Brands VS Private

Fighting To Win

Labels

-Yash PatelIIT Madras

Most Likely perceived as:

Best BrandWorth MoreTrust WorthyOriginalDown to EarthHigh Quality

Most Likely perceived as:

SimpleGood ValueFriendlyGaining In PopularityDown to EarthObliging

• Economic Conditions – Private Label Market share generally goes up when economy is suffering and down in stronger economic conditions

• Economic Conditions – Private Label Market share generally goes up when economy is suffering and down in stronger economic conditions

• Managers of brand-name products can temper the challenge posed by private-label goods

It becomes difficult to look at acompetitive threat objectively andin a long term context when day-to-day performance is suffering…

For Example, the managers are worried aboutthe success story of classic Cola, a private labelfor Sainsbury markets, which was launched in1994 at a price 28% lower than Coca-Cola’sand today accounts for 65% of total cola salesthrough Sainsbury’s and 15% of the U.K. colamarket

Meeting the Private-Label

challenge requires the

same consideration

a company would give to

any other competitor

Private Label Threats

The IMPROVED QUALITY of Private-Label Products

The Development of PREMIUM Private-Label brandsEx : Loblaw’s President’s choice line of 1500 items, whichincludes leading chocolate-chip cookie sold in Canada,squeezed the national brand between its top-of-the-linePresident’s Choice label & the regular Loblaws private-labelline

European Supermarkets’ SUCCESS with Private Labels

Reasons:1) Regulated television markets in Europe

2) Retailers’ power in relation to manufacturers’ is greater in Europe than in US

Private Label Threats

US SupermarketsAverage sales from Private

Labels – 15%Average pretax Profits – 2%

European SupermarketsAverage sales from Private

Labels – 54%Average pretax Profits – 7%

The Emergence of NEW CHANNELSMass Merchandisers, warehouse clubs, and other channels account for growing percentage of Sales.

Ex: 39% of soft drink volume sold in mass merchandisers is private labels versus 21% in

supermarkets

The Creation of NEW CATEGORIES

Private Label Threats

• The product is an inexpensive, easy, low-riskpurchase for the consumer.

• It is perishable, thereby favoring local suppliers

• National brand new product introductions areinfrequent or easy to copy

• Consumers can easily make side-by-sidecomparisons of national brands and private labels

• Private-label goods have been available toconsumers for many years

• Variability in quality is low

• Quality in comparison to national brands is high andimproving

• Consumers have confidence in their ability to makecomparisons about quality

• Retail gross margins in the product category arerelatively high

• Price gaps between national brands and privatelabels are wide

• National brand expenditure on advertising as apercentage of sales are low

• The retailer is a part of a stable oligopoly andtherefore sells national brands at relatively highprices

The purchase process favors BRAND-NAME PRODUCTS

Brand-name goods have a SOLID ADVANTAGE on which to build current advantage

Brand strength PARALLELS the STRENGTH OF ECONOMY

Brand Strengths

National brands have VALUE for Retailers

EXCESSIVE Emphasize on Private labels DILUTES their strength

Brand Strengths

Faced with the Pros and Cons of Private label productions, what should National brand manufacturers do ???

Faced with the Pros and Cons of Private label productions, what should National brand manufacturers do ???

The recommendation to companies that do not yet make products for the private label market is simple:

For Manufacturers seeking only to

use excess capacity,

private-label production can

eventually become a narcotic

Consider the Case of Borden…

It was once a strong manufacturer of well-known brands. It floundered in early 1990s largely because of a progressive, and eventually excessive, commitment to private label manufacturing, which eroded its focus on sustaining its branded products.As a result of declining margins and cash flows, the company was finally sold to an investment firm in 1995.

Manufacturers tempted by Private-Label

production should understand..

1) Managers invariably examine private-label production opportunities on an incremental marginal cost basis. However if they were evaluated on a fully costed basis, it would mostly appear less profitable.

2) It can result in additional manufacturing and distributing complexities that add costs rather than reduce them.

3) Efficiencies of selling private-labels are also exaggerated. And since most retailers employ different buyers for national brands and private brands, so manufacturers must maintain two sales relationships for each retailer.

4) It is easy to overstate the relative contribution of private-label goods and therefore to underestimate the cost of cannibalization.

