Retail Converging: The Battle of Private Label

For a while now, retailers have been dabbling with Private Labels, or store brands, but it’s recently that this trend has really taken off widely. The COVID-19 pandemic has further fueled this shift as supply-chain disruptions hit national brands hard, prompting consumers to turn to private-label goods. These items are typically less expensive than their national brand counterparts, making them an attractive option for budget-conscious shoppers. Private labels also offer retailers a lucrative opportunity to enhance their margins - boasting gross margins of around 35% compared to the 20% of national brands - and foster customer loyalty. Globally, household expenditure on private label products is on the rise. In Europe, private labels account for 38% of total FMCG value sales, which is estimated at €229 billion, outperforming several national brands across various categories.

However, is private labeling a viable strategy for all retailers? And what steps should retailers take to ensure they get it right? Let’s delve deeper to find out.

Although Private Labels offer a compelling value proposition for retailers, they come with their own set of challenges. The primary concern is the potential to let down first-time buyers with a private label product that hasn’t been well-conceived. Therefore, retailers must elevate their private-label efforts by carrying out a comprehensive evaluation and gap analysis of their private labels. They should then establish or recalibrate their private-label strategies to convert temporary switching behaviors into enduring customer loyalty.

Private Label Strategy

For retailers to achieve success in their private label strategy, it is essential to scrutinize three key areas — Product Strategy, Price Point and Packaging & Marketing. A detailed action plan should be developed for each of these domains.

Product Strategy

While it may appear straightforward and attractive, selecting the appropriate products from thousands of SKUs (for instance, one of our clients had 14,00,000 on a particular day) is frequently a challenging task however serves as the cornerstone for a sustainable private label strategy. A product should be assessed from multiple perspectives, including product market size, market demand, peer performance, competition, associated costs, pricing, and so forth. The following dimensions of product evaluation should be considered to identify the right products:

1. Product Market Size: In the retail sector, the decisions regarding product selection are significantly driven by the capital investment needed to introduce that product. The overall market size of a product can be estimated in terms of customer numbers, total sales volume, margin, or a combination of these. Additionally, the complexities increase due to market fluctuations across various targeted regions.
2. Market Demand: Examine the market conditions for the product to determine if it’s expanding, stable but saturated, or diminishing. Elements like demand and out-of-stock data for competitive national brands’ products could indicate a gap and the necessity for a private label product. This is vital for formulating a pricing and promotional strategy during the introduction, growth, maturity, and decline stages.
3. Market Competition: Conduct focused research to identify other market players attempting to close the gap between demand and supply. A competitive evaluation will determine if the market is monopolistic, oligopolistic, contestable, or in perfect competition, to enter the market.
4. Cost Considerations: Product categories that offer higher margins, face less competition, and require low capital investment are ideally the ones to be prioritized. However, all factors – including fixed costs, variable costs, inventory carrying/storage costs, and associated margins (for instance, local sourcing versus cross-border sourcing) – should be considered to cumulate the total cost. Constraints such as a minimum order value or a certain order quantity threshold should also be considered.

Price Point

Traditionally, private label goods have been seen as more cost-effective while offering the same value as national brands. Therefore, to draw in customers, particularly those making their first purchase, retailers must price their private label products appropriately. Here are some crucial factors to consider when setting the right price points:

1. Determine the appropriate “national brand and corresponding product” to use as a benchmark for price and quality.
2. Establish a routine for adjusting product prices in response to promotions or changes in competitor pricing.
3. Develop a strategy to consistently uphold price positions across different categories.
4. A product is deemed to have high price elasticity if a small reduction in price leads to a substantial increase in sales/revenue. Additionally, consider how the market would react to the product if it needs to be sold at markdowns/discounts due to underperformance.

Packaging & Marketing

In the past, retailers have not heavily invested in marketing their private label products, which means customers typically discover them on store shelves, often placed alongside national brand products. For their private label products to succeed, retailers need to attract consumers’ attention by investing appropriately in both packaging and marketing. Here are some key factors to consider:

• Utilize digital marketing strategies, including social media platforms, personalized marketing for loyal customers, and in-store marketing (such as point of purchase, store flyers, and the retailer’s own website).
• Design the packaging in a way that communicates the product’s quality and benefits (like the origin of ingredients, for example).
• Adopt and promote sustainable sourcing practices, either on the packaging or through digital marketing.
• Ensure the product’s look and feel matches that of leading competitive national brands.

Digital technologies such as AI, Data & Analytics are pivotal in the success of private labels. For example, platforms powered by AI can offer insights into consumer behavior, allowing retailers to tailor their products and enhance customer loyalty. Additionally, these digital technologies can assist retailers in analyzing sales and consumer trends, optimizing product distribution, store positioning, and pricing, and maintaining targets for price perception.

In summary, while private labeling offers considerable opportunities for retailers, it also brings its own challenges. Nevertheless, with the correct strategies, solutions, and the application of IT technologies, retailers can effectively overcome these challenges and enjoy the advantages of private labels.

So, want to start your private label journey? Partner with Coforge to improve your sales revenue and margin by introducing private label products.