The Advantages of Using Private Label Products

 

The world we live in today presents the consumer with many challenges and choices previously unheard of. The average person is bombarded with a near-constant deluge of different products, ideas, and options that can leave him or her confused as to which product or service is the one that suits their needs the best. From electronics to car sales to medicine to the latest toy for a child, each company claims to be superior to the rest. How does the consumer know which one is right for them?

More often than not, he or she does make a conscious decision based on the advantages or drawbacks but rather is directly influenced by what is advertised both locally and nationally. Each time they see or hear about a product advertised, they are unconsciously preconditioned to recognize that product on the shelf of their local supermarket, for instance. They become automatically and covertly influenced to choose the very same product not necessarily due to its quality but rather the amount of times they have heard of it through the various types of media available.

Nationalized brands have a large market share of the available advertising space. Through television to radio and increasingly through the utilization of internet advertising space these conglomerates push billions of products to the unaware consumer each year. However, in recent times private labeled products have increasingly gained a more solid foothold in this ultra-competitive arena of customer satisfaction. Private label sales now account for nearly half of the products sold in supermarkets in the European Union. In the United States, the figure stands closer to 25% and the trend has notably increased over the last five years. The main influx, however, has centered around the Far East.

With China now being clearly recognized as an economic powerhouse, the focus is placed directly on this market; one of the largest and most diverse in the world. The figures stand only to increase in decades to come as China further realizes its role in the world market. The advantage that many domestic retailers have is that they are becoming very much aware of the benefits of private labels versus mass-distributed items from large companies. For this reason, China is proving to be one of the regions where sales are increasing at some of the highest rates in the industrialized world.

Before we examine the reasons why this sector has particular appeal and advantages to the retailer who wishes to provide for his customers’ needs, we must understand the reasons why there has been a very real shift towards private as opposed to national brand names. We must look at the bigger picture.

Retailers have been very keen to recognize the benefits such labels can make in both sales and overall customer satisfaction. These very same retailers understand that above all, the proof of private labels is directly measured not only in increased revenue but more importantly in customer loyalty. So, the primary question to address is why there has been such a growing shift.

Simply put, private labels offer the customer and retailer a number of advantages that national brands can never provide. Some of the main points we will examine are:

Direct control over product pricing and services

Specialized marketing plans more directly addressing the retailers’ own customer demographics, providing for efficiently targeted marketing

Product Images specifically designed to keep a customer returning, creating loyalty and therefore repeated revenue

Less middlemen in the distribution process, therefore the profits are distributed solidly back to the merchant

Increased revenue produced on a local and/or regional scale, contributing to an overall positive economic outlook; more money saved locally can increase liquidity allowing for repeated and cyclic generation of revenue

Both retailer and customer alike have a heightened ability to give their own inputs back into the equation, allowing for adaptation to a changing regional market whereas national brands follow national trends.

Money-saving strategies during economic downturns which address the seller’s need for cost-effective sales as well as the client’s need for financially sound purchases

Especially noted for perishables, the guarantee that produce delivered is fresh and often times goes through more rigorous quality controls than larger conglomerates.

We will examine each of these important advantages some detail. The keys to success in today’s marketplace lie in the realization that we are in the height of the information revolution. By definition, the importance lies here in recognizing the fact that even the average consumer is more aware than ever before. They are better-educated and have more choices. More and more potential customers are becoming sharply aware that private labels not only offer more quality but they also have the distinct advantage of cheaper pricing while not sacrificing taste, quality, or freshness. Furthermore, in the age of corporate mass-production, a customer is more likely to purchase a good or service they feel addresses their individual needs rather than the needs of a large group that may differ distinctly from their own. This policy of building a retail-client relationship from the ground-up gives increased guarantees of return business and additional purchases.

