Private Label Strategy - Part I

"Indian Management" is a magazine published by the Business Standard group and is the Journal of AIMA. The August 2009 issue featured an article about Private Label Strategy, written by me which I would like to share with all of you.

What is a private label?

Private label products are usually manufactured by a company and sold under the brand of another company. This is a common practice in retail and is also referred to as store brands. Private label portfolios are a powerful margin enhancer for any retailer and most chains promote them aggressively. Such products also deliver several other strategic and tactical benefits to a retailer and are emerging to be a strong factor in any successful retail strategy.

Private label or store brands have two components. One is the product and the other is the brand. The product component is usually benchmarked to an existing one, usually the market leader, in terms of features and benefits. This helps in creating an easy benchmark in the customers mind.

Typically, store brands leverage the branding of the chain and the trust that customers repose in the stores. So, when the customers see a near similar product on the shelf and which has either better features or a lower price, the tendency to pick up that store brand SKU is high. If the product meets the customer expectations, the store brands subsequently substitute the national brands in their shopping baskets.

So, how do retailers get their act together in this regards?

First they define the branding strategy for private label. This is very important because this will not only guide the choice of products but also the features to be included, the packaging, pricing, etc. Typically the retailer adopts an overall private label strategy. The usual strategy used by the majority of retailers is to follow a good; better; best approach.

This strategy clearly defines the portfolio into three segments. The ‘Good’ segment is often the base version or functional products wherein the features are matched but the pricing is significantly competitive. The ‘Better’ segment operates on either better or additional features at similar prices or even lower prices. The ‘Best’ segment is the top end of the portfolio and has a dual role. This segment apart from enhancing the category offering helps to build the overall store imagery as also ensure that the private label portfolio is perceived to be comprehensive and not only cheap products.

Next is the approach to the branding of these products. At a macro level there are two options. One is to use an unrelated brand name for the products and the other is to leverage the store’s name as a prefix followed by a branding which is often a descriptor like Value, Premium, Organic, etc.

Most retailers seem to veer towards the store brand with sub brands for each group as against a generic unrelated name. However, it is not uncommon to see unrelated brand names in certain situations like in the case of Apparels, where customers would prefer some nice names instead of XYZ Cottons. Also, in the Indian context where retailers are experimenting with trying to also distribute the store brands to the trade, have the store name on the product might not work.

Once the overall private label strategy has been finalized and agreed upon, detailed guidelines with regards to the product differentiation, segment classification, packaging guidelines, etc are developed and circulated.

The trading team in the meanwhile would have identified products which would qualify for a private label. This is done basis two main criteria; is there an existing gap in terms of product and/ or price, is the current offering generic and therefore offers an opportunity to create a brand and leverage the first mover advantage. The selected products are then evaluated and the suitable positioning is decided basis the guidelines for each of the segment - good; better; best.