Summary
Consumers buy private label products for a variety of reasons. They do it to save money and may have switched from a name brand product. In many cases they buy private label goods unaware that they are private label. For many consumers in many categories the store brand is their preferred brand. The private label designation is often more of a preoccupation for manufacturers and retailers than it is of the consumer.
Analysis
During every economic downturn the conversation turns to private labels (PL) as soon as scanner data shows that PL sales volume is increasing. The current recession however may result in private labels taking a lasting toll on the share of sales and profits previously enjoyed by brand name products.
A new age of private labels has dawned for several reasons. First, consolidation at the retail level has amassed significant buying power. As an example, before a series of acquisitions that have made it part of the Supervalu family, Jewel Osco was a regional chain of approximately 185 stores. Now it is part of a group of over 2500 stores. Homelife PL paper towels are not just a label manufactured for a few hundred stores but for thousands. Thus, economies of scale make it possible to price Homelife lower and make greater profit.
A second reason is that the downturn and renewed retailer interest in PL programs is occurring at a time when manufacturing options are greater and product quality is vastly improved. In many categories it makes no sense to own the means of manufacturing when numerous companies will contract manufacturer to any given set of specifications. Companies such as TreeHouse Foods, Inc. are in business to be just a private label producer. They have the ability to produce products every bit as good, and in some cases better, than what is available from brand name manufacturers.
Finally, the quality of the packaging (name, materials, construction) of private label products has vastly improved. PL products in most cases simply don't look like PL products are suppose to look. And they don't carry the traditional store name. When consumers are asked to name the brands they buy, an increasing number of the names mentioned are in fact private label.
All of this may have been the result of brand name producers thinking that PL sellers were focusing on price when they were focusing on profit and quality. Engage a brand name producer in conversation and you can get a hint of the misunderstanding as the words price and value are used interchangeably. They are not the same. For a consumer, value is the relationship between price and quality. As Warren Buffett said, "Price is what you pay. Value is what you get." For the PL producer, price gets the consumer to try but the quality gets them to stay. And in this recession, they might just stay with private labels long after the economy has turned around. They may be lowered priced but they are representing greater value.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
