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In general we can see that there are three sets of players whose expectations and actions affect the success of private labels; consumers, retailers and manufacturers. Consumers need to demand our product, retailers need to allocate the necessary resources and competitiveness among manufacturers will determine the environment in which private labels compete.
With this in mind I will yet again look at an interesting framework presented by Leif Hem (2012).
+ Product quality / Quality consistency: The quality aspect can prove vital for private labels. 85 % of consumers rate quality as an important determinant for choice. If one is able to have a higher quality and a consistency on that quality, the private label could easily obtain a higher market share.
- Consumer involvement: The more involved consumers are with the product, the less likely they are to choose a private label. This means that consumers has brand preferences and has a more complex decision process which in turn will not favor the private labels.
+ Category retail sales: As retailers must invest in inventory, production, and packaging of the private labels, categories that has higher sales will be more interesting. In such categories the private labels only need a small market share in order to cover the fixed cost. In such the category retail sales effect whether we will see private labels or not. Where there is significant risk of operating in the market we will not see private labels, as the risk is greater than potential profits.
+ Category gross margin: If there are high margins in a category, it is a greater potential to see private labels. How come? It is easier for private labels to exploit having less costly production when they can undercut the national brands severely and still make profits.
- Number of national manufacturers: The higher number of manufacturers and national brands the higher the competitiveness would be. In such cases the margins are already pressed to a minimum, and a private label would have a hard time establishing in the market.
- Advertising intensity: The private labels does not have the same amount of funds as the national brands, and could thus not advertise to the same extent. In a market with high advertising intensity the private labels will not be able to promote their products as they need to.
+ Price orientation of market: In markets where price sensitivity is high among consumers, the more likely they are to choose lower priced alternatives. In so, consumers will choose private labels instead of national brands.
- Manufacturers innovativeness: This could potentially reduce the market shares of private labels. If there is a high level of innovativeness it could prove hard for private labels to keep up with the product development. Private labels will then automatically grab a smaller share as they don't have the funds to innovate.
So, what does this model tell us? To increase market shares the private labels should focus on increasing and keep their quality consistent, enter markets with high gross margins and high levels of sale. They should move into markets where consumers are price sensitive. Through doing this private labels could use their limited funds in markets where they have a higher potential to obtain a greater market share.
We have then seen that private labels also has strategies for gaining higher market shares, and I keep questioning how brands such as GreenGiant can survive and remain profitable with products such as canned corn. They manage to have a higher perceived quality through advertising, packaging and their famous green character. Sometimes this could be enough to remain profitable in product categories with seemingly no quality difference.
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