The Evolution of Private Brands

Shopping studies demonstrate how private brands are gaining ground versus national brands. Consumers in recessionary times are more open to new brands and less attitudinally loyal. This paper shares 10 key considerations for retailers.

Retailers in the US are implementing increasingly sophisticated and aggressive approaches with their private brands to help boost margin and profits, build overall brand equity, defend themselves from competitors and fill gaps that manufacturer brands are not filling. Overall, these new strategies appear to be working, especially in these recessionary times as consumers are becoming more open to retailer brands and less attitudinally loyal to brands that don’t continually meet their needs.

Virtually all US consumers are open to private brands. GfK Roper Reports®, which has been studying consumer attitudes and behaviors since 1973, shows that more than 80% of Americans have knowingly purchased a private brand; almost half of the 80% report buying more private brands today than they did a year ago. In addition, 67% say they bought “less expensive brands instead of name brands” in the past month, up 5 points from just 2008, with 62% saying they bought store brands the last time they went grocery shopping. Further evidence comes from a GfK study commissioned by the PLMA in 2009 showing that 9 out of 10 Americans won’t stop buying private brands even if the economy improves.

An in-depth GfK study of shopping in the US – Future BuySM – also demonstrates how private brands are gaining ground versus national brands, not just on price/value, but also on other dimensions that were once the sole domain of manufacturer brands.

• More than 60% of consumers agree that private brands offer better value than national/name brands
• 46% agree they often cannot tell the difference between private and national or advertised brands
• 48% agree they actually prefer private brands and actively seek them out (note a similar number indicate a preference for national brands in a separate question)
• 39% agree that private brands offer more unique items which makes them more interesting than national brands

In order to understand where private brands can or should go next, it is useful to study the evolution of private brands through a consumer need-state lens. GfK Strategic Innovation has been studying patterns of innovation for 30 years across 350 categories around the world. This work has resulted in a deep understanding of how need-states evolve in a predictable pattern, and how successful (or unsuccessful) brands are in meeting those emerging needs with both the right idea and, importantly, the right timing.

Most private brands started with store name labels and offered price concerned consumers a convenient, entry price option. Many retailers have evolved their private brand strategy to offer much more than entry pricing, with higher order benefits and higher prices. President’s Choice cookies, which taste better to many consumers than the leading national brands, in many ways marked the hallmark change in approach and opened the door to much more diversified private brand strategies.

A simple example of how private brands have evolved is shown here:

This evolutionary model should also look at more evolved categories or countries, as it can provide a crystal ball view of what may come next. As many retailers know, especially those who compete in grocery or personal care, the UK is the most evolved private brand market in the world. It is a key market to look at for clues on how the US will likely develop over the next five to ten years.

Many of the factors that contribute to the UK’s private brand leadership exist or are developing rapidly in the US, including:

1. Consumer’s increasing desire for value, especially in today’s economy
2. The increasing sophistication and marketing ability of retailers to develop true brands
3. Consumer openness to relevant, well executed brands that are not omnipresent
4. Hyper segmentation (requiring a well-balanced brand portfolio driven by differing needs, lifestages, ethnicity, price / value equations, etc.)

An important part of looking at evolutionary patterns across time, categories and markets is to better understanding what is likely to come next. There are a number of emerging trends that likely will continue to evolve. Retailers are acting more and more like brand manufacturers. They either have or are developing key strategic and executional capabilities to effectively manage and grow an increasing complex private brand portfolio. This includes using more sophisticated approaches to segment the market – whether by age/lifestage, ethnicity, income, urban versus rural or whatever segmentation makes sense for a particular retailer or brand.

Overt price tiers (e.g. good/better/best portfolio) will also continue to emerge as retailers try to maximize profitability. The use of “360° marketing” and focusing on consumer touch points beyond the package or shelf is also expected to increase. Several retailers are using or testing full marketing programs including traditional vehicles like TV and print, along with exploiting their database or using emerging channels like the internet, social networking, call centers and word of mouth.

Similar to what has been done within store departments, there will also be an increase in the idea of cross-selling or selling bundled solutions instead of individual products. This could include cross-selling a private brand with a complementary national brand. In fact, this may be a key way for some national brands to survive, by partnering with retailer brands in segments that are not attractive to private label.

In the past, people have shifted to private labels in tough times, then returned to name brands afterwards. Indeed, “buying more store brands” is one of the last things consumers say they plan to do when the recession is over, ranking #12 on a list of 14 shopping strategies (in the most recent study by GfK Roper Reports®). This suggests Americans may jump back to the name brands they know and love. However, passion can be hard to find, and both national and store brands will continue to compete for consumers’ hearts and wallets.

