GLOBAL TRENDS FOR
PRIVATE LABEL PRODUCTS (PLPs)
is occupationally affected by or intrigued with the rapid increase in global PLP
sales should carefully read the book Private Label Strategy: How to Meet the
Store Brand Challenge. (Published Jan/07; authors: Kumar and Steenkamp.)
This well - researched, written and comprehensive - book focuses on the global,
best practices for consumer PLPs or “store brands”. But, many of the books
statistics, economic studies and summary guidelines can be readily applied to the
accelerating sales of PLPs within commercial/industrial distribution channels in
article will summarize some of the book’s highlight findings and then pose some
questions for distribution-channel players to think about.
sales are growing at the expense of manufacturers’ brands around the world:
(retail) PLPs’ total sales have passed $1 trillion.
PLP share of global, retail sales was approximately 14% in 2000 and on trend to
hit about 22% by 2009, a 50% increase. In North America,
the share gain appears to be going from 20% to 27%. Wal-Mart has, however,
already achieved 40% of its sales on store brands.
is actually a laggard in total PLP sales among first world economies. W. European
countries range from a low of 25% to a high, in Switzerland,
of 38%, and the US will
presumably close some of that gap as retail consolidation catches up with Europe’s.
brands are present in 95% of consumer product goods categories. Even Barnes and
Noble is shooting for 10-12% of its sales to be on store brands by 2008. Their
Sparks Notes series, for example, is an equal or better quality knockoff (at
least they have more pages) of the Cliff Notes series that I relied on in high
school, but costs $1 less per volume.
one factory brands around the world are still, on average, growing very slowly.
Therefore store brand growth is coming entirely, again on averages, out of the
share that has belonged to all of the other, lower-ranking, brand names.
simple reasons for why store brands are succeeding are: too many name brands
have become unchanging commodities that can be reverse engineered – quickly, accurately
and cheaply – then made and sold for a lot less than the brand name goods. Consolidating
store chains control the retail location traffic and shelf-space for displaying
the copy cat products right next to the targeted brand product with
unconditional satisfaction guarantees. And, consumers continue to test the
products, find real value and spread the word.
have shifted supply chain profit power to the retailers from the name brand
third of consumers are loyal to the stores (as a brand itself) where they shop ;
50% are still loyal to name brands and will go to whatever store stocks them;
and 27% are undecided.
’96-’03 retailers gained 5 share points of the combined manufacturer-retailer
profit pool and 50% of the incremental growth in the total supply chain profit
have deployed a range of PLP brands:
original, generic PLPs were historically of inferior, even shoddy quality
and sold at the lowest price as a minimally sufficient solution. After
declining to low-levels of total sales, “value labels” are making a comeback
with better quality and unconditional satisfaction guarantees.
of all PLPs are “copy cat” products that clone the quality and look of
the best selling brand items as close as is legally possible.
stores now also have “premium” label products like:
“President’s Choice” (at grocery chains), “Sam’s Choice” (at WMT) and “Kirkland” (at Costco).
These products usually are of better quality than the target brand, but still
sell for less.
some stores have total supply chain value propositions
with focused business models that allow deep discounts on both copy cat and
unique product brands like Aldi and Trader Joe’s (food stores) and Ikea
(furniture). These players have grown the fastest, made the best return on
assets, but also are the most restricted by their tight strategic scope.
average price discounts from the name brands for the different qualities of PLP
are: 56% if the PLP brand is perceived to be inferior (generic/value); 37% for
copy cat brands of equal quality; and 21% for premium store brands. One study
in the book concluded that 23% of the name brand’s price premium was derived
from the “imagery” effects that advertising has achieved in consumers’ minds over
time. These averages mask big ranges in both price differences and market share
of unit sales for PLPs. Copy cat PLPs in the “Personal Products” category average
45% less than name brands and have only 4% of the unit share. At the other
extreme, “Refrigerated Food” PLPs sell for 16% less and have a 32% category
share. Categories with the strongest brand power force PLPs to be discounted
the most and still get the lowest share.
has in depth research on “price gap management” which involves choosing the
prices for both the competing brand name and store brand items as they sit side
by side on a shelf. The authors also point out that many retailers put too much
emphasis on the better margin percentages that they get on store brands instead
of focusing on: “the profit dollars generated per square foot of space and
duplicate inventory investment costs”. Different
studies in the book conclude that 50% of PLP brands are net losers from a
profitability perspective even though the store brands have higher margin
percents built into their lower price.