Short-term factors favoring

private-label production

The dual manufacturers have more ability to…

Short-term factors favoring

private-label production

The dual manufacturers have more ability to…• Influence the category

• The shelf-space allocation between national brands and private labels, the price gap between them

• Timing of National Brand Promotion

• The learning about consumers and costs that comes from being in private-label market can enhance the manufacturer’s ability to defend its national brands.

Few companies that have used

Private-label Production Effectively…

It succeeded in capturing private-label businesses

from its key competitor, forcing

it to close plants and weakening its

national brand

Few companies that have used

Private-label Production Effectively…

It first captured private-label trade

contracts from competitors and then

proved that trade accounts could make

more money just stocking GE light bulbs than by stocking them

with private-label bulbs.

Evaluating

Private-Label

Brands

If your company does produce

private-label goods, it is

important to asses their effect on

the business as a whole and to

keep private label operations

under control.

Taking the following steps should

help…

Conduct a Private-Label Audit.

Calculate the private-label profitability on both a full-cost & marginal-cost basis.

Examine the impact of private-labels on the market shares of your national brand.

Close Excess capacity.

Winning Strategies

The National-brand manufacturers are recommended to follow the following nine actions- whether they currently make private-label products or not- to stem any further share gains by private labels…

1) Invest in Brand Equities

Brand Equity- the added value that a brand-name gives the underlying product- must be carefully nurtured by each successive brand manager

Ex: P&G had 70 separate improvements to Tide laundry detergent since 1956, but the brands core promise that it will gets clothes cleaner than any other product has never been compromised.

Winning Strategies

2) Innovate Wisely

Too many line extensions confuses consumers, the trade, and the sales force, and reduces the manufacturer’s credibility with the trade as an expert on the category.

Product line extensions do make sense when a category has a large premium component & the level of rivalry is high.

Winning Strategies

In 1994, national-brand

managers introduced 20,000 new

grocery products. Most of them didn’t

survive through 1997.

3) Using Fighting Brands sparinglyManagers should be wary of launching fighting brands, which are price positioned between private labels and the national brands they aim to defend.

However, they may end up competing with the national brand for consumers who would not switch to private label product anyway. Also, they rarely make money.

Ex: Philip Morris used fighting brands L&M, Basic & Chesterfield around the world to flank Marlboro

Winning Strategies

Winning Strategies

4) Build Trade Relationship

Retailers and national-brand producers can maximize their profits jointly without excessive emphasis on private-labels.

It can be done if manufacturers take

the following steps…

• Loan retailers an accountant to educate them about private-label profitability.

• Offer to examine retailers’ purchase scanner data.

• Subsidize in store experiments

• Ration Support

Winning Strategies

5) Manage the Price Spread

National Brand manufacturers must monitor the price gap both to the distributor and to the end consumers between each national brand and the other brands, including private labels, in every market. They must also understand how elastic the price is for each national brand-i.e., how much effect changes in price have on consumers.

The graph of Price Elasticity of National Elasticity shows that private label sales are twice as sensitive as national brands to changes in the price gap

Winning Strategies

6) Exploit Sales-Promotion Tactics

Strong brands with full product lines such as Neutrogena can sometimes secure retail space for their own custom display. Manufacturers can emphasize performance-based merchandising allowances that require special in-store displays or advertising over cash discounts applied to invoices.

Winning Strategies

7) Manage Each Category

Categories differ widely in Private-Label Penetration, price gap between private label and national brands & the relative profitability and potential cannibalization cost of any private label or value brand.

They can be categorized as…

• Low Private-Label Penetration – Managers must understand and sustain barriers to entry – such as frequent technological improvements within a category, manufacturer’s low-cost producer status, or intense competition among national brands.

• Emerging Private-Label Penetration – Consider value added packaging changes, line extensions- that make the product stand out on the shelf, keep consumers’ attention focused on the national brands, and raise the costs for private-label imitators.

• Well Established Private-Label Penetration – The emphasis must be on lowering the costs in the supply chain – through minimum orders, truckload, and direct shipment discounts, more efficient trade deals and the elimination on slow moving stock keeping units.

Winning Strategies

8) Use Category profit pools as a performance measure

Market share and volume are often considered as primary measurement tools. However, they can lead to poor decisions as they inherently value all share points equally.

