brands versus private labels : fighting to win

B R A N D S V S P R I VAT E L A B E L S

F I G H T I N G T O W I N

The battle is still on…

Private labels in the United States command higher unit shares than the strongest national brand in 77 of 250 supermarket product categories.

But, private-label strength generally varies with economic conditions :

Private- label market shares generally goes up when the economy is suffering.

E C O N O M Y

And, private-label market shares generally goes down in stronger economic periods.

E C O N O M Y

Classic Cola was launched by Cott Corporation for J. Sainsbury supermarkets in the United Kingdom 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.

Meeting the private-label challenge requires the same consideration a company would give to any other competitor. v

THE PRIVATE-LABEL THREAT

Development of Premium Private-Label brands.

Emergence of New Channels.

Improved Quality of Private-Label products.

Extension of Product categories.

MANAGING BRANDS TO THRIVE

Brand-name goods have a solid foundation to build current advantage.

Brand strength parallels the strength of

the economy.

National brands have value for retailers.

Purchase process favours brand-

name products.

Excessive emphasis on private labels dilutes their

strength.

For manufacturers seeking only to use excess capacity, private-label production can

eventually become a narcotic !!!

The company’s strategy becomes confused; it starts to cannibalize its brand-name products; and it may even face financial disaster.

For companies that do not yet make products for the private-label market is simple:

D O N ’ T S TA RT !

For companies that do not yet make products for the private-label market is simple:

D O N ’ T S TA RT ! E V E R .

So, Manufacturers still tempted by Private-Label production must understand…..

If private-label manufacturing were evaluated on a fully costed rather than on an incremental basis, it would, in many cases, appear much less profitable. 1

Private-label production can result in additional manufacturing and distribution complexities that add costs rather than reduce them.

For example, packages and labels have to be changed for each private-label customer, and inventory holding costs

increase with each private- label contract.

2

Efficiencies of selling private-label contracts are also exaggerated. Whenever a private-label contract comes up for renewal, there is inevitably a long and arduous negotiation as competitors attempt to steal the business.

3

It is easy to overstate the relative contribution of private-label goods and therefore to understate the cost of

cannibalization.

4

However, a few companies have used private-label production effectively as a temporary strategy to enhance competitive

advantage.

In Europe, PepsiCo Foods International succeeded in capturing private-label businesses from its key competitor, forcing it to close plants and, more importantly, weakening its national brands.

Armani differentiates it product line into three tiers distinct in style, luxury, customisation and price. Clear differentiation

minimises confusion and brand cannibalisation.

T I E R 1T I E R 3

T I E R 2

National-brand manufacturers should 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 EQUITY : Brand equity—the added value that a brand-name gives to the underlying product—must be

carefully nurtured by each successive brand manager.

1

2INNOVATE WISELY : 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.

3USE FIGHTING BRANDS SPARINGLY : The fighting brand gives

the price-sensitive consumer a low-cost branded alternative.

BUILD TRADE RELATIONSHIPS : The best consumer goods companies should know more about their consumers and their

categories than any private-label manufacturer.

4

MANAGE THE PRICE SPREAD : National-brand manufacturers must monitor the price gap both to the

distributor and to the end consumer between each national brand and the other brands, including private

labels, in every market. 5

6EXPLOIT SALES-PROMOTION PRACTICE : Manufacturers can emphasize performance-based merchandising allowances that require special in-store displays or advertisements over cash

discounts applied to invoices. !

MANAGE EACH CATEGORY : Categories differ widely in private-label penetration, the price-quality gap between private labels and

national brands, and the relative profitability and potential cannibalization cost of any private label or value brand.

7

USE CATEGORY PROFIT TOOLS AS A PERFORMANCE MEASURE : Most consumer-goods companies use market share and volume as the primary measurement tools for category performance which lead to poor decision making because they inherently value all

share points equally.

8

9TAKE PRIVATE LABELS SERIOUSLY : Every national-brand marketing plan should include a section on how to limit the

encroachment of private labels.

CONSIDERING THE INDIAN SCENARIO…

Private label’s share in the modern retail in India is about 7%, but it is as high as 40% in European countries, and as low as less than 1% in China.

Though the growth of private labels was seen across categories in India, growth in grocery was prominently seen in supermarkets at 15% and hypermarkets accounting for 30% of

total value sales.

Private labels owned by retailers such as Bharti Retail, Future Group and Aditya Birla Retail outsold several national brands in home care and packaged food categories at their retail stores as value conscious consumers opted for best

bargain in an uncertain economic condition and soaring headline inflation.

The private label market in India is currently estimated at Rs 13 billion, which accounts for 10-12% of organised retail in India. Retailers such as Pantaloon, Trent, Shoppers Stop and Spencer’s have increased focus on private label retailing.

One major advantage to the retailers in India, and which works in favour of private labels, comes from the fact that

Indian consumers are less brand conscious and more quality and freshness conscious.

Created by NILESH RANA, IIT BHU under the guidance of Prof. SAMEER MATHUR, IIM LUCKNOW

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