Private Labels

Private labels can be defined as products that are marketed and produced by retailers and their distribution chain. Famous examples is seen in the Norwegian grocery store sector with for instance First Price and Rema's own brand. The private label products are usually cheaper and has inferior quality than those of national brands such as Nestlé and P&G. However, in recent years private labels has increased their quality and widen their product range to include more upscale products such as clothing and sporting gear. We find private labels in product categories where consumers are price sensitivity is high and sales volumes are high as well. This is famously called fast-moving consumer goods (FMCG). In so, national brands are facing a situation which could lead them to lose market shares to these private labels. So, how could this be avoided? An interesting model presented by Leif Hem (2012) in lectures at Norwegian School of Economics covers the subject.

Let me explain what we see here. The national brand is usually located at a point where we pay more, but get more quality for the money. As 85% of us rate quality as important, whereas 70% rate price as important, we can see that quality is a main aspect to increase sales, hence getting a higher market share. However, if private labels move up in quality and only slightly in price, we can get a situation that causes disturbance in terms of market shares. A national brand then have six different strategies they can implement to make sure they do not lose market shares.

Firstly, we can see that the national brand can innovate with a new and improved product. In this product they offer increased quality the same or discounted price. By doing this they increase the perceived quality distance to the private label, hence in the consumers mind the private label would seem increasingly inferior. Another strategy to increase the perceived quality distance is to basically provide more for the money. The Norwegian students out there have probably noticed that for instance Stabburet's Grandiosa consistently markets "now with better crust" or "higher quality ham". This is basically to make sure that when you look at a private label pizza, for instance Euroshopper, in comparison they want you to think "Jesus, that's crap".  

I find it more interesting to look at the other strategies. Reducing the price gap could prove fatal in terms of the brand concept, and could cause confusion among customers. Why is this product suddenly cheaper? I find this a dangerous strategy that could have severe long term effects for the brand. A solution however could be to convince the retailer to charge more for their private label.

Introducing a value flanker is an interesting option that one could see with for instance Gillette and their shaving foam. One could buy rather cheap shaving foam from Gillette as they have several types, implying that they have implemented the value flanker strategy. The value flanker strategy implies that one introduces a new product, that is seemingly of lower quality and cheaper. However, one must make sure that this does not hurt the brand associations and should thus market the more expensive version. This could apply to those consumers who don't wish to be associated with private label users, but is still price sensitive enough to not buy the most expensive shaving foam. I therefore find this to be an interesting strategy, although it has it pitfalls. 

Interestingly enough we can see that a strategy could be to make private labels. This is not to introduce a private label themselves, but profit from private labels by manufacturing them. This could give profits as well as filling up free capacity. However, if this gets known consumers might react "What's the difference then?" and this could prove very fatal for the national brand. This is a well-known strategy, and Synnøve Finden in Norway actually produces the First Price cheese. An important implication is that they make the private label cheese with other ingredients and it thus has inferior quality.

I find that the wait and do nothing strategy provides little value. Although it might be expensive to react towards the private labels, one risks that they increase the market share. Reaction might take time to implement and one should therefore react as quickly as possible. 

Do you buy private labels? And what is your take on this framework to counter them?