Category Profit Pool calculates the total profit for all participants in a category by segment and then attributed percentages of the total to the companies competing within that category.

9) Take Private Labels Seriously

Every national brand marketing plan should include a section on how to limit the encroachment of private labels. The marketing plan might include specific actions to be taken in categories, trade accounts, or regional markets where reports indicate private labels are gaining grounds.

Winning Strategies

Private Label

Brands In

India

Share Of Private Label

Brands In Indian Retail

Private labels constitute around 10-12% (Rs

13 billion) of the organized retail product market in India and their share is likely to grow even in the current economic environment, says a report by global consultancy firm KPMG.

Their penetration is on the rise especially in the apparel, consumer durables, home care and FMCG segments.

In India, Shoppers Stop and Kishore Biyani’s Future Group have

pioneered the launch of private labels. Shoppers Stop launched its

first private label ‘STOP’ in 1994 and has since then has added around 10 exclusive brands. It forms about 17

per cent of Shoppers Stop’s total range.

Among the major Indian players, the degree of private label penetration was the highest in Trent with 90 %, followed by Reliance Retail (80 %), Pantaloon (75 %), Nilgiris (38 %), India bulls/ Piramyd (30 %) and Food world (22 %).

Sr. No. Company Degree of Private Label Penetration

1 Trent 90 %

2 Reliance Retail 80 %

3 Pantaloon 75 %

4 Nilgiris 38 %

5 Piramyd 30 %

6 Food World 22 %

Creating Private Label

In the Indian market, there is a colossal capacity existing with the retailers to explore in the

area of private branding due to the diverse spread of spending

power and generic competition at the lower end of the market.

• There is a massive consumer section of Indian Socio-Economic continuum, which has the presence of generic competition.

• 50-60% consumers balance their budget by having a trade-off by buying branded commodities across product categories. These consumers may buy a few branded products and compromise in the other product categories for unbranded offerings.

Acceptance of Private Labels

In Indian Market

The major reason for acceptance of Private Labels in Indian market is the high profits for the retailers due to huge margins (30-40% higher than branded companies) and cheaper product for consumers than those of National Brands’, with same Quality.

Probable

Question

popping up in

your mind is

that…

If Quality is

Same then WHY

National Brand

product is

Priced Higher

than Private

Labels??

Reasons aRe veRy simple…

• Popular Brands invest heavily on branding whereas Private Labels do not invest much in terms of branding (except branding of umbrella brand which anyways retailer has to invest).

Reasons aRe veRy simple…

• Popular Brands invest heavily on branding whereas Private Labels do not invest much in terms of branding (except branding of umbrella brand which anyways retailer has to invest).

• Huge Margins in Private labels is because of few intermediates like distributor, retailer etc.. The retailers directly source them from manufacturer and logistics is maintained by all these big retailers.

Reasons aRe veRy simple…

• Popular Brands invest heavily on branding whereas Private Labels do not invest much in terms of branding (except branding of umbrella brand which anyways retailer has to invest).

• Huge Margins in Private labels is because of few intermediates like distributor, retailer etc.. The retailers directly source them from manufacturer and logistics is maintained by all these big retailers.

• Customer loyalty is high in case of Private Labels. Suppose I am happy with Croma DVD player I recently bought, there is a high probability that my next purchase of TV will be from Croma as I know the quality will match with big brands and I can save up to around 5k on purchase of 50k. Probability of repeat sale is high in Private labels.

The Aditya Birla retail launched an experiment across 30 stores in

Visakhapatnam in Andhra Pradesh. Titled Project Vizag, after the colloquial

name of the port city, the strategy places private labels in 25-30% of a store‘s shelf space, against a mere 4-

5% earlier

Experiences Of Indian Companies with Private Label Brands

Private retailers will occupy 50 per cent of the market the world over.

At 50 per cent, they begin to saturate. If they try to occupy more than this, then consumers feel that

there aren‘t enough choices. In countries such as Switzerland and

the UK, private labels have reached this limit and these markets have saturated. But they will continue

grow in the other countries till they reach the same level. And this will

happen very soon in India, too.

Future Of Private Label Brand In India

Created by- Yash Patel, IIT MadrasDuring an internship by Prof. Sameer Mathur, IIM Lucknow