a whole spectrum of industries. Rather than competing directly with much larger companies and incurring the related advertising expenses, these small manufacturers can grow by marketing their products to retailers. “Despite the competition, the trends in private labeling present opportunities for small and midsize manufacturers that can meet the demands of this market,” McCune stated. In essence, the small businesses who create private label goods serve as the manufacturing arm for their retail customers.
FACTORS IN SUCCESSFUL PRIVATE LABEL MANUFACTURING
In her article, McCune outlined three main factors that determine the potential for success of small businesses that wish to manufacture private label goods: the right product, a competitive price, and a strong marketing program. For products to be considered for private labels, they must have a large sales potential, because retailers are not usually interested in branding low-demand items. In addition, the manufacturer must be able to assure that the product quality is as good or better than the leading brands. As McCune explained, “A retailer puts its own name on the line when it private labels your product, and it won’t want that name to be sullied by inferior or inconsistent quality.” Small manufacturers may gain a marketing advantage if they are willing to assume responsibility for product quality, rather than leaving the retailer holding the bag. This might involve providing a toll-free number on product packaging for consumers to make complaints or suggestions, or giving the retailer a discount on future orders if the quality does not meet predetermined standards.
The type of manufacturing process involved is another important product-related aspect of private labeling. In general, private labels are most appropriate for products that can be manufactured on a tight schedule while maintaining high quality standards. Private label manufacturers must be able to assure their retail clients of reliable, on-time delivery. In addition, they must be flexible enough to ramp up production quickly to meet increases in demand or to change the product’s formulation according to the retailer’s wishes. “Given these demands, private labeling generally isn’t for industry newcomers,” McCune noted. “Retailers look for manufacturers, whether large or small, that are well-regarded in their fields. In a relatively young company, however, the owners’ own reputation can compensate for the firm’s short track record.”
Price is another important component of successful private label manufacturing. The price must compare favorably to competing name brands while also enabling both the manufacturer and the retailer to make money. In general, private label sales provide high volume but tight margins, so price calculations are crucial. McCune claimed that private label goods are usually priced 20 percent or more below the market leader. In addition, the retailer generally expects to see a profit margin on private label goods that is 8 to 10 percent higher than it receives with name brands. When calculating the final sales price for private label items, manufacturers must be sure to consider any costs that are incurred especially for the private label line. These may include tailoring the product to meet retailer specifications, or designing special packaging for each retailer.
The third factor in successful private label manufacturing is a strong marketing program. The marketing program for private label goods consists of two parts: contracting with retailers to become their supplier for a certain product, and assisting the retailer in marketing that product to the final consumer. If a small business lacks expertise in dealing with retailers, it is possible to hire distributors or consultants who specialize in private-label selling. For small manufacturers who proceed on their own, however, McCune recommended getting all of the conditions of the contract in writing. It is particularly important to determine the amount of packaging that must be kept in stock, since extra packaging with a certain retailer’s label becomes useless if the deal falls through. Manufacturers will want to keep the amount as low as possible and perhaps also include a clause that requires the retailer to reimburse them for unused packaging. It is also important that the contract specify realistic delivery dates, product design modifications, and the amount of notice required to terminate the contract. Finally, it may also be useful for private label manufacturers to contribute their product marketing expertise to their retail accounts. This may involve recommending specific promotions or even creating advertisements and writing ad copy.
Overall, McCune noted that private label manufacturing can present tremendous opportunities for small businesses, as well as significant challenges. For example, creating private label goods often requires developing a partnership with retail clients. “Private label veterans …warn newcomers to be prepared for some hand-holding, since the relationship between retailer and private-label supplier tends to be especially close,” McCune wrote. Still, she recommended that small businesses who manufacture private label goods not allow any one retailer to account for more than 15percent of their sales. After all, most contracts in this area are open-ended, which enables retailers to change suppliers at any time. Another potential challenge is that name-brand manufacturers are increasingly being attracted by the growth of private labeling. It has encouraged many to reduce prices, improve value, and in some cases even set up private-label divisions of their own to take advantage of their excess manufacturing capacity.
PRIVATE LABELS AND E-COMMERCE
An emerging trend in private labels is the rapid adoption of these brands by firms involved in Internet commerce. “While supermarkets and department stores in the brick-and-mortar world can take years before they venture into private label merchandise, etailers—in a development that echoes the rapid emergence of the medium itself—are developing private label programs as they approach the starting gate,” Elaine Underwood wrote in Brandweek.
According to Underwood, some electronic retailers are attracted by the higher margins typically offered by private label merchandise. Others see it as a way to offer unique merchandise that helps differentiate them from competitors. For example, the online toy retailer eToys sold special cabinets and stands for customers to display their collections of toys under their own brand name. Some experts claim that offering private label merchandise gives substance to online brand names and reminds customers of ecommerce Web sites. Electronic retailers must be careful not to offend big name manufacturers by copying their products and packaging too closely, however, because they lack the leverage in the chain of distribution that is enjoyed by regular retail stores.