February 26, 2008
Will Rising Prices Give Brands an Edge Over Private Label?
The prices on just about every commodity are going up and that could be good news for national brands and bad news for private label.
The rationale behind that assertion goes something like this: Rising commodity prices will drive up the cost of all consumer packaged goods. Large national brands with greater buying power will keep a tighter lid on rising costs while private label manufacturers that purchase in smaller quantities will see costs rise at a faster pace. The end result is that the price gap between national and store brands will close.
Under this scenario, Citi analyst David Driscoll sees little evidence that consumers will begin switching en masse to store brands should the much talked-about recession turn out to be real.
Ken Harris, managing director of Cannondale Associates, also believes that national brands will hold back store brands should the economy not deteriorate further. “On the face, this seems bad, but it has not yet dissipated consumer purchasing behavior in a material way,” he told Brandweek. “We’re a price increase or two away from this.”
Jan Benedict E.M. Steenkamp, a professor of marketing at the University of North Carolina, Chapel Hill, doesn’t see store brands losing any share even if the cost increases for these items are marginally higher than national brand competitors.
“Even when both manufacturer brands and private labels increase prices, private labels remain cheaper and offer the potential for price savings.” After that, consumers who try private label often become fans after they find out the quality is decent, he told Brandweek.
Nirmalya Kumar, a professor of marketing at London Business School, added, “Part of the private label share increase over the coming recession will be ‘permanent’ because a significant proportion of consumers who moved their purchases from manufacturer brands to private labels will remain loyal to private labels even after the need to economize is over.”
National brands are looking to deter consumers from switching to private label by increasing ad spending to communicate brand messages and overcome price objections.
“Cutting back on marketing is not a good strategy,” said Connie Maneaty, analyst at BMO Capital Markets. “Brands have to keep [themselves] in front of the consumer; consumers have to believe what they are buying is better than the other choices out there.”
Discussion Questions: Is the current economic environment different than trouble spots in the past and will it affect the traditional sales patterns of national and store brands? Do you see rising commodity prices benefiting national over store brands or vice versa? What is your strategy for, at the very least, maintaining sales share if you’re a chief marketing officer for a national or store brand?
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As my BrainTrust peers have pointed out, private label products are usually made by the brand name manufacturers themselves. Longer lead times, no promotional monies and allowing a product to look, feel, taste and work like the national branded product (i.e. nothing changes) allows a store brand to reduce their price and offer a better value.
This is more true (not less as the article contends) as prices are increasing, since the cost of advertising, promoting and creating a national brand is growing at the same time.
Store brands are a great way to offer value to a consumer while still offering a choice between the “looks like the original” store brand and the national brand.
Most major manufacturers already do private label, so some of the “advantages” of national brands over private label, in terms of economies of scale in buying commodities, isn’t as big as might be thought. Also, statistically, recessions have not been the big boon to private label that is so commonly believed. What’s different today is the recognition by retailers that private label is a key part of their own store branding/differentiation, and most of that statement today is in quality a la Kirkland Signature vs. low-end commodity products to make a price/value statement.
Price/value is obviously still important for private label, on that lower tier, but the real positioning statements today are being made against the upscale private label. There’s a ceiling on private label penetration, of course, and it depends on the local market demographics and the retailer’s positioning. A few retailers have gone over the edge with too much PL vs. too little on the brands, and have had their fingers burned, so they’ve shifted back to more brands. This isn’t a seismic move by any means, but it’s there, and now a recognized factor.
The current economic trouble may not be different than past troubles, however, the attitude consumers have about store brands is different. In many cases store brands are at least as good as national brands, and some are believed to be even better. Consumers, once loyal to a brand, even a private label will remain loyal even if the price delta closes with competing national brands.
I think a lot depends on where the private-label goods are. I don’t see people forgoing a trip to Trader Joe’s, for instance, where gourmet private label–higher quality and savings in a single package–has always been the story. In fact, I could see TJ’s picking up business from people looking to maintain an upscale lifestyle on a tighter budget.
