Wednesday, August 19, 2009

Private Label Strategy - Part II

Is it worth it?

The natural question that would come to anyone’s mind is whether all this effort is worth it? After all there is a cost attached to all this effort too.

The answer is an unqualified Yes. The effort is more than worth it. Let us see how.

The biggest benefit lies in benefiting from the differentiated cost structure. A retailer typically leverages the existing manufacturing capability of someone else and hence does not have to incur fixed costs with regards to manufacturing. This is a clear savings and a significant one. Second, most store brands leverage existing technology and as such there is no R&D cost to be recovered. Third, there is no need for a separate sales team to generate demand and hence the cost of that effort is also saved.

In addition to the absence of the above mentioned costs, store brands incur far lesser advertising, marketing and transportation costs as they piggy back on the existing infrastructure and promotion of such products is usually done in-store which is not very expensive. In fact some chains actually promote such products as “No Name” brands to strongly communicate the extreme price value that these products deliver.

China’s emergence as a manufacturing base for the world has created a lot more of opportunities for private labels which international retailers are keenly taking advantage off. This is basis the cost advantage detailed above.

Next, a good and well planned private label portfolio helps the retailer in increasing sales in addition to margins. The cost advantage enables the retailer to price these products significantly lower and/ or give added features too. Not only does this induce customers to switch to private label products which deliver higher margins, but in most cases it also increases the overall category sales. This is because of the fact that brand loyalists continue to patronize the brands and many new customers start purchasing the private label products.

A classic example is the private label CFL that was introduced by a leading retailer. CFL bulbs are a nascent category and are only now beginning to make a mark in the sales charts of any retailer. When the private label product was introduced, many new customers entered this category and the overall sales went up. Although most brands did not lose out too much with regards to sales, the private label picked up a majority of the new, incremental sales. Similar examples abound in several categories. In fact, during the early days of corporate retail store brand jams have had a similar story.

Most importantly, store brands offers an exclusivity that further fosters loyalty of the shopper and creates yet another strong reason to shop at a particular chain only.

So, the rewards of a private label program goes beyond just margins and sales and over a period of time can become an important element of the overall strategy. Is it any wonder that some chains generate more than 40% – 50% of their sales from private label products.


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