Article

Private label: The prestige brands of tomorrow?

Retail expert and author Kate Newlin says the only odd thing about private label brands is that they've taken so long to win shoppers over.

July 29, 2009

There are two inexorable forces at play in the shopping universe right now: Rabid discounting at retail to push price and profit down in a desperate plea to match comp store top lines from a year ago, and an equal and opposite push to raise the quality level and profit potential of private label. We see it at grocery, in apparel, home furnishings — you name it. Look around: It's here and it's growing.

Europeans have known and trusted store brands for years. In the States, we're just getting in on the party. By we, I mean retailers and consumers alike. What's not to love? Profit for the retailer; tremendous value for the consumer. It's a winning proposition for nearly everyone — except the No. 2 brands on the shelves.

A little more than 20 years ago, Larry Light, then a leading light at historic agency BackerSpeilvogelBates, coined the credo, "One, two, three or you're out." By this he announced the results of an exhaustive analysis he and his colleagues had conducted which illustrated compellingly that if you weren't one of the top three brands in your category, you would lose out — shelf space, consumer awareness, manufacturing efficiencies — across the board. That precept served us well for a long time, but it too has passed. Today, it's more like "One, upscale private label, okay-available-and-cheap-private-label — or you're out."

In the world I work in most often, packaged goods, private label is a stealth drone warrior which arrives under varying guises, since every retailer has its own entries. There are two reasons I think of it as stealth: First private label is a target that is difficult to pin down and therefore difficult to compete with in the old head-to-head comparisons that used to be product advertising's stock and trade. It's called one thing in one chain and something else down the street. Nearly every major retailer has two types of private label now: one for upscale wares to compete with the highly featured category leaders and another for basic value.

Secondly, you only realize its power once it has eviscerated the shelf — all of a sudden you read in the business pages that a one-time powerful No. 2 brand has just been sold by a major player to a private equity firm, which hopes for awhile at least to capitalize on all the years of consumer advertising that used to support that product, be it soap, detergent, disposable diaper or soft drink.

story continues below... advertisement
		The Best Retail Customer Experiences 2009   Find out which retailers consumers crowned their favorites in five different categories across eight different retail segments. Get authoritative analysis from members of the Retail Customer Experience Advisory Panel on why these retailers are succeeding. And learn which retail technologies win over customers — and which ones don't matter.     Order your copy today!

The consumer does win, however. Those upscale private labels — whether you find them in the vitamin, shampoo or frozen food aisles — are pretty terrific. Well designed packaging, highly featured offerings with scores of benefits at a price that represents a savings. The consumer gets to trade down without trading off. The store gets some margin and even more importantly an opportunity to lock in customer loyalty to a savvy product which is unique to their chain.

The best example of that is Kirkland from Costco. Scores of people I know swear by it, going out of their ways to shop Costco rather than its direct competitors — or even a more convenient corner grocery. It bears some scrutiny, I think, since it's the one quality brand I know that spans scores of categories. I believe there's some wonderful wisdom trapped in Costco's development of that brand to extend through those labyrinthine aisles.

The private label on the ascent here, of course, is not an unalloyed boon. We do lose some historic players. Manufacturers also lose whatever remaining leverage they have with retailers: Retailers with strong two-tier private labels to manage can effectively set the prices at which everybody will play. They are able to price gap manage the distance between the No. 1 brand and their own No. 2 and No. 3, effectively dictating the price points which category leaders can command.

The potential effect of that, of course, is that in order to keep prices within a tolerable price gap — i.e., not so out-of-whack that no consumer will pay the premium to have their usual brand and will begin to shop store brands — major manufacturers are likely to have to scrimp somewhere, and it's bound to be somewhere that will ultimately compromise their ability to lead. Whether it's in research and development, marketing, packaging innovation or environmental impact deterrents, there will be an unseen and unremarked, but nonetheless costly penalty charged.

An equally troubling open question is the effect of potential manufacturing efficiencies on the private label manufactures. These are companies that operate under the consumer radar, plants throughout the country and potentially the world which don't have to answer to a chain-of-command that leads back to the office of a global CEO who worked his way up from brand manager. The opportunity to cut corners is undoubtedly compelling and we hope avoidable.

Kate Newlin is the principal owner of Kate Newlin Consulting, where she works with Fortune 100 and entrepreneurial firms. Prior to that she was president of Faith Popcorn's BrainReserve, a trend-based marketing consulting firm. Her latest book is "Passion Brands: Why Some Brands Are Just Gotta Have, Drive All Night for, and Tell All Your Friends About."