I do think private label in general has to do more to promote itself as something special connected to the store, though, and not just a cheaper alternative to the basics. And a recession would be a great time to put that message out there and give it a customer-care spin as well: Check out our great new line of X–it’s just for you and your gourmet tastes, and it’s easy to serve. Plus, it costs less….
It’s basically bringing the TJ’s specialty message into the supermarket environment. (Which also saves the customer another trip–to the specialty store.)
I have noticed myself that a lot of private label brands do not have a large price difference from their major brand competitors. I am not sure if this is due to the type of product or the store in particular. Unless I have some experience with the off label, I generally will stick with the name brand if it is just a small difference.
I realize that retailers are trying to prevent “leaving change on the table,” but most people look for off brands to save money.
National brands in commodity markets have faced increasing difficulty in justifying their price premium over Private Label. This trend has accelerated as Private Label quality has improved. A weak economy and price inflation are likely to lead to lower market shares for brands rather than greater.
Private label rules! Private brands are an important differentiator among retailers, and a proven way to reinforce customer loyalty. They’re an important contributor to the bottom line…retailers love them because margins are so much higher than with national brands.
Retailers who have established corporate identities based on exclusive brands (think Isaac Mizrahi for Target, the new American Living brand at JCPenney, and Craftsman and Kenmore at Sears) wouldn’t dream of doing anything differently. If anything, I’d expect an expansion of the private label business.
Lest we forget, it was the recession of the ’70s that spawned one of the worst food product “innovations” in history–generics. As noted several times above, the current variety landscape has considerably higher quality private label products than what existed even before and certainly after that grand experiment.
One of the big differences is the huge amount of variety trying to squeeze into the pipeline. As prices rise, the differentials between national and store brands could shrink in some categories and expand in others. The sheer size of the category could have an impact, especially where the field is crowded with suppliers.
I don’t see this helping brands much either. All the current media coverage of “increased cost of food” might even give private label a little nudge. At best, my guess is it will be a wash.
The increasing costs that influence retail prices apply across all products–private label and national brand. As most private label has a higher margin for the retailer than national brand, I would see just the opposite happen. If both are forced to raise costs, the inflationary cost pressure would be less for private label than for the national brand. Additionally, the fact that almost all of private label is contract packed allows PL to better fight inflationary pressures.
Most Private Label manufacturers are neither as small as some believe nor as backward as some would believe. Most have longer term procurement contracts in place the same as the National Brand manufacturers. Even if the price gap reduces there will be little or no effect or advantage for the National Brands. As our studies have proven, the price gap is excessive for most Private Label items. Reducing the gap will not reduce sales.
The current economic down turn is expected to last until the 3rd quarter. This is simply too short a time period for significant consumer trading down. With the improved Private Label quality, any trading down will–longer term–just wind up increasing Private Label share.
This isn’t the first recession. During the Great Depression, there were private label groceries positioned against national brands. And this isn’t the first time private label folks claimed their quality is tops. The poorer folks often shop Wal-Mart and dollar stores. Even those outlets have a healthy mix of private label and famous brands.
Aye. It’s a wash.
Only a very minor portion of the population truly “shops food on price.” Instead, the great majority look for the lowest cost solution TO MEET THEIR DEFINED NEED.
That’s not to say there is no economic pain in lower/middle class America today. But that pain is much more likely to be felt in which new shoes to buy or whether that new Xbox fits in the budget rather than in whether or not to buy black olives this week. If I like black olives and want some, I’m buying them. This is a recession (or so we are told) not Lent, for goodness sake. We will stick to our little indulgences as a means of keeping our lives livable. And food is the indulgence most likely to stick. Now, if the Kirkland black olives are just as good or better than the Castle & Cook’s–well, score one for the private brand. But you were going to do that regardless of whether the stock market went up or down today, now weren’t you?
