The Private Label War
Private label or store controlled CPG (consumer packaged goods) products have a lot going for them. They are less costly in part because they are not burdened by expenditures on marketing including advertising, promotions, and slotting fees (payments to get new products stocked in stories) and because their production and logistics are simpler and more efficient. Stores have control over the price and thus can provide customers with a guaranteed substantial price value. During the periodic times of recession, price becomes more important and private label brands can gain and hold customers. For many products, private label brands enjoy the best placement with stores. They can be at the eye level or even on end displays, for example. And the packaging can send cues that the product is similar to the national brands who, needing the cooperation of the retailers, are reluctant to make an issue of it.
CPG private label share is just over 20% or so in the US and growing at a very slow rate. Given the advantages of private label brands the question is why have they not grown more over the years? Why are they not matching the performance in Europe where the share is much higher and growing faster. There are at least three explanations that provide strategic guidance to both private label brands wanting to break out and to national brands attempting to inhibit their growth.
First, quality perceptions. The private label brands often struggle to gain quality parity, to be perceived as close enough in quality to be an acceptable choice. They are burdened with a value price that cues inferior quality and the lack of a marketing budget that will tell the quality story. The successful retailers like Tesco, Trader Joe’s, and Loblaw’s have been able to create an organizational narrative, but these are in the minority.
National brands have a well-earned reputation for quality. They have demonstrated, often over generations of users, that the offering delivers. The mere fact that they spend money on advertising, sponsorships and other marketing efforts signals quality. Why would any firm support a brand that did not deliver quality? If a brand is very visible, the assumption is that it is well made with good ingredients.
Second, brand building. Most retailers are astonishingly incapable of creating a brand portfolio strategy and implementing effective brand building. In part, this is a budget issue but in large part it is simply due to the fact that the retailer and its people are hired and trained to be good at store management, logistics, shelf strategy, driving store traffic and not brand building.
National brand organizations from P&G on down, in contrast, hire and train people to build and leverage brands. That is in their DNA. They recognize that a successful brand should go beyond functional benefits and value for price and introduce other bases of relationships by delivering emotional, self-expressive, and social benefits. It should develop and leverage a sense of common interests with the customer whether it is with the Betty Crocker kitchen or the good food aspirations of Healthy Choice.
Third, innovation. Private label retailers are most successful in categories in which there is little innovation, where a stationary product is enjoying high volume. Where products are dynamic such as snacks, sodas, beer, detergent, and candy, there is very little private label success. Retailers want the market to stay still so that their cost advantage will be accentuated and their investment leveraged. They lack the motivation or ability to innovate.
National brand firms are all about innovation—they are close to customers of their category and naturally think about how to improve the customer experience. They continually engage in incremental innovation in order to fight off other national brands They introduce new flavors, packaging, and forms to provide energy and increase loyalty. They further look toward transformational innovation which will create new categories and subcategories like energy bars, diet sodas, fruit-based waters, and new forms of frozen dinners. Innovation is the enemy of private labels.
The story of Loblaw, a food retailer in Canada, illustrates many of these points. Their President’s Choice (PC) line was introduced in the mid 1980s. The signature PC product was the decadent chocolate chip cookie, which had nearly 40% chocolate by volume and contained real butter. It was many times better than competition and served with the President’s Blend coffee, a passion-fruit sorbet, and special Belgium Biscuits to demonstratively show that PC was actually better than existing options.
The PC brand was backed by the personal involvement of the CEO Dave Nichols who placed his signature on the package. He wrote his “Insider’s Report,” which provided a quirky, humorous take on food in a comic book format and relentlessly promoted the innovation and quality of the brand and, in doing so, provided ongoing energy and credibility to it.
Loblaw’s developed its own kitchen to develop and test new ideas and nurtured the PC brand as it captures, along with the value no-brand label, 26% of the volume and much more of the profits. The key was taking the innovation initiative away from the national brands, providing quality cues in the form of signature products that were demonstratively superior, and having the credibility and visibility of the president.
Another role model, is Tesco, which has around 50% of its sales as private label. Tesco is relentless at promoting the organizational values which involve going way out of their way to provide the finest products for their own brands. They also have a coherent and effect brand portfolio with Tesco Finest (250 products that exceed the national brands), Tesco (comparable to national brands), and Tesco Value plus specially brand such as Tesco Organic and Tesco Healthy Living.
Clearly the key to private label success is the ability to get beyond simply having a value price and the key to the national brands’ ability to compete against private labels is to make that step difficult by watching costs, brand building, and innovating.
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