When the customer feels his needs are being catered to, the loyalty bred from this perception is more personal and often times supersedes the marketing impact of larger, less personalized corporate products. Given the important role of psychology in the retail world, these innate differences from the client’s point of view have directly contributed to the rising power and profitability of private labeled products. In addition to these important attributes, we now will begin to take a closer look at some of the main factors that motivate retailers to focus more heavily on private companies. For the sake of clarity, we can identify four major points to consider which differentiate private label from mass-produced products. These factors are of utmost importance to the retailer and he should already be familiar with their obvious benefits. The four variables that private labels directly influence are:

Quality

Cost and profit margins

Product Control

Customer Satisfaction and Loyalty

 

Quality

One of the most important aspects to any business is the quality of the very products they provide to their customers. In the world of mass-packaging and marketing, quality may be secondary to quantity for larger corporations while for private labels quality control is of a greater concern. For the former, corporate entities rely on the sheer volume of sales to generate income, with the retailer seeing a smaller portion of the profit due to the number of channels a perhaps substandard product must go through before reaching the shelves of a local store. In contrast, private labels do not compete with big businesses using numbers but instead provide a superior product whilst at the same time providing an advantageously lower price to the retailer. Though quality is of paramount importance to every facet of the sales industry, it comes to the forefront especially in regards to produce and perishable items.

During the latter half of the 20th century, multinational corporations provided perishable goods to billions of people under the premise of more equating to better. In regards to produce in general, this often led to inferior taste which the customer easily recognized. One of the main problems arose from the fact that the shopper had very little exposure to private labels and were instead bombarded with national brands. This led not only to an entire generation consuming sometimes less-than-perfect products but also contributed to major increases in pricing. Shoppers came to expect less and due to the very nature of how the products themselves were distributed, they could easily bargain-hunt; traveling to many different stores to find the best price. This made the individual customer less likely to stay loyal to any particular location.

In the last 30 years, the industry has seen a backlash in this attitude; the consumer becoming more aware than ever that private labels offer quality that mass production by very definition often did not. If we combine this attitude with an increased awareness of varying levels of dangerous additives present in bulk-manufactured foods, we can begin to understand the reasons why the interest for private labels has seen a dramatic increase in recent times. Individuals and retailers alike began to recognize the necessity for quality over quantity.

Private label companies often acquire their goods from manufacturers which specialize in one particular item or another. As opposed to competing with multinational companies, their competition lies within the private sector, making quality of higher importance, knowing that the only aspect separating them from the supplier a few kilometers away is the value of their product to the individual customer. When we begin to look into the field of frozen or canned fruits and vegetables, the significance of the retailer providing a quality product is of extremely high importance.

With the advent of mass marketing and distribution of perishable items, larger corporations often times enjoy more favorable status with governments and regulatory bodies, thereby allowing for inferior quality due to the large amount of revenue generated on a national or multinational scale. While they have the ability to ship these products for thousands or tens of thousands of kilometers, not only do the economical logistics of transport and delivery cause an increase in price but by the time they arrive on the retailer’s shelves, many additives and flavor enhancers may have been introduced to help preserve the product along the way. In this area private labels hold a plainly distinguishable advantage.

Private labels are much more likely to be produced regionally and locally, therefore giving the retailer much more confidence that less additives are present. In the age of a more health-conscientious consumer, this alone can help attract a customer who will remain loyal well beyond a first-time purchase. Many consumers have already recognized this added advantage and some actually have switched to buying only private labels.

Cost and Profit Margins

A retailer strives to provide the best for his target clientele. Any successful management team understands the simple concept that a company’s success or failure is only built from the ground up. In a perfect world, every retailer would be able to provide the highest quality product while also enticing the customer with rock-bottom pricing. Unfortunately, this is not the case.

Brand names often come with a higher price tag, sometimes equating to an increase of 20% more than private labels. This is not only due to the assumption that a more recognized name can perhaps ‘get away’ with higher expenses to the retailer, but also because the physical process of shipping the product from warehouse to distributor and then to the individual business takes more time and money. Combine this idea with higher gasoline prices, for example, and it becomes clear why suddenly a can of corn may rise by 10%. These same logistics can even lead to a retailer having little control over his own inventory; either not having enough of a certain item or finding himself overstocked, sometimes having to dispose of outdated products that could have generated revenue but now force a loss on the balance sheets. The retailer is then unwillingly placed into a situation where he, as well, has to cut corners. He is forced into providing what could be a lifelong customer with a pricier product that may be of substandard quality.

Due to lack of advertising and marketing expenses as well as lower overhead, this cost difference is usually significant enough that the retailer can offer the private label at a substantially discounted price while also incurring a substantially higher profit margin, generally 10% higher than if he were selling a brand name. In the current economic climate, this is one of the driving forces behind why both retailers and customers alike modified their preferences to include many more private labels, some retailers now having the bulk of their inventory derived from these sources. Even regional retail chains themselves are now becoming more established as individual private brands, making them more appealing to customers than the higher-priced larger corporations’ stock. For this reason, over the last few years we have witnessed a shift in the balance of power with less dependence on the larger manufacturer and actually making the manufacturer dependent on the retailer for continued sales volume.