As business softens with the economic downturn, the brands will likely sharpen their prices to maintain share, sacrificing margin in the short term, if necessary, regardless of any cost increases. Private label marketers, who use PL to protect margins, will likely feel compelled to maintain their price differentials with the national brand to protect their share, again eroding margins regardless of cost increases.
In an economic downturn, the decline in consumer spending will force all prices down, including, eventually, wholesale costs.
The challenge for private label in a exploding commodity market is to get price increases often enough and large enough to remain profitable for the manufacturer. The percentage of the wholesale price that product cost represents for private label is much larger than for branded products so when commodity costs increase, private label suppliers are squeezed faster than branded suppliers. Retailers want to limit the increase to the same percentage increase as brands in the category take, but the private label percentage increase has to be larger to maintain profitability.
Generally, branded companies have the scale to take more risks in the commodity futures markets and protect their commodity cost for longer periods in the future which can also delay their price increases to a point that private label suppliers are squeezed by retailers who do not want to raise the private label retail if the branded retail does not increase.
This unprecedented rise in commodity cost may have the impact of driving some private label suppliers out of business or increase the consolidation of the industry if they cannot gain price increases to cover their costs.
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As my BrainTrust peers have pointed out, private label products are usually made by the brand name manufacturers themselves. Longer lead times, no promotional monies and allowing a product to look, feel, taste and work like the national branded product (i.e. nothing changes) allows a store brand to reduce their price and offer a better value.
This is more true (not less as the article contends) as prices are increasing, since the cost of advertising, promoting and creating a national brand is growing at the same time.
Store brands are a great way to offer value to a consumer while still offering a choice between the “looks like the original” store brand and the national brand.
Most major manufacturers already do private label, so some of the “advantages” of national brands over private label, in terms of economies of scale in buying commodities, isn’t as big as might be thought. Also, statistically, recessions have not been the big boon to private label that is so commonly believed. What’s different today is the recognition by retailers that private label is a key part of their own store branding/differentiation, and most of that statement today is in quality a la Kirkland Signature vs. low-end commodity products to make a price/value statement.
Price/value is obviously still important for private label, on that lower tier, but the real positioning statements today are being made against the upscale private label. There’s a ceiling on private label penetration, of course, and it depends on the local market demographics and the retailer’s positioning. A few retailers have gone over the edge with too much PL vs. too little on the brands, and have had their fingers burned, so they’ve shifted back to more brands. This isn’t a seismic move by any means, but it’s there, and now a recognized factor.
The current economic trouble may not be different than past troubles, however, the attitude consumers have about store brands is different. In many cases store brands are at least as good as national brands, and some are believed to be even better. Consumers, once loyal to a brand, even a private label will remain loyal even if the price delta closes with competing national brands.
I think a lot depends on where the private-label goods are. I don’t see people forgoing a trip to Trader Joe’s, for instance, where gourmet private label–higher quality and savings in a single package–has always been the story. In fact, I could see TJ’s picking up business from people looking to maintain an upscale lifestyle on a tighter budget.
I do think private label in general has to do more to promote itself as something special connected to the store, though, and not just a cheaper alternative to the basics. And a recession would be a great time to put that message out there and give it a customer-care spin as well: Check out our great new line of X–it’s just for you and your gourmet tastes, and it’s easy to serve. Plus, it costs less….
It’s basically bringing the TJ’s specialty message into the supermarket environment. (Which also saves the customer another trip–to the specialty store.)
I have noticed myself that a lot of private label brands do not have a large price difference from their major brand competitors. I am not sure if this is due to the type of product or the store in particular. Unless I have some experience with the off label, I generally will stick with the name brand if it is just a small difference.
I realize that retailers are trying to prevent “leaving change on the table,” but most people look for off brands to save money.
National brands in commodity markets have faced increasing difficulty in justifying their price premium over Private Label. This trend has accelerated as Private Label quality has improved. A weak economy and price inflation are likely to lead to lower market shares for brands rather than greater.
