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National Brands and Private Labels:

Fierce Rivals, Uncomfortable Bed

Fellows, or Enlightened Partners?

MASMI Research Group
As product markets have matured and retailers growth strategies have increased their leverage, a significant proportion of sales are accounted for by
private labels, estimated as being a global US$ 300 billion consumer packaged goods industry . Private labels (also known as own-label or store brands)
are products or services typically manufactured by one company, to be sold under the contracting companys brand name. Manufacturers of store brands
fall into three main categories: large national or global manufacturers who use their expertise and excess production capacity to supply store brands;
small manufacturers who specialise in producing store brands; and major retailers who own their own manufacturing facilities .
Retailers have exploited their growing buying power by developing their own store brands - often in association with manufacturers - that offer equal or,
sometimes, superior value to national or global brands. The economic rationale for retailers is compelling: Because they do not have to spend as much on
product development or advertising, they can go to market at a price is that is often significantly lower typically by 10-20%. This becomes an
increasingly attractive proposition for price-conscious consumers in a recession, who need to make their money go further.
Penetration of store brands
In Europe and the USA, private label retailing is now a mature industry: In some retail sectors, store brands account for 40 to 50% of sales, reaching 100%
in some categories; for example chilled foods. What is more, some store brands have been able to stretch to premium variants. While advertising by
national brands brings shoppers to the store, retailers have leveraged their control of the shop floor to profit from comparable store brands. Whether the
superior profitability assumption holds true in most cases is the subject of considerable academic and trade literature which has been examining issues of
the positioning of store brands vis-a-vis national brands with increased interest and rigour.
What seemed like a suicidal strategy for manufacturers is now being embraced by many of the makers of national or global brands, leading to more
collaborative, even sometimes win-win, scenarios. Indeed, it has become increasingly evident that private labels are not necessarily eroding leading
brand shares. Research has shown that an effective way to grow profits for manufacturers is to advertise their own best selling or premium priced
products (which increases demand for the product category as a whole) while encouraging private label versions of them. . Moreover, research across
product categories shows that the price differential between leading and private label brands has remained steady or even widened. And, from the
consumer viewpoint, the trend for store brands co-existing alongside national brands can paradoxically result in less rather than more choice. Empirical
evidence suggests the introduction of high quality store brands can cause major manufacturers to increase advertising expenditures in support of major
brands, and retailers to raise the price of both the national and store brands, trends often accompanied by retailers de-listing weaker brands that do not
enjoy the same advertising support. Consumers are then left with the reduced choice of one or two national brands and the store brand.
Brand Co-existence
It is important to remember that the commercial rationale/business model in each case is quite distinct. There are compelling reasons for retailers to
pursue their own (store) brand strategy. The same goes for manufacturers who need to continue to build their brands through innovation and various
forms of brand building, allowing them to continue enjoying high shares and profitability. Retailers need both, as it offers customers a choice based on
price or benefits. Meanwhile, national brands present a benchmark that helps customers make choices and indirectly helps to position store brands.
It is, of course, true that in recessionary times, there are spikes in private label sales as price becomes of such paramount of importance, putting
pressure on manufacturer margins and sometimes eroding their shares and profitability. However, research has indicated that there are natural limits to
the market share that store brands can capture, depending on product category, and that certain products, such as health and beauty, even in
recessionary times, are relatively immune to store brand penetration.
MASMI research has demonstrated the link between private labels and cyclical economic activity. Private labels generally do better in hard economic
times as price becomes an even stronger factor in consumer decision making, even though recent research carried out amongst consumers in Russia does
not yet fully corroborate this hypothesis.
Likewise, experience in the United States has shown that private label market share goes up when the economic climate deteriorates, and drops when
the economy is stronger.
Retailer/Manufacturer Strategy
Far from sounding the death knell for national or global brands, these trends just call for appropriate strategies which are quite different, depending on
the perspective one is taking on the issue (manufacturer or retailer), the sector or a particular brands positioning.
Having said that, the typical reflex of manufacturers during recessionary periods - cutting advertising and decreasing price-promotional activity - actually
help strengthen private-label demand. Instead, to stave off private label competition, when the economy slows down, brand manufacturers should avoid
advertising cuts and temporarily heighten their price-promotional activity.
As for retailers, they should promote private labels during a recession - e.g., through more displays and greater discounts - if possible to better connect
Whilst price will always be a factor, particularly in hard times, MASMI research into consumer wants, needs and motivations demonstrates that there are
often deep-seated factors that explain consumer choice such as trust, pride and identification which go well beyond functional benefits and price.
Whilst retailers who enjoy a strong reputation might be able to build emotional appeal, a strategy of continuous brand building (through innovation,
product development and sustained advertising) will put a distance between global and store brands at least in most cases.
Horses for courses
Clearly the strategies followed by manufacturers and retailers regarding main and store brands are different. However, their interests may not be
diametrically opposed; there can be win-win situations for those that tap into collaboration opportunities and have clear strategies. Indeed, different
manufacturers may want to adopt different private-label strategies. Private labels tend to succeed more in situations where entry barriers are low, where
there are significant economies of scale, or where the label is a premium line for a category with low price-sensitivity. For manufacturers who seek closer
ties with retailers, private labels may represent a neglected opportunity. By partnering with retailers to create a lower-priced branded option,
manufacturers can limit the damage that store brands can have on their market share and profitability . Better a strategy of cooperation than a costly
and expensive fight for the consumer dollar.
Examples from MASMI markets
In emerging markets, the consolidation of retailing and the growing power of retail chains have mirrored the gradual strengthening of private label
brands in the developed markets