When at the end of each financial cycle a retailer balances his books, the bottom line is always black-and-white; profit from sales. Private labels increasingly generate higher sales and increased profit margins back to the provider; allowing the company to reinvest revenue back into their own operations providing an avenue for increased expansion within their sector. Also, resulting directly from increased profits is the manager’s ability to give employees incentives such as sales targets and higher bonuses. After all, 10% commission is much more attractive than 5%!

When discussing cost and profit, the state of play as to world finance cannot be ignored. Though larger companies present themselves as having the wherewithal to combat financial turmoil because of their size, the exact opposite can also be true. National and multinational companies have taken financial hits during the last few years that were previously unheard of due to the worldwide recession. It may seem contrary to popular for this being the reality but there is a very simple reason.

National and multinational brand names have more exposure to the volatility of the marketplace. Their influence spans a number of different market sectors and therefore they also feel the effects of any financial downturn more acutely. Some corporations have incurred huge losses and have had to raise the price of many of their products in an attempt to counteract this scenario. This leads to the retailer at the receiving end having to pay more for the same product, as does the one or more middlemen the product has to pass through before it even arrives to the store. This increase ultimately falls to the individual customer to pay. Private labels have benefited directly from their lower financial exposure and have been able to overcome much of the open-market terror that has achieved daily headlines since 2007, offering the merchant affordable alternatives regardless of market conditions.

To illustrate this using a real-time example, in February of this year food prices in China rose by 6.2% in response to many financial factors from inflation to the decreased output of exports. While the GDP of China remains high, most consumers have already felt the financial crunch of this increase. Stores that provide private labels to such consumers stand in a unique position to cater to a local population more preoccupied now than ever before with saving money. Meanwhile, the store continues to increase their own profit margins and has the ability to establish themselves as a provider who has begun to address the client’s concerns.

Product Control

Control of how a product is marketed and delivered to the client is one of the most important factors on whether a sale is made or the customer goes elsewhere. More often than not, this is determined within seconds of a product being recognized on the shelf. Private labels have the distinct advantage of creating better sales opportunities for retailers.

From specialized logos to tag lines with the potential buyer in mind, a shopper’s experience suddenly becomes more personal and once again this leads to increased customer loyalty. Due to the flexibility of private labeling, the merchant can acquire manufactured products which can easily be re-branded into a specific form or purpose. This allows the retailer to create a uniquely designed product with multiple business features. This process can be done in less time and for a lower cost than it would take for the manufacturing of a top brand product. As an example, a private label is able to offer a quality product at a discounted price while exhibiting a sophisticated packaging that can rival the larger brand names. The customer feels his needs are being looked after while the retailer is providing the same top-level quality and service.

This higher level of control can also be used to directly target a retailer’s pricing strategy. The store will have the advantage of offering the shopper different purchasing options such as a 2-for-1 or BOGO (Buy one, get one free) that larger corporations hesitate to offer. It is proven that such offers further reinforce the very realistic appeal of a client getting “more for their money”. The retailer also has direct influence when certain sales may take place, say, for example, on the third Saturday of every month. Not only will clients continue to habitually return, but the retailer can also advertise in tandem additional items which are regularly priced and that same client is more likely to purchase because they have saved money on the private label.

Another important aspect of product control that cannot be overlooked is in relation to the retailer and the private label provider themselves. Larger companies have been known to push their own products on consumers that neither the supplier nor the consumer may wish to buy. This can lead to the shopper feeling too pressured into a purchase and sour him to the in-store experience in general.

Taken to an extreme, an increasingly alarming trend has been seen in the less-than-honest practices of some of the larger brand names. Considering that they are looking to cut costs wherever possible, there have been numerous cases where they will actually market your client directly. It is disturbingly simple to see that it is more economical for these producers to sell directly to their target rather than pay the retail chain which they may consider just another expense.

Alternatively, considering the private provider is not a multinational corporation, the retailer has more bargaining power in regards to price, delivery, and presentation. By providing numerous brands of cereal, for instance, ranging from the economical package to the higher-end option while maintaining the lower cost and integrity of a private label, many customers will choose the private brand over the more well-known package which is more expensive. Thus, the retailer can more readily cater to the target market. The decline of such massive conglomerates as the cereal company Kellogg’s illustrates the success of such product control.