Private label rules! Private brands are an important differentiator among retailers, and a proven way to reinforce customer loyalty. They’re an important contributor to the bottom line…retailers love them because margins are so much higher than with national brands.
Retailers who have established corporate identities based on exclusive brands (think Isaac Mizrahi for Target, the new American Living brand at JCPenney, and Craftsman and Kenmore at Sears) wouldn’t dream of doing anything differently. If anything, I’d expect an expansion of the private label business.
Lest we forget, it was the recession of the ’70s that spawned one of the worst food product “innovations” in history–generics. As noted several times above, the current variety landscape has considerably higher quality private label products than what existed even before and certainly after that grand experiment.
One of the big differences is the huge amount of variety trying to squeeze into the pipeline. As prices rise, the differentials between national and store brands could shrink in some categories and expand in others. The sheer size of the category could have an impact, especially where the field is crowded with suppliers.
I don’t see this helping brands much either. All the current media coverage of “increased cost of food” might even give private label a little nudge. At best, my guess is it will be a wash.
The increasing costs that influence retail prices apply across all products–private label and national brand. As most private label has a higher margin for the retailer than national brand, I would see just the opposite happen. If both are forced to raise costs, the inflationary cost pressure would be less for private label than for the national brand. Additionally, the fact that almost all of private label is contract packed allows PL to better fight inflationary pressures.
Most Private Label manufacturers are neither as small as some believe nor as backward as some would believe. Most have longer term procurement contracts in place the same as the National Brand manufacturers. Even if the price gap reduces there will be little or no effect or advantage for the National Brands. As our studies have proven, the price gap is excessive for most Private Label items. Reducing the gap will not reduce sales.
The current economic down turn is expected to last until the 3rd quarter. This is simply too short a time period for significant consumer trading down. With the improved Private Label quality, any trading down will–longer term–just wind up increasing Private Label share.
This isn’t the first recession. During the Great Depression, there were private label groceries positioned against national brands. And this isn’t the first time private label folks claimed their quality is tops. The poorer folks often shop Wal-Mart and dollar stores. Even those outlets have a healthy mix of private label and famous brands.
Aye. It’s a wash.
Only a very minor portion of the population truly “shops food on price.” Instead, the great majority look for the lowest cost solution TO MEET THEIR DEFINED NEED.
That’s not to say there is no economic pain in lower/middle class America today. But that pain is much more likely to be felt in which new shoes to buy or whether that new Xbox fits in the budget rather than in whether or not to buy black olives this week. If I like black olives and want some, I’m buying them. This is a recession (or so we are told) not Lent, for goodness sake. We will stick to our little indulgences as a means of keeping our lives livable. And food is the indulgence most likely to stick. Now, if the Kirkland black olives are just as good or better than the Castle & Cook’s–well, score one for the private brand. But you were going to do that regardless of whether the stock market went up or down today, now weren’t you?
As business softens with the economic downturn, the brands will likely sharpen their prices to maintain share, sacrificing margin in the short term, if necessary, regardless of any cost increases. Private label marketers, who use PL to protect margins, will likely feel compelled to maintain their price differentials with the national brand to protect their share, again eroding margins regardless of cost increases.
In an economic downturn, the decline in consumer spending will force all prices down, including, eventually, wholesale costs.
The challenge for private label in a exploding commodity market is to get price increases often enough and large enough to remain profitable for the manufacturer. The percentage of the wholesale price that product cost represents for private label is much larger than for branded products so when commodity costs increase, private label suppliers are squeezed faster than branded suppliers. Retailers want to limit the increase to the same percentage increase as brands in the category take, but the private label percentage increase has to be larger to maintain profitability.
Generally, branded companies have the scale to take more risks in the commodity futures markets and protect their commodity cost for longer periods in the future which can also delay their price increases to a point that private label suppliers are squeezed by retailers who do not want to raise the private label retail if the branded retail does not increase.
This unprecedented rise in commodity cost may have the impact of driving some private label suppliers out of business or increase the consolidation of the industry if they cannot gain price increases to cover their costs.