No longer plain, simple; Private-label brands use new tools to compete

Marketing News, May 15, 2006, by Michael Fielding

Not too long ago, private-label brands were practically wrapped in plain brown paper. Consumers wanted them that way; it underscored the fact that they were saving money. Those days are long gone, though. Consumers began to realize that cheaper doesn't always mean poorer quality, and nowadays private-label products are getting fancy packaging and are putting the heat on their national-brand rivals.

According to research giant ACNielsen, North American private-label sales grew by 7% in 2005, securing nearly one-fifth of the market share across all consumer product categories. The biggest change was in cosmetics, which grew globally by 23% year-on-year.

Private-label executives are using a variety of tools -- improved manufacturing capabilities, consumer savvy, executives experienced in branding and smart packaging -- to build their brands.

"In the earlier days of private-label brands, there was almost no choice but to compete as a virtual generic, sending a clear message to consumers that they weren't going to take the hit for unnecessary frills, such as fancy packaging, unique formulations or a wide variety of flavors and sizes," explains Beth Zimmerman, principal of Cerebellas LLC, a Long Beach, New York-based strategic planning and marketing solutions company.

In the mid-1990s, however, middle-of-the-road Target Corp. hired post-modern architect Michael Graves to design its private-label goods. "The distinction became more about design," says Dennis Whalen, vice president of marketing at San Francisco-based Philippe Becker Design Inc., a branding and package design firm. Target was a pioneer at a time when selling private-labels was more about getting products on the shelf to fill the gaps. As for their marketing plans, "none of them was clearly thought out, and (private-label goods) weren't run like brands," Whalen adds. "There's been quite an evolution over the past two decades, and that's been accentuated in the past five years," as more retailers picked up on Target's lead.

As retail chains consolidate (drugstore chain CVS Corp., for example, announced in early 2006 it would acquire about 700 standalone Sav-on and Osco drug stores from Boise, Idaho-based Albertson's Inc., adding to its roster of more than 5,400 locations and overtaking Walgreen Co. in total store numbers), companies are searching for ways to differentiate themselves.

"They're doing that through branding," says Blair McCaw, president of Chicago-based Constellation Management Group, which consults retailers who are developing in-house brands that are designed to be considered premium and exclusive. McCaw has helped CVS develop its brand strategy. "One way for retailers to compete is to develop premium brands that can't be acquired anywhere else."

The national brands are partly responsible for their own fall from grace.

"Manufacturers of branded products switched from product innovation and R&D to branding, which doesn't add value to the product," explains Mitchell Gooze, president of Santa Clara, Calif.-based consultancy Customer Manufacturing Group Inc. "The reason was that publicly traded companies are under constant pressure to perform, and product innovation can take years to pay back. Price promotion or branding promotions have quicker paybacks."

So while the national brands found themselves lacking in innovation, their private-label counterparts began eating into their sales.

One way to do that was to seek better manufacturing capabilities.

"It used to be that if you were a private-label supplier you couldn't get a quality product, but the capabilities of private-label manufacturers have improved," Gooze says. The recent economic downturn has helped boost sales of private-labels, too, he adds. "If, during a downturn, consumers try out private brands and find out that they're good, when the economy kicks back up again and they can afford to buy national brands again, they don't. Each time that happens, the brands get in trouble."

Consumers, too, have become savvier and more finicky, willing to hold out for a good-quality product at an affordable price. The price differential between private-label and national brands can be tremendous. In the personal-care category, it can be as much as 46% less, according to ACNielsen.

"In the old days, it was: 'Give me the cheapest products at the cheapest price.' But there's been a change in consumer attitudes. For example, in personal care products, consumers want to feel that they're getting the added value that a quality image provides, but the private-label industry has never been image-oriented," McCaw explains.

"People are ruthless about saving two or three dollars so they can buy a BMW. We'll go for the value as long as the basic quality is there. That's why luxury brands are successful," adds Steve Chang, partner in the Chicago office of San Francisco-based Prophet consulting firm, which specializes in brand strategies.

With this ever-evolving, more intelligent consumer has arrived a new breed of managers and executives in the retail industry.

"Retailers are hiring (consumer packaged goods-trained) professionals to run private-label brands like CPG brands, not like lines of products," Whalen adds. "The management at supermarkets has an been insular thing; there are a lot of people who have been brought up from checker to VP in 27 years, and they're comfortable in that environment. But the people who are creating the innovation at big chains tend to be from outside the grocery world. They're bringing in branded people who know the consumers and the demands rather than the supply."

These managers who are experienced in branding know that the packaging and placement have long-lasting effects in the mind of the consumer. "It's a way to blur the national brand distinctiveness," Chang explains. "It's not just a volume game to get your margin anymore. Marketing science is allowing (brand marketers) to get more sophisticated."

Still, packaging plays the lead role in building a private-label brand. "Providing (private-label) products in more eye-catching packaging ensures that consumers will not only choose these brands as an alternative to pricier competitors, but that with the right design and slogans, these formerly secondary or last-choice options could become a consumer's first choice," which ensures brand loyalty beyond the initial sale, adds Rachel Weingarten, president of New York-based GTK Marketing Group.

"Major chains have awakened to the fact that a good private-label product -- well-packaged and merchandised -- sells," says Whalen, who has worked with Target, Wal-Mart, Safeway, Costco, Williams-Sonoma, Starbucks and Gap on their private-label brands.

The success of the private-labels -- from CVS's Gold Emblem to Wal-Mart's Equate to Target's Michael Graves -- has made it difficult for national brands to communicate the benefits of their higher-priced branded offerings. That allows the middle-tier private labels to polish their own brand-building efforts.

"Brand-savvy players will tie their private labels to the overall brand of their business," Chang presumes. "The margin on a private label is more than on a branded product, but you have to invest in building that (private-label) brand. Smart CPGers will continue to build strong product brands that will create strong customer loyalty."

While the experienced brand managers know that successful branding relies on consumer impressions at the point-of-sale, if a product's packaging does not turn heads, it won't churn sales. "When you have superior-quality products, you want the packaging to communicate that," McCaw says.