How so? If,
for example, a store brand is sold for a price that is 30% less than the name
brand while getting a 25% margin on the store brand versus a 20% margin on the
name one, then the net margin dollars are less on the store brand per square
foot. And, the store now has at least twice the SKU/inventory costs.
not wanting to admit that 50% of store brands are unprofitable, many executives
reason that other factors more than offset the margin dollar per square foot
problem. The most common rationalizations for too many store brands and SKUs are:
give the store buying leverage with brand manufacturers that will deal in order
to minimize the loss of both shelf space and volume to the competitive store
give stores unique value offerings, especially the better-quality-for-lower-price
labels, which grow customer loyalty for the store; and,
more loyal customers buy over time more store brands, then those customers will
become more profitable and loyal.
authors cite studies that prove that the first two factors do have modest
value, but that the third hope is just that.
the 50% un-profitable, store-brand-item issue, the authors cover other pitfalls
for store brands. The retailers that have gone beyond simple copy cat product
creation have backed into all of the marketing activities that the brand
manufacturers have always done, such as: consumer research; product
development; (sourcing/contracting) manufacturing, quality-control and
logistics; and advertising. Many retailers don’t do all of these activities as well
as they need to, nor do the smaller chains have the economies of scale that name
brand manufacturers do with universal distribution volume which, in turn,
supports the cost of advertising to build “imagery” value.
SHOULD MANUFACTURERS DO TO COUNTER THE PLP GROWTH TREND?
half of the book is dedicated to answering this question. The six chapter
Private Labels For Greater Profits
(the PLP retailers) Effectively To Craft Win-Win Relationships
Brilliantly To Beat Private Labels
Selectively To Marshall Resources Against Private Labels
Winning Value Propositions For Manufactured Brands
unfairly summarize all of these chapters: none of these “strategies” are easy;
and, PLP clones will continue to cherry-pick away at mature, unchanging branded
items. Manufacturers will benefit from giving these chapters a careful read.
OBSERVATIONS AND QUESTIONS
wholesale-distributors and retailers of all sizes have sourced private label
clones from Asian producers. Offering copy-cat products of the most popular,
simple commodities at lower prices with fatter margin percents has usually
resulted in quick “new” sales. But,
percent of these sales are to new customers as opposed to cannibalizing sales
to old customers that were already buying the branded products that yielded
almost the same total margin dollars (albeit at a lower margin percent times a
long supply lines from Asia, plus container quantity shipments, are the clones
really turning-and-earning as well as we might think with equal or
better fill-rate satisfaction for customers that have switched from standard
if the first wave of copy-cat products proves to be a winner using the more
thorough total economic analysis from this article’s featured book, when will
we cross the line into the 50% of PLP items that aren’t profitable? Could we
develop a total math model to help us better define that breakeven zone?
are the criteria for ranking which items should be cloned first to last? Should
the criteria be modified and re-weighted for each new category of items and for
each different segment of customers that a category might be sold to? If so,
how? Is psycho-demographic analysis a core competency of the company?
we source more items and do more repeat buys from Asian sources, how do we stay
on top of those producers’ all-around reliability and economic efficiency?
Should we consider outsourcing all of these problems to a firm like Li and Fung
that has grown into a giant, supply-chain, process manager for store brands at huge
apparel chains and now has an “industrial division”?
industrial/commercial channels the buyer of goods can often be different than the
eventual, internal user of the goods. As cost-controllers at headquarters
declare new cost-cutting mandates on purchasing departments, the company’s
internal users, who may be loyal to traditional brands, may be disappointed
with private label alternatives.
the decision of whether to develop generic, copy cat or premium PLPs be
potentially very context and customer-type specific? Distributors often sell
products across a number of segments which may have different buying,
wholesalers, unlike retailers, can’t control retail-traffic, shelf-space,
in-store advertising and product demonstrations, how should PLPs be sold to
both purchasing people and commercial end-users to make up for the
merchandising advantages that retailers have?
mimicking the PLP strategies from the world of retailers be less successful in
a commercial/industrial distribution channel? Which ones and why?
In closing, the
importance of making the right PLP decisions for all manufacturers, distributors
and retailers will continue to grow. Our understanding of what has already
happened in this topic space needs to catch up and stay on the leading edge.
Thoroughly digesting and discussing the book, “Private Label Strategy”, is a
first, easy step. Meeting with the author(s), representatives from Li and Fung
and the PLP teams from other, most-progressive, non-competitive distributors
and retailers might be a good second step for what could be an important
journey over the next 5 to 10 years. If any readers have interest or ideas
about such a conference, please let me know.
Consulting Group, Inc., Article 1.19