Private labels outperform manufacturer brands
Private label buyers are now found among all socioeconomic strata and seen as thoughtful shoppers, who are not influenced by advertising. Customer service
Private labels have been around for a long time. A&P with its Eight O’Clock Breakfast Coffee has been purveying own brands for more than a century. Yet, private labels were seen as poor cousins to the manufacturer brands, with a small share of the overall market that was considered unlikely to become significant.
Manufacturers of branded products therefore have been taken aback by the unexpected and continued increase in private label share since the 1970s. Private labels have outperformed manufacturer brands in all but one of the last ten years. They now account for 20 per cent of sales in supermarkets and mass merchandisers as well as a healthy share of sales in department stores, category killers, specialty stores, and convenience stores.
Private labels are ubiquitous
The three best-selling private label categories may still be predictable-milk, eggs, and bread in food; food storage and trash bags, cups and plates, and toilet tissue in nonfood.
However, today’s large and sophisticated retailers are able to develop credible private label offerings for categories where traditionally customers were more wary of straying from their favorite manufacturer brand names.
Manufacturers of branded products therefore have been taken aback by the unexpected and continued increase in private label share since the 1970s. Private labels have outperformed manufacturer brands in all but one of the last ten years. They now account for 20 per cent of sales in supermarkets and mass merchandisers as well as a healthy share of sales in department stores, category killers, specialty stores, and convenience stores.
Private labels are ubiquitous
The three best-selling private label categories may still be predictable-milk, eggs, and bread in food; food storage and trash bags, cups and plates, and toilet tissue in nonfood.
However, today’s large and sophisticated retailers are able to develop credible private label offerings for categories where traditionally customers were more wary of straying from their favorite manufacturer brand names.
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Store brands are currently present in over 95 percent of consumer packaged goods categories. Among the fastest-growing categories for private label sales are lipstick, facial moisturizers, and baby food.
Private labels compete on quality. Traditionally, the image that private labels evoked was of white packages with the words toilet paper, beans, or laundry detergent embossed in plain black typeface on them, found somewhere at the bottom of store shelves.
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But times are changing
Consumer Reports magazine ranked Winn-Dixie’s chocolate ice cream ahead of Breyers, Wal-Mart’s Sam’s Choice better than Tide detergent, and Kroger’s potato chips tastier than Ruffles and Pringles. Hotel Collection by Charter Club, a Macy’s own label, sells $1,350 duvets and $275 pillowcases. Similarly, Gap has introduced the 1969 label, which retails at twice the price of most Gap jeans, while The Limited has launched Seven7 jeans to compete against jeans by Calvin Klein, Diesel, and Hugo Boss.
Consumer acceptance of private labels
The improvement in private labels has made them an acceptable purchase alternative for consumers. Two-thirds of consumers around the world believe that “supermarket own brands are a good alternative to other brands.” In 2001, 45 per cent of shoppers were more likely to switch to a store brand, up from 31 per cent in 1996.
In a recent survey, only 29 per cent of US consumers agreed that manufacturer brands are worth the price premium, while only 16 per cent believed that store brands are not as good as manufacturer brands. And any social stigma associated with store brands seems to have vanished, since only 6 per cent of consumers in the survey reported that they don’t feel comfortable serving store brand items in their home.
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Given these attitudes, it is not unexpected to learn that virtually every household purchased private label products in the past year. The rich buy private labels
In the past, private labels were primarily targeted to the poor. Today, while the poor still buy private labels more often than other consumers, one observes wealthy consumers purchasing store brands. Increasingly, it is considered “smart” shopping to purchase private label products of (supposedly) comparable quality for a much lower price, rather than being “ripped off” by high-priced manufacturer brands.
This trend of private label purchase as smart shopping can be observed in apparel, where chains like Target (with its Mizrahi line) and Zara cater to the “cheap chic” phenomenon. Private label buyers are now found among all socioeconomic strata and seen as thoughtful shoppers, who are not easily influenced by advertising and take pride in their decision-making ability.
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Private labels are not a recessionary phenomenonIt has often been speculated that private label buying is something that occurs in recessions. A systematic examination of data from four countries (United States, United Kingdom, Germany, and Belgium) spanning multiple decades indeed reveals that private label share increases during recessions and decreases during periods of economic expansion.
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However, these changes are asymmetric. Private label share increases faster and more extensively during a recession than it falls in the subsequent expansionary phase. In fact, the net increase in private label share in recessions is not completely compensated for by its net decline in expansionary times. Part of private label growth in a recession is permanent caused by consumer learning. As consumers learn about the improved quality of private labels in recessions, a significant proportion of them remain loyal to private labels, even after the necessity to economize on expenditures is over.
Consumer loyalty shifts from manufacturers to retailers
A study encompassing such disparate product areas as groceries, apparel, toys, and consumer electronics found that in the last fifteen years, brand loyalty had declined in ten out of the fifteen product areas included. This does not, however, mean that loyalty is a thing of the past.
Increasingly, consumers are first and foremost loyal to a specific retailer. Retailers like Gap and Whole Foods generate intense levels of loyalty. As a result, most consumers first think of Home Depot, the leading retailer, rather than American Standard or Kohler, the leading brand manufacturers, when they have to replace a faucet in their bathroom.
Profits flow from manufacturers to retailers
The new private label world has put tremendous pressure on manufacturer brands. Between 1996 and 2003, retailers gained five share points of the combined manufacturer and retailer profit pool and more than 50 percent of the system profit growth. During this period, manufacturers’ total market capitalization grew only 4 percent, well below the 19 per cent growth in the S&P 500.
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The future will be even more challenging for manufacturer brands, especially if trends in the US follow those of the more advanced European private label markets. The US is actually not leading in private label because of the low levels of retail concentration. If the US closes the private label development gap with the UK by half, manufacturers will lose tens of billions of dollars in annual sales, and billions of dollars in operating profits will migrate to retailers.Start a SIP with as low as ₹500 with ET Money App!
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