It used to be that private-label products were for consumers on a tight budget. However, a global shift has occurred in which consumer sentiment about store brands is overwhelmingly positive. To leverage that relatively newfound respect in the marketplace, there are very specific things that U.S. retailers can do to help store brands compete with their more recognized name brand counterparts.
Private-label sales and shares are strongest in commodity-driven, high-purchase categories and those where consumers recognize little differentiation, such as paper products and medications such as headache pain relievers. Private-label products do not do well in conditions where there is a:
Higher innovation rate: Launches in categories like hair care require significant investment, making it more difficult for private label to compete.
High product differentiation: Manufacturers in the hair care category, for example, have developed products to serve a wide array of consumer needs, including anti-dandruff, color protection and damage repair. Therefore, the degree of real and perceived differentiation is extremely high.
Strong marketing support: Marketing spend is incredibly high, for example, in the hair care category. In 2012, Advertising Age estimates that name brand manufacturers spent approximately $6.8 billion globally on personal care products. Although it’s a tough proposition to overcome, investing in marketing activities for store brands will likely result in increased equity, even if slightly.
Strong brand equity: Name-brand manufacturers’ investments in innovation and marketing have created strong brand loyalty among consumers. In the U.S., more than one-third (34%) of respondents in Nielsen’s recent survey about private-label products say they’re willing to spend more than the average price on shampoo because it’s worth paying extra. Shampoo is among the top three products for which consumers are willing to pay a premium.
Longer purchase cycle and heavy promotional activity: Consumers purchase hair-care items less frequently than some other categories. Since hair-product purchasing is more sporadic, a higher price tag for brands is less of a barrier, making more price-competitive private-label brands less of a contender.
Conversely, name brands have a tougher time competing with store brands in categories that showcase the following attributes:
Minimal differentiation and low brand equity: Perceived differences among milk products, for example, are low. There are many suppliers, and it’s easier for private-label to create similar products at lower cost in this category. Interestingly, the “Got Milk?” advertising campaign—the most successful in the category—was not branded.
High price sensitivity and high purchase frequency: Private-label success is strongest in high-purchase categories and those where consumers perceive little differentiation. In general, consumers are highly price sensitive, and in developed markets like the U.S., milk is a low involvement, low-risk purchase. In addition, milk has a fast purchase cycle, making its price more noticeable to most consumers.
Low innovation rate: Name brands have done very little to innovate in the milk category. In general, innovation is less common in commodity categories, and at a global scale, new products represent less than 0.5% of same year sales.
Formula for Success for Both Private Label and Name Brands
Private labels are here to stay, and a key piece of the puzzle for their growth and success is the assortment challenge. It is a misconception, however, that increasing the breadth of assortment will automatically drive sales. Retailers must pursue the right selection, not just a bigger selection. Consequently, retailers should take necessary delisting decisions with great care. In the U.S., where the retail market is fragmented, 31% of sales come from the category leader, 17% from private label and 52% from all others. Retailers must manage their shelf space carefully. Removing too many high-penetration, high frequency or strong niche brands from store shelves can drive shoppers to the competition.
To determine an optimal assortment strategy, a keen understanding of market dynamics and consumer consumption patterns is necessary. While the right assortment varies by market conditions, one factor is critical for all consumers: Consumers want to comparison shop. Over three-fourths (78%) of U.S. respondents prefer to see name-brand and private-label items next to each other on the store shelf so they can easily review prices.
Additionally, manufacturers must adopt a collaborative mindset and help retailers win across the store with both private label and name brands. Consider joint promotion opportunities. For example, If one group of consumers prefers a name brand in a category while another prefers private label, a retailer could promote them both in the same week. Additionally, manufacturers could create integrated shelf sets to help retailers lay out their store shelves. They could also discuss shelf placement options with retailers in categories where they don’t already have a private-label presence.
This article originally appeared on www.storebrands.info.