Private labels experienced swift gains in success when the Great Recession hit, forcing many consumers to change their spending habits. And it appears shoppers are sticking with their frugality even as the economy begins its recovery.
“Several researchers have suggested that consumers who have changed their buying behaviors are not going back,” says Danny Halim, Vice President of Industry Strategy for JDA Software. “Concerns about the economy and high unemployment will continue to drive consumers to save money.”
Such research includes the 2010 American Pantry Study, conducted by Deloitte LLP, which indicates that 92 percent of shoppers changed their grocery shopping behavior in the last two years, with only 35 percent stating they intended to return to purchasing national brands as the economy improves.
Not only are private labels less expensive, but consumers have made the discovery that many of the products are of similar quality as brand names. “More products will be imitated into private brands in the future, especially those products that have been in the market without significant innovations,” Halim says.
Halim says the combination of savings and quality can make private labels hard to resist for consumers. He says, “If you save 50 cents each time you buy a can of soup, and you typically buy two cans per week, 50 times a year, that’s $50 savings per year. Now, do that also for cheese, paper cups, pasta and toilet paper. The number adds up nicely.”
With Change Comes Opportunity
While the rise in popularity of private labels may create a challenge for national brand manufacturers, it also creates a crucial opportunity for these brands to differentiate themselves through improving quality and innovation. Keeping up with “lifestyle trends” like reducing sodium and introducing “green” products can help a brand lure consumers away from traditional items, according to Halim, who indicates that private labels lack the capability to be as innovative as the national brands.
Manufacturers can also rest assured that some brand name products occupy a permanent place in consumers’ minds. “People associate cheese with Kraft, soup with Campbell’s, ketchup with Heinz, soda with Coke or Pepsi,” Halim says. “… Consumers are already aware of the perceived quality and value these manufacturers offer.”
The advent of social media also offers an opportunity to highlight a brand’s unique identity. With millions participating in the social media world, national brands can reach a tremendous audience of potential buyers. To take full advantage of both innovation and social media, Halim says manufacturers have to keep in mind the entire product process, from the supply chain to the shelf. “This means applying their knowledge about local consumer buying behavior, preferences, demographics, buying power, etc.”
Maximizing Retail Relationships
When it comes to retail, it is important for manufacturers to remember that retailers need both private labels as well as brands to succeed in the marketplace. Without one or the other, retailers cannot achieve the optimum diversity to attract consumers. “Since they [private labels] are typically offered in lower prices, they increase traffic to the stores,” says Halim. “Private labels also boost their [retailers’] own store brands, and therefore increase traffic to the stores yet again.”
The addition of private labels also allows retailers to “think like their manufacturing counterpart.” Retailers learn how to manage inventory across the supply chain, taking into account seasonal demand as well as any product promotions. Actual profits from private label sales vary, but retailers can earn anywhere from 30 to 40 percent profit. However, the real sell on private labels is the increased traffic and consumer loyalty, Halim says.
The major benefit of private labels is that they help foster relationships between manufacturers and retailers. “Both manufacturers and retailers want to offer values to the end consumers,” Halim says. “Manufacturers need retailers to carry their products and at the same time, private brands offered by the retailers set the price-floor for their value-add products.”
The Future Of Private Label
Most consumer product analysts agree that the private label industry will continue to grow, continuing to place price pressures on manufacturers. However, when considering a move to the private label sector, Halim provides manufacturers with a word of caution. “Private label is considered another brand extension that generates additional revenue… However, private labels should not be a large part of the manufacturer’s go-to market strategy.”
Halim indicates that manufacturers should focus on innovation where they can to stay profitable, using private labels as a way to fill any additional volume needed. By maintaining consistent product quality and offering unique product selections, manufacturers can make the most of producing both brand names and private labels. “In the end, whether it is in the retail store or online, consumers like to have options and will pay more for the better products.”