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Managing Private Labels reviewed
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Chapter summaries Managing Private Labels
Retailers who used to depend upon brand manufacturers have reversed the ballgame. At first, retailers did not possess a great deal of knowledge or experience in the field of packaging and product quality. However, as they acknowledged the strategic value, retailers started to invest heavily into building their stores into strong brands and placed private label at the centre of their strategy. Retail concentration fuelled competition and private label was assigned a pivotal role in driving shopper loyalty and improving profit.
In this chapter we will discuss the competitive role of private label among retailers (in inter-store competition) and within the store (intra-store competition). On the one hand, the shopper’s intention to buy private label is influenced by store image and price image perception. On the other hand, purchase intention and the ultimate choice for private label are influenced by the shopper’s value consciousness and quality perception of private label. Private labels associated with good value for money will support the retailer in improving its competitive image. A tiered-strategy allows retailers to compete with brands and other supermarkets including discounters.
Besides driving shopper loyalty, margin improvement and independent pricing are key objectives for retailers when investing in private label. The consolidated retail landscape has shifted the balance of power dramatically and although the supply side has also consolidated over the past decades, its selling power has not increased in line with retail buyer power.
The last section of this chapter argues that category management should not overemphasise private label dominance. National brands do have and will remain to have an important role.
The balance of power has shifted in favour of retailers and there is some concern that this may have undesired effects. In a competitive market the exercise of bargaining power often results in efficiencies and lower consumer prices. However, there are examples where the exertion of retail power has negative side-effects. A one-sided focus of retailers on price in combination with at times insufficient product knowledge can result in undetected quality erosion. A few examples of this have come to light in recent years.
Private label management
Private label allows retailers to be in full control of the product and take independent initiatives. Additionally, an important competitive advantage of retailers is their possession of detailed data as well as the capacity to execute new product development projects.
By means of trial and error tactics they test the market with new concepts. Furthermore, a differentiated private label strategy offers retailers a unique opportunity to launch multi-category sub-brands. Besides the commonly used three-tiered strategy based on price segmentation, an active gap analysis may reveal opportunities for new initiatives and consequently develop and launch retailer brands.
By using a consistent packaging design, private label products become clearly visible on the shelves to the shoppers. They will be navigated in their decision-making as the products offered throughout the store can be easily recognised. The latest initiatives show that product and packaging quality as well as venture brands make private label ranges suitable for export.
National brands in defence
Brands have lost considerable market share over the decades. Many secondary and tertiary brands lost their relevance due to private label introductions and were delisted. This chapter will discuss the managerial implications for national brands and suggests possible strategies of defence. Proactive marketing and new product introductions supported by advertising can reduce the risk of consumers switching to private label permanently.
Consumer choice for private label is strongly related to their perception of risk. Both sensory and other product-related elements play a role in consumer perception of private label product quality. Although their attitude regarding quality may be very positive, in some categories shoppers are still somewhat reluctant to purchase private label.
Consumers benefit from lower prices due to private label competition. There is some concern, however, that retailers may derive unfair advantages from being both customer and competitor of brand manufacturers. A supplier may depend heavily on the supermarket as the channel to reach the consumers. Asymmetry of information and the fast copying of successful introductions may affect the willingness of brand manufacturers to innovate.
Consolidation in the private label manufacturing industry has created large players with a pan-European presence. This chapter will share insight on proved practices in private label manufacturing and how best in class suppliers succeed in building and managing good relationships with retailers. Because of a single target group approach, a private label manufacturer should put this at the centre of attention. Besides the challenge of combining variation in production and low cost manufacturing, it is important to be able to compete on other elements than price. We will share information on how suppliers succeed in doing this.
Furthermore company score cards used by retailers to assess their suppliers will be discussed. There is a fundamental difference between the business model of a brand and dedicated private label manufacturer. In view of extreme competition the latter must operate based on a robust strategy well embedded in the organisation. Finally, the increasing reluctance of private label manufacturers to participate in internet auctions and buying alliance tenders, backward integration of retailers in manufacturing and dealing with unannounced factory audits will be discussed.
Private label packaging design
Of all communication of a retailer to its customers, private label packaging is the most conspicuous. The design makes the retailer’s identity tangible and the retail brand visible for consumers. Not only on shelf in the store but also in their homes where private label products visualise the brand values and continue to communicate the retailer message. The packaging should clearly distinguish the various tiers in the private label architecture and support retailers in balancing the price and quality perception of consumers.
The phenomenal success of discounters in Europe was fuelled by the economic downturn. This retail format successfully competes on price, quality, consistency and simplicity. Initially, the rather cheap-looking, no-frills stores attracted people on lower incomes. Now the concept is more familiar and accepted, with those on higher incomes also migrating to the discount format.
Whereas discounters are successfully moving up in the retail spectrum, now offering fresh and premium products, mainstream retailers seem to be moving down in an effort to reduce their price gap with discounters. Discussed will be how discounters operate and why mainstream retailers find it difficult to effectively compete with the discount retail concept.
In emerging markets, food distribution is mostly organised via open markets, kiosks and mom and pop stores. Although the entry of major retailers from developed countries into emerging markets has introduced the concept of private label, market shares are still modest and consumer acceptance of private label products in emerging markets remains weak.
The private label marketing strategy should be aimed at raising consumer interest to buy and manufacturer interest to produce private label. By means of in-store demonstrations, sampling and cash-back refunds, retailers can positively influence purchasing behaviour. Furthermore, private label pricing should be consistent and the strategy should emphasise that lower prices of retailer brands are the result of cost-reduction efforts due to effective supply chain management.
The use of smartphones and social media allows retailers to interact with consumers in a unique and more personalised manner. Shopper engagement in new product development as well as evaluation of existing lines may improve customer loyalty to the store. When marketed online, private label products are in a significantly better position to compete in terms of market share and attracting new shoppers to the store online than offline. However, the volume of online sales in food retail is still very small and in most cases ordering via the internet is still unprofitable for retailers.
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