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Understanding the Value of Private Label Store Brands – Reasons to Buy

By Michael Lewis

shoppingSales of private label brands have exploded in the past half-decade as consumers have done the best they can to get through the economic recession. According to market researcher Packaged Facts, store brands accounted for almost one-third of new food and beverage items introduced in the United States in 2011.

While monetary savings are usually the primary impetus for choosing private label products over national brands, purchasers have discovered that there is little tangible difference between the two categories of products in taste, use, or quality of ingredients. The lack of differentiation and the clear cost advantage of private brands are imposing fundamental changes on the retail industry today, affecting pricing, advertising, merchandising, and product selection.

The Value and Future of Branded Products

The term “brand” refers to the practice of ranchers and farmers distinguishing their livestock from that of others by burning their personal mark of ownership onto the hide of herd animals. With the development of commerce and the trade or sale of manufactured products across distances, branding became necessary to maintain the link between the person who made or provided a product and the user of the product.

For example, it was one thing to buy a plow from a local businessman down the road, and quite another to buy a plow from an unknown blacksmith who may have failed to properly forge the metal. Marking the product with the name of the manufacturer enables a distant supplier to develop a reputation for consistent quality and good value, which is necessary to compete with the local providers of the product.

Prior to the 20th century, the reputation of a manufacturer and the opinion about its products was spread by word of mouth. A brand ensured a purchaser that he or she would get the same quality product regardless of his location. For example, Levi-Strauss began marketing men’s work pants manufactured with heavy denim and metal rivets for reinforcement, producing an almost indestructible pair of trousers when compared to other manufacturers’ cheaper work pants. The presence of the Levi-Strauss’s brand (and its trademark double-arched stitching on a back pocket) guaranteed buyers that they were getting a superior product that met expectations wherever purchased. With the advent of print and media advertising, manufacturers of all products learned to build their companies’ reputations, personified in the consumer’s mind as brands.

many large retailers offer private label products

The Rise of Private Label Brands

In the last 100 years, manufacturers have become increasingly sophisticated in the marketing and sale of their products. There are very few mass markets remaining, replaced by hundreds of niche segments differing by price, service, image, and quality. For instance, reputation for durability has little value in a market with constant product innovation. Cell phones, for example, are replaced constantly by consumers to gain additional technical capabilities, not because their previous phones no longer work.

This fracturing creates an opportunity for more private labels (not fewer) due to several factors:

  • Lower Marketing Costs. This is due to focus being placed on the retailer, rather than the retail brands. In other words, Walgreens can advertise its physical store location, rather than spend money to promote individual products.
  • Excess Manufacturing Capacity. As branded product sales recede, manufacturing capacity increases. It’s usually a simple matter for a corporation to manufacture a private brand product alongside a branded product.
  • Technological Advances in Manufacturing, Storage, and Shipping. Products can be manufactured anywhere in the world for sale in any location on the globe. For example, manufacturing plants in China are likely to be more modern than those in the United States – computers and equipment are rapidly altered to produce a variety of products, and container ships longer than three football fields can carry 140 million cubic feet of cargo (about the size of 60,000 average American houses) across the seas. These factors drive down the cost and time required to get a product to market.
  • The Ubiquity of the Internet. According to the 2010 U.S. Census Bureau, almost one-half of homes in America have access to the Internet, allowing marketers to target and reach selected groups of buyers at low cost. Buyer loyalty clubs, product discounts, and weekly sales are hawked 24/7 by retailers, large and small, across the nation. In fact, one of the largest retailers in the world, Amazon, doesn’t even operate a physical retail location, instead relying solely on the web.

The growing replacement of nationally and regionally branded products by private label products is an increasingly important factor in the trend. Much like a hole in the wall of a dam, the resulting leak further widens the hole and weakens the wall. So it is with private label products: It is likely that they will continue to replace national brands in all but a few distinct markets where neither cost nor quality are factors, rather prestige and status.

What Is a Private Label Brand?

A private label brand, also known as a “store brand,” is simply a product manufactured by one company and sold under another company’s brand. Private label brands were initially introduced as a lower-price alternative to a national brand, the difference in price being sufficient to induce some purchasers to stock such products, despite a perceived difference in quality.

Even when manufacturing costs are higher than a national brand, generally due to the difference in the quantity produced, the savings in marketing costs allow retailers to simultaneously sell the product at a lower retail price and make a higher gross margin on sales.