Whilst nowhere near the penetration levels in Western markets, emerging markets are seeing rapid growth in store brands. In Poland, the private label
market continues to grow dramatically, with own label retailers expanding their product range and new players such as supermarket chains and smaller
shops entering a market which was previously dominated by the discount stores. Although private label products are still mainly found in the low and
medium priced range, some retailers have begun to introduce premium brands, which compete in quality as well as price with national brands. However,
despite these innovations, there may be a limit on how far private labels can go in Poland. For many Polish consumers, there is an innate belief that
private labels mean inferior quality; conversely manufacturer brands are inherently superior in their eyes. The recession may have meant a temporary
flight to cheaper alternatives, but will private labels still enjoy the current market share levels when more affluent times return?
In Russia, the penetration of store brands is still not as high as in Europe or the USA but it has been gradually growing. A recent MASMI survey, for
example, has shown that consumer behaviour has changed with the advent of the economic crisis, with concrete implications on brand strategy for both
manufacturers and retailers.
In the UK, which has one of the highest own-label penetration rates in the world, major retailers such as Tescos, Sainsburys, ASDA, Boots and Marks and
Spencers have achieved high market shares with their store brands.
We have found from our experience in these markets that strategic options for private label retailers include appointing a brand manager to champion
and support the brand, much as a manufacturer would with a national brand. But what is beyond question is the need for a brand strategy what does
Minimum standards should be set for product quality; making the cheapest possible product does not work and undermines efforts to build the reputation
of the store itself as a brand. Those store brands that have succeeded have done so, in many cases, by offering quality equal, or even superior to, that
offered by national brands; e.g., the St. Michaels brand of Marks & Spencer. Consistent with this is a pricing strategy that offers value but, at the same
time, is not so low as to imply cheap or poor quality ingredients.
Products need to be researched and market tested until retailers get it right. Experience has suggested that it is best to get in-house fresh food right first
meat, bakery, produce as it signals capability to consumers and engenders trust when more difficult product categories are tackled. And, when
retailers move into creating packaged grocery and non-food store brands, it is best that they start with simple commodities such as flour, sugar, bleach or
washing up liquid.
In conclusion, private labels represent a phenomenon which is not merely a reflection of recessionary times, although they do gain additional ground as
price becomes a stronger driver of consumer choice. The tenets of brand building apply to marketers on both sides of the aisle whether manufacturers
or retailers with each needing a clear brand strategy that is built on a compelling value proposition.
3-Impact of New Product Development of Store Brands on Branded Manufacturers in the US Grocery Industry, N.G.Leader, I.D.H. Cuthill, Harvard
4-Whats Behind the Label: The Economics of Quality-Equivalent Store Brands, David Soberman, Philip Parker, World Business, June 2004
5-Brands versus Private Labels, John A. Quelch and David Harding, Harvard Business Review on Brand Labels (Boston:Harvard Business School Press:
6- Private Label Strategy: How to Meet the Store Brand Challenge, Nirmaly Kumar, Jan-Benedict E.M. Steenkamp,, January 4, 2007
7- Changing Equity of Private Label in the Middle East, Dr. Nicos Rossides, Esomar Congress, 2003