 

Customer Satisfaction and Loyalty

With large corporations, the question arises as to who the customer is loyal to; the retailer or the national brand. Unfortunately, the customer’s loyalty lies with the latter a high percentage of the time. This allows for the corporation to undercut the retailer as far as profit margins, for the retailer is directly dependent on the large brand continually supplying the product. Though the customer may not be content, he or she feels they have little choice in the whole matter. Psychologically, this can lead to the potential exodus of what could be loyal customers when the product becomes discontinued or substantially marked up in price. Once this customer leaves, it is very unlikely that he will return in the future. This results in the immediate loss of what could have been a lifelong client.

Private labels work in the exact opposite fashion. By combining stringent levels of quality, lower cost, direct control over product placement and targeted marketing, we now have the formula for a contented shopper. They come to have a personal attachment to a particular store and certain product; identifying that store or chain of stores alone as the source to buy. The retailer has placed the customer at the highest level of priorities by not only providing for the customer’s needs in this way but by doing so at a reasonable price. Not only will they continue to return but they are also much more apt to purchase additional goods, knowing that their financial needs are addressed on a client-centered basis.

The client also realizes that not only is he being looked after on an economic level, but he has a hand in shaping further product development. While large brand names market their goods based on national demographic observations, private labels are much more focused on the satisfaction of specified regions and social groups. The retailer directly represents the label and therefore he, as well, is seen as having a hand in the day-to-day needs of the individual. The retailer is often asked to give personal feedback on the success of a specific item or he may be asked to offer free samples of a trial product destined for future use.

The two most important aspects of any retail business are hard-earned customer satisfaction and profit. There cannot be one without the other. By offering attractive gross profit margins on their products, private labels can guarantee both, as opposed to nationalized brands. The retailer can feel assured he is getting the best price possible in a product of continuous quality while the shopper feels his needs have been accommodated. Combining these two attributes ensures continued business between the two.

 

The Impact of Private Labels on the Sales of Produce

No longer is it the individual retailer or regional chain stores that have realized the benefits mentioned so far. Bigger corporations have begun to follow suit as well, especially concerning the paradigm shift in perishable sales. Just who has taken advantage of this shift in policy?

Wal-Mart has made considerable use of private labels in perishable goods, the sales generated comprising a significant portion of overall revenue per year.

Whole Foods prefers to use private labeled products, taking advantage of the increased revenue generated, as they specifically target customers who choose organic quality over mass distribution.

Cott Corporation is the leading producer of soft drinks in the United States, producing 68% of all sales to the individual retailer. Both Cott and the retailer alike have set the industry standard for the synergy of profit and retail value.

Unlike other retail sectors, canned or frozen fruits and vegetables manufactured and distributed by brand names are actually subject to much more of a price fluctuation over the short to medium-term. An example could be, for instance, the price of a can of frozen orange juice in New York suddenly increasing 30 cents in less than a week. The reason could be attributed to a particularly cold spell of weather hitting orange-producing regions thousands of kilometers away. Since the large companies are so exposed and have to meet their massive demands from a number of outside sources, they take much more of the brunt of this increase, having no choice but to charge the distributors and warehouses more, leading directly to the retailer and the customer.

Private labels suffer much less in this area. While of course a local event may change the pricing for a short amount of time, the change is likely to re-correct itself sooner than a change that affects the entire market. Barring an unpredictable set of circumstances on the local to regional level, the private label is much less likely to be affected by any large-scale price changes. Even if he is, he has less overhead regarding marketing and distribution, reducing the severity of any price increases even if they occur.

Local or regionally grown fruits and vegetables are likely to be of higher quality and less cost than a product that has to be shipped 5,000 kilometers. That, of course, is apparent. What may not be so apparent is that the money generated from the sale of these products has been generated without the use of any number of middlemen, therefore not only does the client save but the regional producers see a higher return for the work they have put in. This capital, therefore, can be more readily injected back into local and regional economies, helping ease their financial strain. This has an additional trickle-down effect that helps the most important variable of the relationship, the customer, continue to shop at your establishment.

Produce has been one of the sectors in which private label brands have grown the most. Not only is this attributable to financial concerns, but also directly related to the heightened quality of the product. While the overall advantages of having a good or service that is of perceived higher quality has already been discussed in general and the logic sound, it is important to relate this cause-and-effect relationship back to fruits and vegetables specifically.

