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Private labels have been on the rise for the past few years, and with good reason. Private label products are more cost-effective for both retailers and consumers, as they tend to bring down overhead costs on marketing and advertisements. But that only happens if you have a good private label management process.
Historically, buying private label products has been seen as a cheaper and worse alternative to national and international brands, but that kind of thinking is quickly becoming a thing of the past.
Research from Ernest&Young has shown that 66% of consumers find private label products just as good as branded alternatives.1
There’s more than just survey responses to back up the notion that private labels are on the rise.
In 2023 private label brands made up 37.8% of all fast moving consumer goods sales in Europe, which made it a €229bn industry. In Germany alone, the value of private products sales amounted to €66bn.2
And this isn’t a new development either. It’s been brewing for the last half decade. In early 2020 a McKinsey study found that up to 75% of US consumers changed their brand preferences over the course of the pandemic.3
So, with the rise in cost-of-living, private labels are becoming a big opportunity for retailers, but one thing to bear in mind is that the private label management process is complex, and the more private label products you set out to develop, the more complicated it will get.
In this article, we go over some of the challenges retailers face when managing their private label products as well as the benefits they can achieve.
Private label products, often referred to as ‘store-brand’ products, are a type of product distributed by a retailer under their own brand name, but produced by a third-party manufacturer.
While the terms ‘private label’ and ‘white label’ are often used interchangeably, they are in fact two rather different things.
A private label product is a product produced by a third-party manufacturer, but it is in fact the retailer (or the owner of the private label) who controls everything about the product including product specs, packaging, marketing etc.
A white label product, on the other hand, is a product in its own right developed and maintained by the manufacturer, where the retailer simply adds their own logo and branding to the already finished product.
So with a white label product you only take control of the label, with a private label product you could take control of the ingredients as well, so to speak.
In the early days of the pandemic, many stores saw the top brands disappear from the shelves due to panic fueled buying and people wanting to stock their pantries.
And customers, not finding their preferred brands, instead saw to the private label alternatives that they had previously overlooked. Additionally, as many people were buying in bulk, the lower cost of private label goods meant that their money would stretch further.
And this mentally seems to have carried on. A study from the UK shows that 64% of British consumers have changed their shopping habits within the past months, and this has led to noticeable channel and brand shifts as consumers seek better value for their money.2
In Denmark, retailers have confirmed a change in consumer buying behaviour as well. The shopping habits of the Danes have changed in conjunction with soaring prices. Salling Group, Rema 1000, and Dagrofa all confirm that consumers increasingly purchase private label products over national and international brands.3
Probably the biggest benefit to establishing a private label is the potential for better profit margins.
With a brand owned product the retailer essentially ends up paying for everything twice. For instance, the brand has manufacturing costs, sales costs and marketing costs that they need to cover. And then the retailer has their own costs related to sales and marketing as well.
In the private label process you are essentially cutting out the middle man; the brand. There’s still a manufacturing cost, but the only marketing cost you have to cover in your overhead is your own.
While all retailers obviously want increased revenue and greater profit margins on their products, the benefits of private label products go beyond the financial aspects.
The mindset of the consumer has changed dramatically within the last couple of years, and this has impacted the private label landscape too. With an increased desire for locally sourced products private label products, while essentially not local, are often viewed as more local than national or global brands.
According to Information Resources, Inc. the number of private label loyalists—consumers who prefer private labels over national brands—is now equal to the number of national brand loyalists on the European markets.4
It’s been well established that consumers base a lot of their decisions on trust. Do they trust the brand they are buying from? Which means the opportunities for additional sales tied to the initial purchase can be reduced by the fact that the brand they are buying doesn’t offer other products they need.
Coca Cola doesn’t sell soap, for instance.
But with a private label you can connect multiple products and product groups under your own brand, which means that you could have trust in a soap rub off on your cereal sales.
A survey by Ernest&Young has shown that the enmity towards private label products is becoming a thing of the past, and this is in no small part due to the cost of living crisis.
In fact, 72% of consumers have become more focused on value for money as a result of the ongoing rise in the cost of living. This leads them towards private label products, but according to the same survey 38% have no intention of switching back to branded goods when the situation changes.1
And this will create a higher demand for private label products in the long run.
A private label makes the retailer less dependent on the supply of the global brands, which in turn allows the retailer to expand or edit their product assortment without needing to involve brand owners.
But it’s not just supply-chain issues related to global brands that retailers rid themselves of when they implement a private label strategy.
With a private label:
Additionally, a private label gives the retailer more control over the design, cost, materials, and quality of the finished goods. Retailers also have more flexibility when producing their own brands, enabling them to respond to consumer trends faster.
While private labels do seem like a good way to increase your profit margin, it’s not all retailers who have been successful with their private label brands. And while there are many contributing factors to why this may be, the primary reason retailers fail with their private labels often lie in execution.
The process of sourcing through the supply-chain—from product development and design to the point of sale—is far more complex than the traditional retail business of sourcing and selling products managed by other brands.
Developing a private label brand usually starts with a business case where the commercial team decides on strategy, pricing, product positioning, and identification of manufacturers.
Afterwards there are two levels.
The first level is strategic and is the development of the retailer's brand. This has an identity which reflects the aspirations of its target consumers.
The other level is tactical and relates to which products are developed as part of the retailer's brand portfolio. Between the two, sub-brands may reflect different niches or price levels within the brand.
Many retailers have already managed to integrate the development process into their organization. And as private label products usually have better margins, many retailers are increasing the proportion of private label to brand owned products in their assortment.
This means that retailers need to manage more brands, handle more SKUs, and develop more marketing material such as POS, packaging, etc.
This increases complexity which in turn creates more work.
In our experience, managing this complexity is best done by implementing a private label management solution where both internal and external stakeholders can take part in the same workflow and contribute to the process when it is needed.
Private labels provide the retailer with an excellent opportunity to build loyalty, meet consumer demand and increase their margins.
It also gives them more flexibility and control over the products they offer, and this relates to everything from design to cost, materials, and the quality of the finished products. This, in turn, enables them to respond faster and more promptly to consumer trends.
But the complexity of managing private label products or a private label brand potentially increases the margin for error and puts a huge strain on the involved teams. Which is why a private label management solution is an essential tool for managing private labels.
It helps give the retailers complete visibility throughout the entire production and marketing process while maintaining high-quality levels and minimizing errors. It also allows the retailer to create products based on current trends and reach their target markets faster.
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