Other advantages for a retailer to offer a private brand include:

  • Control of the Marketing Strategy. Retailers can more easily tailor product offerings to individual stores and the communities surrounding each location. For example, one store in a Hispanic community might offer more traditional Latin foods than a store with a predominate Jewish population, which purchases Kosher foods.
  • Control Over Volume. Many manufacturers require a retailer to guarantee the sale of a large minimum volume in order to receive price concessions, marketing rebates, and other benefits. However, private label manufacturers offer the ability to buy the product in smaller volumes more likely to sell, and to adjust those volumes according to customer demand.
  • Reinforce the Retailer’s Brand. Reinforcing the retailer’s brand, rather than the brands of the individual products, effectively leverages the cost of advertising and marketing, and replaces the concept of “trust the products” with “trust the retailer.” Best Buy, a big box retailer of electronic products, is currently trying to implement this strategy with foreign and small manufacturers of electronic goods by matching low prices, free delivery, and intensive customer service.
  • Flexibility. Retail markets are notoriously unstable, affected by fads, crazes, and rumors. Product recalls require costly effort to remove product from shelves, return them, and restock with another product. Often, retailers and manufacturers have long-term contracts which are not easily adjusted. A private label brand, while affected by some of these problems, is much easier to remove and replace than a national brand.

comparison shopping

Reasons to Buy Private Label Brands

According to TIME, most consumers “have gotten clued in to the fact that many generic store-brand foods are actually made by the same companies that produce the higher-priced name-brand stuff,” which “come out of the same factories with the same ingredients…with the only difference being the label.” The author goes on to say that the result of switching from a name brand to a private label is “an easy way to save 30% or so, without sacrificing quality.”

This is one of several reasons to make the switch to private label brands:

1. Cost

Private label brands are most effective when retailers implement a low-cost strategy to capture revenues. Outsourcing production and logistics to large national brand manufacturers with excess capacity or to specialty manufacturers who focus on a limited variety of products eliminates the need for large capital investment. In instances where the retailer also owns manufacturing facilities, the capital costs can be amortized over the combined retail and manufacturing base. Either tactic reduces per unit costs.

Marketing costs for a private brand are incremental or nonexistent. This presents a significant cost savings to the retailer, a portion of which is passed along to the consumer in the form of lower prices.

2. Quality

While quality can be defined in many ways, most consumers feel there is little difference in the quality of a private label versus a national brand product. For years, Consumer Reports has conducted blind taste tests between store brand and national brand products to poll consumers about the quality of store brands.

In October 2012, Consumer Reports reported that more than 80% of those polled (about 24,000) indicated the private label brand to be the same or better than the national brand. A 2011 survey reported in the October 2012 issue of TIME magazine showed that almost two-thirds of consumers agreed with the statement, “Brand names are not better quality.”

3. Safety

While food and drugs, popular private label products, are heavily regulated, dietary and nutritional products or supplements (nutraceuticals) are not subject to similar rigorous regulation. As a consequence, the active ingredients in a supplement “may not be fully understood or even known,” according to Dr. Grant Cooper, noted healthcare author. “Some supplements have been shown to have differing ingredients from those they advertise. Some have been found to contain harmful substances in the form of microorganisms, prescription drug ingredients, and metals.”

In lieu of federal regulation and oversight, large retailers such as Walmart or Walgreens selling a private label nutraceutical usually require intense manufacturing and safety processes and standards due to being liable to the consumer for the safety of the products it privately brands.

Final Word

Private label brands are here to stay, and in general have been good for consumers. In order to compete, national brands frequently offer discount coupons, deals, and special sales to bolster sales volume and keep customers. With the economy still struggling, people are finding ways to save money, even on necessities. Using private label brands is a good place to start.

Do you buy store brands? If so, do you see a difference in quality?

Michael Lewis
Michael R. Lewis is a retired corporate executive and entrepreneur. During his 40+ year career, Lewis created and sold ten different companies ranging from oil exploration to healthcare software. He has also been a Registered Investment Adviser with the SEC, a Principal of one of the larger management consulting firms in the country, and a Senior Vice President of the largest not-for-profit health insurer in the United States. Mike's articles on personal investments, business management, and the economy are available on several online publications. He's a father and grandfather, who also writes non-fiction and biographical pieces about growing up in the plains of West Texas - including The Storm.

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  • John@MoneyPrinciple

    The big game of course is to confuse the buyer when comparing Brand A with Brand B, s/he may assume they are competing when in fact they are probably made in the same factory.

    The appearance of competition means that the customer doesn’t question it and, most importantly, the owner of both brands controls the price.

  • http://mydebtucation.blogspot.com/ Mario

    Safety isn’t really a concern to me in 2013. There’s something to be said for perceived quality, but for the grocery staples that I’m shopping for, there really isn’t much of a difference. I don’t have, as they say, a golden tongue, after all

    • http://mydebtucation.blogspot.com/ Mario

      @3089530013672ba6dfb448ae0b73d89c:disqus : Oh that’s a great point. Thanks for the heads up!

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