People trust local or regional brands. This is not only because they are less expensive but because there is a more palpable connection between the manufacturer and seller. Most likely, the consumable was produced more recently, has spent less time on a warehouse shelf, and is generally considered to be fresher than something grown thousands of miles away in a place the consumer has never heard of. Especially in China, there has been a well-documented trend for organically-grown fruits and vegetables that shoppers pay good money for, knowing the origins and the care taken to supply their households.

 

Why China, Why Now?

During the last decade, all eyes have turned to mainland China. As of 2010, the Chinese population has exceeded 1.3 billion. The number of hypermarkets have increased fourfold over the past eight years, supermarkets sextupled, and convenience stores grew by 2,300%. Big businesses would have to be blind not to see that such a market is fruitful to tap into and indeed they have. One of the most important areas of focus has been that in the food sales sector, as demonstrated at right:

With more per-capita income arises more consumer spending. The domestic food market clearly reflects this trend and as many produce retailers have seen, these figures correlate with production of vegetables and fruits alike for both domestic consumption and foreign exportation. While more supply has equated to more demand, most merchants are keen to incorporate inflationary aspects into their choices of to whom to provide their produce. Simply put, when an average unit of currency is worth less, not only does a product cost more to produce but the customer pays more at the counter. Choosing private labels has allowed thousands of retailers to take full advantage of these cost-effective aspects and employ this strategy to further advance their individual businesses’ interests. In such a growing economy it has become essential to take advantage of this sector boom.

With China having recently come to the forefront of the world economy, the shopper is presented with many choices regarding what to buy and where to buy it. By combining private label discounts with a top level of customer service the Chinese are world-renowned for, many have already capitalized on what private labels have to offer.

 

The Future for Private Labels and Retail

The economic crisis will eventually come to an end; albeit slowly and painfully. Jobless figures may return to levels not seen since 2007. Overall financial sentiment will once again turn more optimistic. These present themselves as facts more than fiction. Still, the world the individual lives in has changed dramatically and nowhere can this be seen clearer than on the supermarket or hypermarket shelves.

While the markets will gain their momentum back and will see an increase in spending once again, many have said that consumer confidence is at an all-time low. They feel that they have been duped by the large corporations and these very much include the brand names. They began to feel that they were giving more than they were getting in return. What had begun in the late 1990’s with small groups of shoppers opting for private brands has now turned into an exodus away from what is rightfully perceived as products of lesser quality and prohibitively higher costs. Because of the increased awareness and demand. Private labels are now on average 30% less expensive than brand name products.

Clients and retailers alike have begun to educate themselves on the numerous exceptional opportunities of private labels. The customer will not resort to the internet to find these products but rather on the shelves of the retailer who understands the market shift. No longer are these products seen as “low-cost” imitations but rather as genuine alternatives. Value and loyalty have overtaken the lure of the brand name which is the way it should be.

Also, the role of the internet is of particular concern with regards to the future of retail sales. In a way, large corporations have become victims of their own success. Because their products have become so widely known, many shoppers navigate to third-party websites where they can make a purchase for a fraction of the price than they would find on the shelf of a local retailer. The brand name corporations can only compete with this new market by raising retail prices and the physical store suffers, along with their customers. Most private labels bypass the internet, instead focusing on physical delivery and sales of their product, fully aware that their continued investment lies not on mass-marketing but rather putting liquidity back into the community.

The days of the “hard sell” have come to an end. From 1997 to 2005, sales of private labels increased twofold over nationalized brands. Private companies put much of the purchasing power back where it belongs; in the client’s hands. By making available everything from free samples to providing brochures, customers are in complete control of their purchases and because the product addresses their specific interests the sale is made without the store employee or manager’s direct involvement.

This trend will continue into the foreseeable future and while many economies in the west have been tightening their belts, China has continued to see massive internal growth. Cognizant of the many benefits private labels offer, many Chinese merchants have already opted to place themselves one step ahead of the game and avoid dealing with conglomerates and brand names when possible. Thankfully, there are more alternatives than ever before and while the retailers can and do take advantage of what this strategy has to offer, the client once again is able to be satisfied knowing they are not only buying a trusted product from a familiar retailer but also that their interests are being looked after, the most important aspect of any successful business.