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Sean Hinton

Private labels as % of 2006 sales for the top four U.S. grocery retailers

Private label describes products manufactured for sale under a specific retailer‘s brand. They are often designed to compete against branded products, offering customers a cheaper alternative to national brands. Though the public generally used to see them as low-cost imitations of branded products, private labels have overcome this reputation and achieved significant growth in recent years. The most commonly known private label goods are the “store brands” sold by food retailers, though this is just one example of many. Department stores, electronics stores, and office supply retailers all offer private label products or services.

Private labels offer several benefits to both retailers and customers, driving the segment's rising popularity. For retailers, margins on private label goods are an average of 10% higher than those on similar branded products. Customers benefit from private labels' lower prices, which are often significantly less than those of national brands. This combination, while beneficial to retailers and consumers, can put substantial pressure on the manufacturers of branded goods, who have to compete against their own customers (the retailers) for market share.

At Wal-Mart, brand name products share shelf space with pivate label products belonging to the retailer itself.

Impact of Private Label

Brand Loyalty

• National brands are sold all over, so there's no real sense of brand loyalty in terms of where consumers buy them. Because private labels are unique to one retail chain, there is the possibility for retailers to cultivate a sense of brand loyalty. Though they used to be seen as knock-offs of "name brands", private labels have become increasingly more accepted by the public as quality has increased and retailers have expanded their offerings of private label goods. Many consumers now seriously consider private labels as acceptable alternatives to national brands. Retailers can capitalize on this shift in public perception by offering quality private label products, which can foster a feeling of brand loyalty. This can give retailers a significant advantage over competitors.

Largest private label categories, by % of 2006 volume share

Lower Prices/Higher Margins

• Private label goods are generally much cheaper to produce than branded goods, due to the lack of advertising and marketing expenses. As such, retailers are able to purchase private label goods for much less than they would have to pay for comparable branded products. The cost difference is usually large enough that retailers can offer customers lower prices while still making higher profit margins themselves. Lower prices can be enticing to customers and increase a company's competitiveness. Small chains have a particular incentive to offer private label goods; they are often unable to match larger retailers' prices for branded goods, but private label can allow them to price more competitively.

Retailers as active Marketers

• In the past, retailers were merely the last stop on a product's way from the manufacturer to the consumer. Retailers are now becoming increasingly established as brands themselves, marketing their private label products as alternatives to national brands. This has resulted in a growing shift in the balance of power between retailers and manufacturers, with retailers not only becoming less dependent on manufacturers for product offerings but actually making manufacturers dependent on them for sales volume.

Who benefits from an increase in private label?

• Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Costco (NYSE:COST), and other retailers for whom private label goods constitute a significant percentage of total sales. Stores such as these would benefit from the higher margins that private labels provide.
• Whole Foods (NASDAQ:WFMI), Kroger (NYSE:KR), and other supermarkets with strong private labels could benefit from the further penetration of private label into the food retail industry.
• Cott Corporation (NYSE:COT) is the largest manufacturer of retail-branded carbonated soft drinks in the U.S., producing 68% of all private label soda sold by U.S. retailers. Cott's largest customer is Wal-Mart, who accounted for 38% of total revenue in 2006. An increase in demand for private label soda could benefit Cott greatly, as its entire business is focused on this segment.

Who benefits from a decrease in private label?

• The Coca-Cola Company (NYSE:KO), PepsiCo (NYSE:PEP), Procter and Gamble (NYSE:PG), and numerous other manufacturers of branded products could be harmed by a rise in private label's popularity. Some manufacturers have hedged their bets somewhat by beginning to produce private label goods as well as branded products. Examples include: Kraft Foods (NYSE:KFT), Nestle (VTX:NESN), Kimberly-Clark (NYSE:KMB), H.J. Heinz (NYSE:HNZ), Del Monte Foods (NYSE:DLM), and Unilever (NYSE:UL). By producing private label goods, these companies would be somewhat less impacted by a decrease in demand for their branded products. Private labels, however, provide much lower margins than branded products, especially since these companies already cover R&D and marketing expenses for their existing products.