As retailers increasingly enter the domain of what was once traditional product brand marketing, it creates a host of new challenges and opportunities. Retailers will have to develop new competencies, new organization structures and processes that correctly balance the private brand opportunities with category management and relations with manufacturer brands.

10 Key Considerations for Retailers
In order to navigate the new world of private brands and capitalize on emerging trends, retailers should consider the factors critical to developing and executing private brands in a way that maximizes future potential.

1. Determine the strategic role of private brands vs. national brands in each category – Should private brands showcase price leadership, reinforce quality or both? Should they fill in small, high margin niches more efficiently than a large number of small manufacturer brands? To what degree is cannibalizing manufacturer brands and owning a category acceptable?. This analysis will shape the type of brands offered and help determine what role private brands will play.

2. Develop a clear brand positioning and architecture vision and strategy – The private brand world is changing very rapidly and as retailers quickly try to respond they risk creating a messy portfolio that can hurt growth rather than help. Part of this will require real honesty on where a private brand adds value and where it really isn’t yet competitive with national brand quality and reputation.

3. Recognize all the costs and risks – Consumers expect private brands to perform and have the support services of a national brand. Moving toward more premium products requires investing in better packaging, better product quality, more product testing, customer call centers, web sites, government regulation, understanding consumer needs and potentially marketing communications. If a retailer cannot match that service level, or if a product disappoints in some way, damage to the retailers’ overall reputation can be severe.

4. Nail the pricing – nothing is more critical than finding the right price point that both optimizes sales/profit and reinforces the positioning you want to establish – often price gaps are quite large (OTC knockoff private brands are a good example). Understanding the price elasticity (everyday and promoted) can help a retailer optimize the role its private brands play. This can be done in test stores, with historic scanner data if enough pricing variability exists or with consumer simulations.

5. Don’t under or over-engineer the product/brand mix (packaging, product, pricing, and assortment) – It is important to find the right value equation, but there is no simple formula as the relationship will vary by category, quality/pricing of the national brands and consumer sensitivity/involvement. Because many suppliers and retailers do not have the long term category expertise of manufacturers and are under very tight deadlines, they have to make many decisions based on judgment and profit objective which can result in a product mix that may either leave money on the table or disappoint consumers and not generate long term repeat. Besides monitoring product acceptance, repeat rates and consumer complaints, more sophisticated retailers will do focused product testing, discrete choice or concept and use testing on key items to ensure they get the value equation right.

6. Use stores as a learning lab – An obvious huge advantage for retailers is that they control the real estate in-store. For issues around private brand pricing, packaging, location etc., if possible develop an in-market testing protocol using representative stores and a fast/efficient feedback system off of the scanner data.

7. Manage SKUs – As manufacturers and retailers know, brands have a way of proliferating SKUs like rabbits if not carefully and tightly managed. Many companies have seen significant topline and bottom-line growth through continual efforts to prune weak SKUs and to set very strict metrics for new SKUs. Holding periodic “SKU review” meetings that evaluate every SKU can be valuable in determining whether to keep, drop or fix a particular item.

Key to a good SKU management process is establishing the right metrics with the category buyers/managers and private brand managers, along with a system that efficiently captures and reports the data.

8. Create a consumer community for early development work – online capabilities now allow retailers to develop custom panels of consumers that can be used for a variety of private brand issues – new concepts, new packaging, communication hierarchy, shelving, product testing etc. It enables the retailer to get very fast, low cost feedback with pre-screened consumers that represent core target audiences. It can also be used to evaluate the threats from competitive retailer efforts.

9. Measure both the health of your private brands, but also the impact they are having on your overall store brand perceptions – As retailers move away from private brands with the corporate name and create unique brands with their own name/identity, it is important to understand the relationship between the brand and the retailer and how consumers perceive each.

10. Develop focused consumer insight, innovation and brand marketing / communication capabilities that fit your business system – As brands move from cheap knock-offs to true, value added propositions, there is a much greater need for high quality brand management. These capabilities, however, have to fit into a retailer environment and time frame, which is often much faster than in the manufacturing world. The leading manufacturers separate out longer term positioning, innovation and trend work from day to day ‘activation’. Retailers should evaluate whether their private brand marketing/innovation /strategy team is structured and resourced to win long-term or just execute quickly and put out brush fires. A packaging graphics error or poor execution, for example, when rolled out across a huge private label line can be very costly relative to some consumer testing before making the final decision.

The world of private brands in the US has never been as exciting, challenging and evolving as it is now. Even as we move out of the recession, it is likely that consumers will be open to retailer specific brands if they offer the functional and emotional benefits they seek, with the right value equation and are communicated in a relevant fashion. Retailers must embrace the challenges and build new models for how to best exploit the opportunities today and learn into the future.

-November 2009

This content was provided by GfK Custom Research North America. Visit their website at www.gfkamerica.com or read their blog.