Summary
Private label is a brand unto itself. Wal-Mart’s move to private label is remarkably similar to any other brand initiative. Rather than moving upscale with unique selling propositions, private label products accept commoditization and manufacture the least expensive product possible.
Analysis
First and foremost, Wal-Mart requires suppliers to have capacity. This means the manufacturers of their private label brands will often be the same manufacturers that create their branded merchandise.
Why would manufacturers create products that undercut their more expensive branded products? It’s about market share, shelf space, consumer trends, control and manufacturing efficiencies.
Private label products have historically provided higher margins for retailers. And historically consumers have preferred branded products. That paradigm is changing and Wal-Mart is merely moving with the market. As you may recall, we went through the same shift between 1980 and 1983. The move back to branded products was due to a growing economy and effective marketing.
Another important point is that Wal-Mart has, for the first time, begun to grow share of the upper middle and affluent consumer market. It can’t hold on to this new customer without creating distinction with the traditional customer. The top 30% of demographic pyramid may have discovered Wal-Mart, but they still have pride and an ego, and they want to watch the hoi polloi buy cheaper products. Private label products provide that entertainment.
