New Appeal of Private Labels

Private-label products are anathema to many consumer goods manufacturers--cheap imitations that undermine margins and weaken product categories. But the growing power and sophistication of retailers has changed that competitive dynamic. Private labels now offer a range of opportunities for savvy manufacturers. Perhaps most notable, retailers are working with manufacturers to bring out store brands whose quality matches or even exceeds that of brand-name goods. These premium labels offer better margins than traditional private labels and can serve as a low-risk way for manufacturers to try new product categories. Like "fighter brands," private labels can help a manufacturer preserve market share in a category when it decides to raise the price of its brand-name product. Or a manufacturer in the number-two slot might design its private label to imitate--and take sales from--the market leader in a category. The authors say the risks of producing private labels are often exaggerated. Retailer switching isn't as easy as is often believed, particularly for manufacturers who work closely with retail partners. And manufacturers who set clear priorities can make sure their private-label sales don't distract them from promoting the main brand. The authors warn that different manufacturers will want to go with different private-label strategies. Private labels are likely to make most sense when entry barriers are low, when substantial economies of scale exist, or when the label is a premium line for a category with low price sensitivity. For manufacturers who seek closer ties with retailers, private labels may represent a neglected opportunity.

• Consumer marketing
• Product positioning
• Product management
• Brand management
• Activity-based costing