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Private Label Maturity Model

January 5th, 2010 by Devangshu Dutta

If we were to look at phrases that have cropped up during the recent recessionary times in the consumer goods sector, “private label” has to be among those at the top of the list.

From clothing to cereals, toothpaste to televisions, there is hardly a category that has not seen retailers trying their hand at creating own labelled products.

The first motivation for most retailers to move into private label is margin. On first analysis, it appears that the branded suppliers are making tons of extra money by being out there in front of the consumer with a specific named product. The retailer finds that creating an alternative product under its own label allows it to capture extra gross margin. Typically the product category picked at the earliest stage of private label development would be one for which several generic or commodity suppliers are available.

At this early stage, the retailer is aiming for a relatively predictable, stable-demand and easily available product whose sales would be driven by the footfall that is already attracted into the store. A powerful bait to attract the customer is the visible reduction in price, as compared to a similar branded product. If the product can be compared like-for-like, customers would certainly convert to private label over time.

However, maintaining prices lower than brands can also be counter-productive. In many products, while customers might not be able to discern any qualitative difference, they may suspect that they are not getting a product comparable to one from a national or international brand. And while private label can drive off-take, the price differential can also erode gross margin which was the reason that the retailer may have got into private label in the first place. Over time, such a strategy can prove difficult to sustain, as costs of developing, sourcing and managing private label products move up.

The other strong reason a retailer chooses to have private label is to create a product offering that is differentiated from competitors who also offer brands that are similar or identical to the ones offered by the retailer. Department stores, supermarkets and hypermarkets around the world have all tried this approach – some have been more successful than others. The idea is to provide a customer strong reasons to visit their particular store, rather than any of the comparable competitors.

Of course, when differentiation is the operating factor, the products need more insight and development, and closer handling by the retailer at all stages. A price-driven private label line may be sourced from generic suppliers, but that approach isn’t good enough for a line driven by a differentiation strategy. In this case, costs of product development and management increase for the retailer. However, to compensate, the discount from a comparable national brand is not as high as generic nascent private label. In fact, some retailers have taken their private label to compete head on with national brands – they treat their private labels as respectfully as a national branded supplier would treat its brand.

So what does it take to go from a “copycat” to being a real brand?

Third Eyesight has evolved a Private Label Maturity Model (see the accompanying graphic) that can help retailers think through their approach to private label, whether their product offering is dominated by private label, or whether they have only just begun considering the possibility of including private label in their product range. The model sketches out a maturity path on five parameters that are affected by or influence the strength of a retailer’s private label offering:

  • consumer knowledge and insight
  • product design and quality
  • pricing
  • promotion
  • supply chain & sourcing

Private Label Maturity Model - Third Eyesight

(Click here for a larger image)

In some cases, retailers may have multiple labels, some of which may be quite nascent while others might be highly evolved, clear and comparable to a national brand. This could be by default, because the labels have been launched at different times and have had more or less time to evolve. However, this can also be used as a conscious strategy to target various segments and competitive brands differently, depending on the strength of the competition and their relationship with the consumer.

The interesting thing is that size and scale do not offer any specific advantage to becoming a more sophisticated private label player. Some extremely large retailers continue to follow a discounted-price “me-too” private label strategy where even the packaging and colours of the product are copied from national brands, while much smaller players demonstrate capabilities to understand their specific consumers’ needs to design, source and promote proprietary products that compare with the best brands in the market.

For a moment, let’s also look at private labels from the suppliers’ point of view. As far as we can see, private label seems to be here to stay and grow. Suppliers can treat private labels as a threat, and figure out how to ensure that they retain a certain visibility and relationship with the consumer. On the other hand, interestingly, some suppliers are also looking at private label as an opportunity. They see the growth of private label as inevitable, and would much rather collaborate in the retailer’s private label development efforts. This way they can maintain some kind of influence on the product development, possibly avoid direct head-on conflict with their own star branded products and, if everything else fails, at least grab a share of the market that would have otherwise gone over to generic suppliers.

If you are retailer, I would suggest using the Private Label Maturity Model to clarify where you want to position yourself, and continue to use it as a guide as you develop and deliver your private label offering.

If you are a supplier concerned about private label, my suggestion would be to gauge how developed your customer is and is likely to become, and ensure that you are at least in step, if not a step ahead.

Of course, if you need support, we’ll only be too happy to help! (Contact Third Eyesight to discuss your private label needs.)

Posted in Apparel, Branding, COLUMN-Progressive Grocer, Food & Grocery, Footwear, India, Lifestyle & Fashion, Marketing, Product Development and Design, Retail, Soft Goods, Strategy, Supply Chain, Textiles, Uncategorized | 2 Comments »

2 Responses

  1. Mukti Says:

    Hello Mr. Devangshu Dutta,
    My name is Mukti Patel and I am a fashion designer/entrepreneur from New York. I have a background in Design from Parsons and a BA in Economics from the University of California. I have been following your articles over the last couple of years. Your insight has helped me gain perspective on global markets. While I have been born and raised in the US, I view the economy as a global entity and am constantly trying to grasp the differences and changes that are occurring in the market.
    Currently, I am putting together a business plan for a clothing line that will fill in the gaps in the Indian fashion industry. Growing up, I have kept an eye on spending behaviors of South Asian Americans. I realized that there are certain aspects of the fashion industry (standardized sizing, global trends, fit, and quality) that Indians in the US are exposed to, but have yet to find these things in their shopping experience for Indian garments. I also see that there is a cultural shift occurring in India and do plan to enter India (with a different tier and different marketing angle) after I have branded my business in the US.
    I know both industries very well and have always been aware of how consumers behave. In the last two years, I traveled to India three times and have seen all the different levels and aspects of the industry. I have visited mass production facilities, export handwork factories, tailors, and have met with those involved in the high-end market including designers and the coordinators of Lakme Fashion Week.
    Throughout this process, many of your articles have confirmed my beliefs. I want to thank you for access to such wonderful wisdom. Please reply with any thoughts at your convenience.
    Regards,
    Mukti

  2. sunny Says:

    i think private label is here to stay. today biggest challenge is supllier still looks at PB as oppurtunity rather long temr relationship. hence, development is depends on them rather what retialer wants to create. may be the scale of volume that holds them not to dare for creativity.

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