Retailing: Why private labels succeed

What keeps brand manufacturers awake at night? How should they combat the large retailers and this new reality of private labels? Is there anything manufacturer brands can do to stop the onslaught of store brands?

Some companies, as they observe the continued growth of private label share, wonder whether their future lies in producing private labels in order to profitably employ their capacity. Rather than trying to beat private labels, perhaps it is better to join the party. For most brand manufacturers, producing private labels is at best a peripheral activity.

One may argue that it only tightens the noose. Their central mission is to sell their brands profitably and grow their market share. They want to beat private labels with their brands and want to know how to do it.

Let us share the bad news first. Our years of working with leading brand manufacturers around the world have taught us that there is no silver bullet. There is no single answer that will solve the brand manufacturers' problem vis-à-vis private labels. Whatever marketing consultants or gurus may claim, no such magic potion exists.

But through hard work and consistent effort, brand manufacturers can address the private label threat head-on by pursuing four strategic thrusts: partner effectively, innovate brilliantly, fight selectively, and create winning value propositions. We will discuss these four actions in chapters 9 through 12.

They are not to be pursued in isolation but rather as a combined, concerted, and frontal attack -- only then is there a chance for victory. And the secret lies in their execution rather than in the grand plans. But beware -- there are no guarantees; one must accept that retailers also have several aces up their sleeves.

As Edwin Artzt, the former Procter 7 Gamble CEO, famously said: "We're not banking on things getting better. We're banking on us getting better."

One note of caution is to be noted up front. We find that before brand manufacturers can beat private labels, they must first achieve a significant change in their mind-set. When discussing private labels with brand manufacturers, our biggest frustration is usually the inability of many executives, especially those from the US, to accept the new reality of private labels.

Many of these executives dismiss private labels as inferior and instead focus exclusively on the competing manufacturer brands. Working with a leading US company, we were impressed by the amount of benchmarking it did on objective quality, market share, consumer attitudes, and so on.

However, we were dismayed to find out that it had benchmarked only against other manufacturer brands, not against private labels. It never occurred to the company that it was competing with private labels too!

But underestimation of private labels is not the prerogative of US executives only. One of us recently participated in a brand strategy session with the CEO and the top management team of one of the largest and most widely admired European CPG companies. The CEO contemptuously dismissed private labels with the argument that they were of inferior quality. He reminded everyone that they had five hundred scientists working on product development, while the retailer had only one.

It never occurred to the CEO that perhaps they had far too many researchers involved. Or that the retailer could purchase high-quality products from brand competitors or from dedicated private label suppliers. Retailers do not necessarily need a five-hundred-person product development department to produce quality private labels.

Most high-powered executives started their careers when retailers were relatively unsophisticated, peddling unbranded generics, and being local rather than global in scope. As a result, those running the large manufacturer brands, with MBAs from prestigious business schools -- which to exacerbate things, give hardly any attention to private labels either - had an arrogant attitude toward retailers.

Most of them did not consider retailers, or the executives who populated them, as their intellectual or social equals. And certainly, manufacturers did not see private labels as worthy competitors to their cherished brands. However, as retailer brands have transformed, there is a need to change the brand manufacturer mind-set.

Today, we should not think of the retail challengers as private labels. Rather, they are more appropriately referred to as retailer brands or store brands, and retailers behave accordingly by communicating this to their customers. For example, Carrefour uses shelf tags stating: "Carrefour, c'est auusi une marque" (Carrefour is also a brand; emphasis in the original).

Even a low-price, mass-market player like Wal-Mart recognizes the need for brand building. In September 2005, Wal-Mart had an eight-page insert in Vogue and hosted its first runway show during New York Fashion Week. Wal-Mart also acquired its own brand of blue jeans, called Faded Glory, paying extra to retain the original design team. Faded Glory is today a $3 billion brand, and independent tests by Consumer Reports named it the best-fitting jeans on the market, beating Wrangler and Liz Claiborne.

Levi Strauss, which had refused to allow Wal-Mart to carry its brand, saw its sales of jeans drop from $7 billion to $4 billion. To combat this, Levi Strauss had to celebrate its 150th anniversary by developing and launching a fashionable, but less expensive, "Levi Strauss Signature" brand exclusively for Wal-Mart.

If brand manufacturers are going to be successful in fighting private labels, it is imperative that they recognize that retailer brands:

Have become a permanent feature of the competitive landscape,
Are of good quality,
Are brands in their own right.

Unless brand manufacturer strategies are based on a completely honest understanding of the reality now on them and the reality that is about to hit them, they will fail. As it is, they have a real fight on their hands vis-à-vis private labels.

Reprinted by permission of Harvard Business School Press.

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